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Law360 (June 5, 2020, 5:04 PM EDT ) A proposed securities class action filed against Wells Fargo in California federal court Thursday accuses the banking giant of hiding its dishonest policy for administering federal Paycheck Protection Program loans for small businesses struggling during the COVID-19 pandemic, causing its stock price to drop twice in two weeks.
Small businesses have filed lawsuits against Wells Fargo, accusing it of unfairly pushing their loan applications to the back of the pile in favor of requests from larger businesses that would yield larger processing fees instead of processing applications on a first-come, first-served basis.
By handling larger companies first beginning April 3, small applications were reviewed only just before the program ran out of money, those lawsuits allege.
In Thursday's putative class action filing, investor Guofeng Ma alleges that in misrepresenting its handling of the PPP loans, Wells Fargo opened up the bank to litigation and possible regulatory scrutiny and enforcement actions, allegations of which caused the stock price to drop more than 5% in April and again fall more than 6% in May.
Wells Fargo and other banks have been administering the PPP loans coming from the Coronavirus Aid, Relief, and Economic Security Act, with Wells Fargo tasked with distributing $10 billion to small-business customers.
Paid for by the U.S. Small Business Administration in two rounds of funding, the PPP authorizes up to $659 billion in forgivable loans to businesses with 500 or fewer employees to pay them during the coronavirus crisis.
Thursday's lawsuit alleges investors were harmed after the country's fourth-largest bank lied when it said it was focused on lending to businesses with fewer than 50 employees and nonprofits, when in fact, investors claim, it selected loans between $2 million and $10 million to make up to $100,000 in processing fees, as opposed to making up to $17,500 for processing smaller loans under $350,000.
Wells Fargo is also facing lawsuits accusing it of improperly requiring businesses to have pre-existing checking accounts to apply for the PPP loans.
The investor suit cites press releases from Wells Fargo that commit the bank to "focus lending to nonprofits and small businesses with fewer than 50 employees" and giving processing fees to nonprofits focused on small businesses.
The Federal Reserve on April 8 announced it would allow Wells Fargo to exceed the $2 trillion asset cap it had imposed in 2018 following revelations that the bank had opened millions of customer accounts without the customers' permission.
In a press release that day, the bank said it would expand its program and "offer loans to a broader set of its small-business and nonprofit customers subject to the terms of the program."
In an April 14 first-quarter earnings call, Wells Fargo CEO Charles W. Scharf said the bank "extended [their] participation in the PPP program and hope to provide significant relief to [their] small-business customers."
Scharf and Chief Financial Officer John R. Shrewsberry are named in the investor suit, which argues they "had a duty to disseminate accurate and truthful information with respect to Wells Fargo's financial condition and results of operations, and to correct promptly any public statements issued by Wells Fargo which had become materially false or misleading."
By misleading investors and the public about its focus on smaller businesses, Wells Fargo increased the company's litigation risk, increased regulatory scrutiny and/or potential enforcement actions, the suit claims.
On April 19, USA Today published an article highlighting a lawsuit filed against Wells Fargo for giving the government-backed PPP loans to larger companies.
As a result, the stock fell more than 5% over two trading days to close at $26.84 per share on April 21, investors allege.
On May 5, in its quarterly report filed with the U.S. Securities and Exchange Commission, Wells Fargo disclosed that it had "received formal and informal inquiries from federal and state governmental agencies regarding its offering of PPP loans."
Following this news, Wells Fargo's stock price fell by more than 6% over two trading days, closing at $25.61 per share on May 6.
The investor lawsuit alleges Wells Fargo used "fraud and deceit" in its management of PPP funds and by lying about how they were handling the program they did "artificially inflate and maintain the market price of Wells Fargo securities."
The suit seeks to represent a class of people who acquired Wells Fargo securities between April 5 and May 5, 2020.
Counsel for the investors didn't immediately respond to requests for comment Friday.
Representatives for Wells Fargo didn't immediately respond to requests for comment Friday.
The investors are represented by Jennifer Pafiti, J. Alexander Hood II, Jeremy Alan Lieberman and Patrick Vincent Dahlstrom of Pomerantz LLP and Peretz Bronstein of Bronstein Gewirtz & Grossman LLC.
Counsel for Wells Fargo couldn't be immediately determined.
The case is Guofeng Ma v. Wells Fargo & Co. et al., case number 3:20-cv-03697, in the U.S. District Court for the Northern District of California.
--Additional reporting by Grace Dixon. Editing by Janice Carter Brown.
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