(WFC) Wells Fargo Lawsuit Costs $125 Million

Wells Fargo & Co. (WFC) is said to have agreed to settle a mortgage-backed securities case by paying $125 million, according to a Bloomberg report. Investors had alleged Wells Fargo of duping them about risks associated with those mortgage-backed securities.

A lawsuit was brought out against Wells Fargo and several investment banks that underwrote the securities in 2009 by the General Retirement System of Detroit, New Orleans Employees’ Retirement System and other public pension funds.

The lawsuit alleged breach of securities laws related to sales of $36 billion in mortgage pass-through certificates in 2005 and 2006. According to the accusation, the securities were backed by pools of mortgage loans, which were either originated or purchased by Wells Fargo or its affiliates. It was alleged that Wells Fargo has misrepresented the quality of loans.

The proposed settlement of Wells Fargo is subject to court’s approval. The company and the underwriters denied wrongdoing.

Besides Wells Fargo, recently Bank of America Corp. (BAC) reached an agreement to pay $8.5 billion for its legacy Countrywide mortgage repurchase and servicing claims. The settlement is for a group of 22 investors who had suffered substantial losses for their investments in mortgage-backed securities sold by the company prior to the housing market failure. BofA had acquired Countrywide Financial Corp. in 2008.

We believe that while such settlements dent the company’s financials, they reduce the litigation overhang on it as well.

Wells Fargo currently retains a Zacks #3 Rank, which translates into a short-term ‘Hold’ rating. We also have a Neutral recommendation on the stock.

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