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Wells Fargo to face ERISA lawsuit over self-dealing in employees' 401ks

3 minute read

A Wells Fargo branch in Evanston, Illinois, Feb. 10, 2015. REUTERS/Jim Young

(Reuters) - A former Wells Fargo employee can proceed with a potential class action accusing the lender of violating ERISA by shortchanging its own 401(k) plan participants by steering their investments into the bank’s proprietary or affiliated investment vehicles, even though lower-cost, higher-performing options were available, a federal judge in Minnesota ruled Wednesday.

U.S. District Judge Donovan Frank denied Wells Fargo & Co’s motion to dismiss the complaint, saying complaint filed by Yvonne Becker and her lawyers at Cohen Milstein and Zimmerman Reed went beyond “bare allegations” of mismanagement and self-dealing by showing how poorly the 17 affiliated funds stacked up against “the very benchmarks that Defendants themselves selected” as measures of performance.

Wells Fargo’s lawyers at Proskauer Rose and Dorsey & Whitney had offered reams of additional evidence to counter the picture that Becker had painted. However, Frank said those attempts were premature since factual disputes and affirmative defenses “cannot be resolved on a motion to dismiss.”

Wells Fargo spokesman Peter Gilchrist declined to comment on Thursday.

Becker’s attorneys did not immediately respond to requests for comment.

Her complaint, filed in March 2020, accused Wells Fargo, related entities and plan manager Galliard Capital Management Inc of funneling $5 billion of the $40 billion plan into affiliated funds, costing the individual investors “hundreds of millions of dollars,” Frank said.

Because of the “enormous size” of the Wells Fargo Plan, Becker alleged that its managers and overseers “should have been able to obtain superior investment products at very low cost but instead chose proprietary products to bolster their own salaries by increasing fee revenue and providing seed money to newly created Wells Fargo Funds,” Frank wrote.

The judge found the complaint plausibly alleged violations of ERISA’s general duties of loyalty and prudence, as well as specific rules that bar self-dealing and transactions between a fiduciary and affiliates of the fiduciary.

Becker, a California resident, originally filed her complaint in U.S. District Court in Oakland. The defendants had it transferred to the federal court Minnesota court last September based on a forum-selection clause in the plan documents.

Becker sought a writ of mandamus from the 9th Circuit Court of Appeals to block the transfer. She argued that forum-selection clauses in retirement plans are contrary to ERISA’s guarantee of "ready access to the federal courts."

The appeals court rejected Becker’s argument on April 1, clearing the way for Frank to hear argument on Wells Fargo’s motion to dismiss the lawsuit on April 16.

The case is Becker v. Wells Fargo & Co et al, U.S. District Court for Minnesota, No. 20-2016.

For Becker: Michelle Yau, Mary Bortscheller and Jamie Bowers of Cohen Milstein Sellers & Toll; June Pineda Hoidal of Zimmerman Reed

For Wells Fargo: Russell Hirschhorn and Tulio Chirinos of Proskauer Rose; Stephen Lucke of Dorsey & Whitney

Our Standards: The Thomson Reuters Trust Principles.

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