Wells Fargo Has Legal Trouble With Uncle Sam

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Tuesday marks the five-year anniversary of the all-time highs made in the Dow Jones Industrial Average and S&P 500. The credit crisis and house bubble sent both indices screaming lower from their respective peaks made in 2007. Equities have managed to claw-back much of their gains in the wake of central banks around the world flooding the market with liquidity, but investors are still waiting for some type of justice among the big banks.

Wells Fargo (NYSE:WFC), the nation’s largest mortgage lender, was sued by the United States government over civil mortgage fraud on Tuesday. Preet Bharara, U.S. Attorney for the Southern District of New York, filed the lawsuit claiming the Warren Buffett (NYSE:BRKA) endorsed bank committed fraud by making reckless mortgage loans, according to Bloomberg and a complaint filed in Manhattan federal court.

Bharara explains, “As the complaint alleges, yet another major bank has engaged in a longstanding and reckless trifecta of deficient training, deficient underwriting and deficient disclosure, all while relying on the convenient backstop of government insurance. As also alleged, Wells Fargo’s bonus incentive plan – rewarding employees based on the sheer number of loans approved – was an accelerant to a fire already burning, as quality repeatedly took a back seat to quantity,” in a press statement. What’s more, even after concerns were raised internally at the bank, Wells Fargo began self-reporting bad loans in a significant way, as required, only after this Office issued a subpoena last year. Now a jury will have to weigh the facts to determine the bank’s liability and the scope of the damages it must pay.”

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The development comes about a week after Eric Schneiderman, the Attorney General of the State of New York, filed a 31-page complaint against JPMorgan Chase (NYSE:JPM). Schneiderman is accusing the country’s largest bank by assets of failing to review residential mortgage-backed securities with due diligence, and systemically misleading investors about both the quality of their checks and the securities.

As the chart above shows, the news had an immediate effect on the banking sector, at least in the short-term. Wells Fargo closed the trading day down almost 2 percent, while Bank of America (NYSE:BAC) finished 0.75 percent in the red. Other banks such as Citigroup (NYSE:C) and JPMorgan Chase also edged 0.52 percent and 0.67 percent lower, respectively.

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