Ohio Pension Fund Sues Wells Fargo & Co (NYSE: WFC)

“Past performance does not guarantee similar future results.” That is a phrase every investor has seen at one time or another, when reviewing a prospectus or being pitched an idea. Apparently, an Ohio pension fund either wasn’t paying attention, or didn’t care much for that adage.

 

An Ohio pension fund has sued Wells Fargo & Co (NYSE: WFC) to recover losses suffered when its recently acquired Wachovia Corp put the fund’s money into a risky investment vehicle that ultimately failed. The School Employees Retirement System of Ohio, represented by state Attorney General Richard Cordray, said it lost $29.6 million from Wachovia’s mismanagement of a securities lending program marketed as a “low-risk” way to earn extra returns. It said $23.7 million stemmed from Wachovia’s investment of some of the fund’s cash in notes issued by Sigma Finance Corp, a $53.5 billion asset-backed securities vehicle that failed in October 2008, less than three weeks before the notes matured.The Ohio fund said Wachovia put its money at risk despite having held talks with other lenders as early as September 2007, at the behest of then-U.S. Treasury Secretary Henry Paulson, to craft a bailout plan for so-called structured investment vehicles, which Sigma resembled.

The complaint filed last week in the Columbus, Ohio federal court notes that “Sigma was not a suitable investment for SERS because of its inherent risks and lack of liquidity.” “Placing SERS’ funds into a complex hybrid SIV with substantial leveraged interest rate risk is inconsistent with the objectives of safeguarding the principal,” it added.

The fund said it lost 95 percent of the $25 million that Wachovia had invested in Sigma. It accused Wachovia of breach of contract and fiduciary duty, negligent misrepresentation, and violations of federal and Ohio securities laws. A securities lending program typically lets an investor lend securities to a broker-dealer, in exchange for cash that a bank invests on behalf of the investor. More than $2 trillion is on loan each day according to SunGard Financial Systems’ Astec Analytics, which tracks more than 31,000 securities.

The $9.7 billion Ohio fund contended that firms that operate securities lending programs — typically Wall Street banks — structured them to share in clients’ gains, while exposing clients to an “exclusive” risk of losses. “The practice of securities lending has been aptly described as ‘Heads, we win together. Tails, you lose — alone,'” the complaint said, quoting The New York Times.

Securities lending and borrowing is nothing new on Wall Street, in fact, it is common practice. Paying a different price based on the temperature of the stock (hot stocks costing more) is an important element for broker dealers and bank rehypothecating securities each night to earn a spread. Wells Fargo has decline to comment to date, as it has not yet fully reviewed the complaint.