* 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
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
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
A spokesman for KPMG said the auditor had agreed to settle
in order "to avoid the cost of litigation and to put the matter
The lead plaintiffs in the case are pension funds from
California and Louisiana, and a Pennsylvania public
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
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
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