Wells Fargo Illegally Used Preferred Stock Dividends to Satisfy 401(k) Employer Contribution Duties, Class Action Claims

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The fiduciaries of the Wells Fargo 401(k) plan for years caused participants to pay more than fair market value for preferred stock by diverting the dividend income from those shares to satisfy the bank’s obligation to make matching contributions to the plan. 

The 45-page lawsuit was filed by former employees roughly two weeks after Wells Fargo agreed to pay $145 million to end a United States Department of Labor (DOL) inquiry into alleged malpractice with employee 401(k) retirement accounts. The DOL learned through its investigation that Wells Fargo employees overpaid for the company’s stock in their 401(k) accounts between 2013 and 2018, according to Forbes. 

Wells Fargo will pay roughly $131.8 million directly to 401(k) plan participants who were affected, and a penalty of more than $13 million to the DOL. 

Preferred stock is a class of stock that has rights superior to those of common stock, including higher dividend payments and a higher claim to assets in the event of liquidation. A holder of preferred stock has a higher claim on distributions than a common stockholder, and preferred stock grants a holder the right to claim income from a company’s operations. 

The proposed class action says that the defendants, from at least 2007 through 2018, acquired preferred stock for the employee stock ownership portion of the 401(k) plan through a loan financed by Wells Fargo. The terms of the loan, the case relays, required the plan to use the dividends from that preferred stock to pay the principal and interest on the loan. However, the dividend income from the preferred stock owned by the Wells Fargo employee 401(k) plan “vastly exceeded the amounts paid on the loans,” by tens of millions or sometimes hundreds of millions per year, the lawsuit says. 

Rather than use this excess dividend income for the benefit of 401(k) participants, as required by federal law, Wells Fargo instead used it to satisfy its own employer-matching contribution obligations, the lawsuit alleges. 

According to the filing, Wells Fargo, its Employee Benefit Review Committee, and GreatBanc Trust Company, a fiduciary for the employee stock ownership fund within the 401(k) plan, engaged in “corporate self-dealing at the expense of the retirement savings of company employees.” Under the federal Employee Retirement Income Security Act (ERISA), the defendants, as fiduciaries, must act in the best interests of plan participants and their beneficiaries, the suit stresses. 

“Defendants in this case violated that bedrock principle by favoring the economic interest of Wells Fargo over those of the Plan and its participants, to whom they owe the highest duties known to law.” 

The filing explains that preferred stock is not readily traded on a public market, and its value must be determined under the “adequate consideration” standard, which, for an asset other than a security, is defined as the fair market value as of the date of the transaction. 

When valuing the preferred stock at issue, Wells Fargo and GreatBanc, among other things, “factored the projected income from Preferred Stock dividends into the fair market value of the stock,” the case says. But Wells Fargo, with “the knowledge and approval of the other Defendants,” used that dividend income for its own purposes, meaning the 401(k) plan essentially paid for dividends that it did not and would not receive since the bank used the income to satisfy its own contribution obligations, the lawsuit alleges. 

“Defendants knew Wells Fargo was diverting dividend income from the Plan and therefore caused the Plan to pay more than fair market value each time it acquired Preferred Stock because the fair market value agreed to by GreatBanc, Wells Fargo, and [CEO Timothy J. Sloan] included a future stream of dividend payments which they knew would not be received by the Plan or used for the benefit of the participants and beneficiaries, but instead would be diverted to defray Well Fargo’s obligation to make matching contributions to the Plan.” 

By causing 401(k) plan participants to pay higher than the fair market value for preferred stock, the plan took on liabilities, the employee stock ownership plan notes, that “exceeded the fair market value of the principal on those notes,” the filing says. As a result, the plan paid too much interest on the principal, and because both the principal and interest were inflated, when the preferred stock was later converted to common stock and allocated to participants’ accounts, less preferred stock was converted than if the plan had paid fair market value, the complaint states. 

Further, had all the dividends from the preferred stock been used to pay the employee stock ownership plan notes, the plan and participants would have received “many more shares” of common stock when more preferred stock was converted to common and allocated to participants, the suit adds.

The lawsuit looks to cover all participants in the Wells Fargo & Co. 401(k) plan from September 27, 2016 through the date of judgment who held any portion of their plan accounts, at any time during that period, in the Wells Fargo employee stock ownership plan fund. 

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