* Wells agrees to settle case for $590 million
* KPMG agrees to pay $37 million - lawyer
* Case alleged misrepresentations in offering documents (Rewrites throughout, adds detail from complaint and comments from Wells and KPMG)
By Andrew Longstreth
NEW YORK, Aug 5 Wells Fargo & Co reached a $590 million deal to resolve a lawsuit alleging Wachovia misled investors about the quality of loans sold before the financial crisis, one of the largest settlements of its kind stemming from the housing market meltdown.
The accord is the latest attempt by Wells Fargo (WFC.N) to settle litigation troubles it inherited after it agreed in October 2008 to buy Wachovia, then on the brink of collapse.
Auditor KPMG LLP, also a defendant in the lawsuit, agreed to pay $37 million to settle, bringing the total recovery for the investors to $627 million, said Darren Robbins, a lawyer for the plaintiffs.
The settlement is a major victory for investors in a case stemming from the credit crisis, Robbins said. In February, a federal judge in Los Angeles approved a $601.5 million settlement of a lawsuit against Countrywide Financial Corp, now part of Bank of America Corp (BAC.N), over allegations it misled investors about its financial health and lending practices.
The settlements are subject to court approval.
Wachovia, once the fourth-largest U.S. bank by assets, struggled when more borrowers fell behind on its roughly $120 billion of "option" adjustable-rate mortgages, including many from its purchase of Golden West in 2006.
The mortgages, known as "Pick-A-Pay" loans, let borrowers make low payments that did not cover monthly interest, causing principal to rise.
The plaintiffs, purchasers of preferred securities and debt, alleged in court papers that Wachovia's offering documents represented that the "Pick-A-Pay" portfolio was of "pristine credit quality" and that Wachovia and Golden West had engaged in "prudent lending practices."
In reality, about $51 billion of the "Pick-A-Day" portfolio was made up of loans to subprime borrowers, the plaintiffs contended. They also said Wachovia routinely made loans to borrowers without verifying their income or job titles.
Wells Fargo disclosed the settlement in its quarterly filing with the U.S. Securities and Exchange Commission. It said the settlement is not expected to hurt its financial position and that it has been reflected in its financial statements.
Wells Fargo "agreed to this settlement in order to avoid the distraction, risk and expense of ongoing litigation," a bank spokeswoman said.
The agreement does not "constitute an admission of Wells Fargo liability or any violation of law by Wachovia," she said.
A spokesman for KPMG said the auditor had agreed to settle in order "to avoid the cost of litigation and to put the matter behind us."
The lead plaintiffs in the case are pension funds from California and Louisiana, and a Pennsylvania public transportation system.
In April a federal judge in Manhattan dismissed three related shareholder lawsuits accusing Wachovia and its former executives of lying about the bank's exposure to risky mortgage loans.
That same month, Wells agreed to pay $11.2 million to settle SEC civil charges that Wachovia charged excessive markups and used stale prices in selling mortgage-related debt.
The case is In re: Wachovia Preferred Securities and Bond/Notes Litigation, U.S. District Court, Southern District of New York, No. 09-06351. (Reporting by Andrew Longstreth; Editing by Derek Caney and John Wallace)