A couple of Pimco investment funds have accused Wells Fargo of paying its own legal costs using noteholder’s money. According to lawyers representing Pimco, approximately $95 million has been reserved by Wells Fargo to take care of the legal expenses. Consequently, a complaint requesting a declaratory judgment to be made saying Wells Fargo has no right to use funds belonging to noteholders has been filed at the Manhattan State Supreme Court.
“[Wells Fargo is accused of] unauthorised and unlawful looting of trust funds to pay attorneys’ fees and defence costs, and to indemnify itself against its own negligent and wilful misconduct,” read the complaint.
According to the filed complaint, the litigation reserves by Wells Fargo were exposed three months ago when New Residential Investment Corp exercised its rights to calls in trusts overseen by Wells Fargo over a principal balance of approximately $309.5 million that had gone unpaid. In the complaint it is alleged that Wells Fargo went on to withhold approximately $57.2 million with a view to establishing trustee reserve accounts which were meant to take care of legal expenses which would arise out of litigation in the lender’s conduct as a trustee.
This is not the first time trustees and noteholders of mortgage-backed securities are getting involved in a legal dispute. Pimco has joined other major institutional investors to pursue such MBS trustees as HSBC, Deutsche bank and Wells Fargo over failure to act against sponsors of mortgage-backed securities once the trusts started to lose money. In June $90 million was withheld from investors by Wells Fargo in MBS deals which dated as far back as 2004 and 2005. Upon liquidation of the bonds, investors were expecting $542 million.
Besides Pimco, Royal Park Investment last March sought a court order demanding that Deutsche Bank be compelled to reveal any legal expenses and fees it had charged to trusts of mortgage-backed securities. Royal Park Investment claimed that the contracts of the trust did not in any way indemnify the German-based lender from claims of misconduct or negligence.
But lawyers representing the lender argued that the contracts of the trust expressly indemnify the trustee of the mortgaged-backed securities from costs and fees that come with carrying out its trustee duties. In her ruling Magistrate Barbara Moses ruled that the request by Royal Park Investment was beyond her scope and suggested that Royal Park Investment file a motion of preliminary injunction if it was interested in pursuing the matter further.