Wells Fargo Settles MedCap Ponzi Scheme Claims for $105 Million

Wells Fargo Settles MedCap Ponzi Scheme Claims for $105 Million

Money in flamesSANTA ANA, Calif. — (Mealey’s) Wells Fargo Bank NA on April 30 agreed to pay $105 million to settle consolidated class action claims alleging that it breached its contract by giving noteholders’ funds to Medical Capital Holdings Inc. (MedCap) as part of MedCap’s alleged $1 billion Ponzi scheme (In Re:  Medical Capital Securities Litigation [Steven Masonek, et al. v. Wells Fargo Bank NA, No. 09-1048, Kenneth Bain, et al. v. Wells Fargo Bank, et al., No.10-0548, James L. Abbate, et al. v. Wells Fargo Bank, et al., No.10-6561], No. 10-ml-2145, C.D. Calif.; See April 2013, Page 52).

According to a stipulation of settlement filed in the U.S. District Court for the Central District of California by three groups of plaintiffs and Wells Fargo, the settlement amount will be divided among the three groups of plaintiffs who filed putative class actions against the bank.  The plaintiff group led by Steven Masonek (the Masonek plaintiffs) will receive $83.5 million, the plaintiff group led by James L. Abbate (the Abbate plaintiffs) will receive $17.3 million and the plaintiff group led by Kenneth Bain (the Bain plaintiffs) will receive $4.2 million.

The settlement announcement followed Judge David O. Carter’s April 2 partial denial of Wells Fargo’s motion for summary judgment.  

The actions stem from an alleged securities fraud in the offer and sale of securities in the form of notes issued by MedCap.  The plaintiffs brought actions on behalf of people or entities who acquired interests in the notes issued by entities collectively referred to as special purpose corporations (SPCs).  Wells Fargo served as a trustee for the SPCs.  The plaintiffs alleged that Wells Fargo breached note issuance and security agreements (NISAs) as trustee.

Stipulation Of Settlement

“Plaintiffs’ Counsel has carefully considered the highly complex legal and factual issues inherent in litigation against Wells Fargo, and weighed the strength of the Plaintiffs’ claims against the substantial uncertainties, delays, expense, and other risks inherent in such litigation,” the parties say in the stipulation of settlement.  “In light of those factors and others, Plaintiffs’ Counsel has concluded that it is desirable and in the best interests of the Plaintiffs to settle at this time upon the terms set forth in this Stipulation of Settlement.  The Plaintiffs, after consulting with their counsel and advisors, have determined that the terms and conditions of this Stipulation of Settlement are fair, reasonable, and adequate.

“Wells Fargo vigorously denies all allegations of wrongdoing, fault, liability, or damage of any kind to the Plaintiffs, and vigorously denies that it acted improperly in any way in performing its role as indenture trustee under the NISAs or as disbursing agent for entities affiliated with [MedCap].  Wells Fargo believes that the [actions] are without merit.  Nevertheless, Wells Fargo also has considered the risks and potential costs of litigation, on the one hand, and the benefits of the proposed settlement, on the other hand, and desires to settle now upon the terms and conditions set forth in this Stipulation of Settlement.”

Summary Judgment Denied

Wells Fargo argued in its motion for summary judgment that it cannot be liable for certain alleged breaches based on a failure of SPCs to submit compliance documents.  The plaintiffs alleged that these breaches did eventually trigger events of default, or should have under Sections 6.01(b) and (c) of the NISAs and, therefore, Wells Fargo breached both sections.

“Wells Fargo argues that no implied covenants or obligations can be read into the NISAs against the Trustee, under Section 5.06(a)(i) of each NISA,” Judge Carter said in the April 2 order.  “But here, under Wells Fargo’s reading, the bank would be close to the master of its own liability, able to insulate itself against even negligence simply by never lifting a finger to notify the SPCs of a breach that needs to be cured.  This is an interpretation that a jury could find for Wells Fargo, but it is also one that reasonable jurors could disagree on, as they seek to interpret the intent behind a contract term that is ambiguous.  See FutureSource LLC v. Reuters Ltd., 312 F.3d 281, 285 (7th Cir. 2002) [an enhanced version of this opinion is available to lexis.com subscribers] (explaining that interpretations of contract clauses that would seem to frustrate the point of the contract are disfavored because ‘people are unlikely to make contracts . . . that they believe will have absurd consequences’).”

The Masonek plaintiffs are represented by Jeff S. Westerman and Jordana G. Thigpen of Westerman Law Corp. in Los Angeles and Joseph W. Cotchett and Mark C. Molumphy of Cotchett, Pitre & McCarthy in Burlingame, Calif.  The Abbate plaintiffs are represented by Richard W. Epstein and Franklin S. Homer of Greenspoon Marder in Fort Lauderdale, Fla.  The Bain plaintiffs are represented by Douglas V. Thornton of Perkins, Mann & Everett in Fresno, Calif.  Wells Fargo is represented by Lawrence C. Barth of Munger Tolles & Olson in Los Angeles.

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