FINRA Expert Says Wells Fargo Fulfilled Fiduciary Duty Amidst Financial Crisis

Court: United States District Court for the District of MinnesotaJurisdiction: FederalCase Name: City of Farmington Hills Emps. Ret. Sys. v. Wells Fargo BankCitation: N.A., 979 F. Supp. 2d 981

Facts

A municipal employee retirement system, along with other similarly situated investors, participated in a securities lending program (SLP) offered by Wells Fargo Bank. As part of the Wells Fargo program, participants would allow the bank to lend their securities to third-party lenders in exchange for cash collateral. Wells Fargo would then invest the cash collateral. The plaintiffs’ relationship with Wells Fargo was defined as a Securities Lending Agreement. On the plaintiffs’ behalf, Wells Fargo lent securities to several companies that went bankrupt, prompting the plaintiffs to file a lawsuit. To aid its defense, Wells Fargo retained a Financial Industry Regulatory Authority (FINRA) expert witness to testify that the program worked in the investors’ best interests. The plaintiffs moved to exclude the FINRA expert’s report and testimony.

The FINRA Expert Witness

The defendant’s FINRA expert witness held a B.S. in mechanical engineering from the University of Pennsylvania and an M.B.A. in finance from Harvard University. He had worked in the financial sector for over 30 years. The expert had been accredited as an expert to appear at trials, tribunal hearings, and Financial Industry Regulatory Authority proceedings over 30 times in the previous four years. When carrying out his research, the expert relied on case documentation and materials, as well as publicly available records and business publications. The expert also used depositions and interviews with employees at Wells Fargo.

The FINRA expert opined that the tools of the program, including key personnel, committee processes, and outside experts, complied with industry standards and allowed Wells Fargo to exercise its fiduciary duties concerning the management of the program. The expert further asserted that the program complied with the industry’s standard practices and served the fiduciary duty in terms of the four critical functions performed for clients. Concerning the loans given to companies that later went bankrupt, the expert explained that the program exerted prudence and due diligence in the face of an ongoing financial crisis. The expert asserted the program served the fiduciary duty to handle customers equally, taking into account the changing market conditions. In summary, the expert opined program always behaved in the best interests of its investors in making and sharing investment decisions, thus satisfying its fiduciary duties.

Discussion

The Court noted that the plaintiff’s Daubert motion placed a duty on the court to ensure that scientific evidence is not just relevant but also reliable under the Rules of Evidence. Per the plaintiffs’ argument, the FINRA expert did not function as an expert but rather subverted the deposition testimony of lay witnesses. The plaintiffs also claimed that because the expert had accepted the self-serving assumptions of the Wells Fargo employees and did not present objective methodology or reasoning, his views represented an impermissible ipse dixit.

In response, however, the court explained that the plaintiffs could test the credibility of the expert’s opinions and methodology through cross examination and submit their own contrary evidence.

Held

The court denied the motion to exclude the defendant’s FINRA expert witness.