(WFC) Wells Fargo & Co Agrees to $590 Million Claim Settlement

Wells Fargo & Co. (WFC) has hit the headlines again and this time for a wrong reason. The company has agreed to pay $590 million to settle claims with investors who alleged Wachovia of misleading investors in a lawsuit, according to a securities filing late last week. Wachovia had been acquired by Wells Fargo in 2008.

The settlement, which is currently subject to the court’s approval, would result in a closure of a class-action case. It was alleged that Wachovia had mislead investors while selling certain securities between July 2006 and May 2008.

Wachovia has been accused of misstating facts in its offering material while selling the securities. The company did not disclose the quality of its mortgage loan portfolio and also significantly misled investors regarding its exposure to its billions of dollars of losses on mortgage-related assets. During the financial crisis, the value of such investments plummeted and investors suffered.

According to Wells Fargo, the settlement agreement does not represent an admission of any liability or violation of law by Wachovia. The case has been settled by the company to shun any distraction, risk and ongoing litigation cost. The company had provisions for such a settlement in its legal reserves and therefore, its financials won’t be affected much.

Post financial crisis, investors have sued a number of institutions of wrongdoings and misrepresentation of facts while selling their investment products. Besides Wells Fargo, others who have also reached settlements or have been penalized in the past include Bank of America Corp. (BAC) and Goldman Sachs Group Inc. (GS).

We believe that while such settlements dent the company’s financials to some extent, they also reduce the litigation overhang.

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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