On Monday, The Department of Labor (DOL) announced a settlement with Wells Fargo and GreatBanc Trust Company that “recovers more than $131.8 million for the retirement plan’s participants after a department investigation found that, from 2013 through 2018, the fund overpaid for company stock purchased for the plan.”
Wells Fargo also agreed to pay a penalty of nearly $13.2 million as part of the settlement. Wells Fargo and GreatBanc entered into the settlement without admitting or denying the allegations made by the department.
The action follows an investigation by the department’s Employee Benefits Security Administration that determined Wells Fargo and GreatBanc Trust Company caused the 401k plan to pay between $1,033 and $1,090 per share for Wells Fargo preferred stock.
Specifically designed for the plan, the stock converted to a set value of $1,000 in Wells Fargo common stock when allocated to participants. In transactions between 2013 and 2018, the plan borrowed money from Wells Fargo to purchase the preferred stock.
In addition, EBSA investigators learned Wells Fargo used the dividends paid on the preferred shares to defray its obligation to make contributions to the 401k plan by using the dividends to repay the stock purchase loans. The investigation revealed the transaction was designed to cause the 401k plan to pay more for each share of stock than plan participants would ever receive.
“Our investigation found those responsible for Wells Fargo’s 401k plan paid more than fair market value for employer stock and, by doing so, betrayed the trust of the plan’s current and future retirees,” Secretary of Labor Marty Walsh said in a statement. “Today’s settlement shows the Department of Labor will act when we find retirement assets are misused and benefit plans suffer.”
Once Wells Fargo pays the settlement amount to the trust, the funds will be allocated to current and former participants affected by these transactions. Wells Fargo will redeem the remaining convertible preferred stock for common stock and will stop using dividends from the convertible preferred shares to repay the stock purchase loans.
Fiduciary no more
In addition, GreatBanc will not act as a fiduciary to a public company in connection with any future leveraged transaction involving an employee stock ownership plan, unless the plan acquires only publicly traded stock and pays no more than the fair market value.
“The Employee Retirement Income Security Act requires, and participants’ retirement security demands, that when retirement plans purchase employer stock, they pay no more than fair market value,” Acting Assistant Secretary for Employee Benefits Security Ali Khawar added. “This settlement demonstrates that the Employee Benefits Security Administration will not allow participants to be harmed by ERISA plans that overpay for plan assets.”
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With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
An obvious fraud. Who goes to jail? Nobody of course.
Somebody designed and implemented this strategy.