A newly unsealed federal lawsuit alleges Wachovia’s investment bank violated accounting rules and skirted internal controls to pursue short-term profits, benefiting senior management at the expense of the former Charlotte-based bank’s financial health.
Two whistleblowers, including a former Wachovia controller who lives in Union County, filed their lawsuit on behalf of the federal government, alleging the bank defrauded U.S. agencies that loaned money and provided other assistance to the bank in the financial crisis.
The lawsuit was first filed in 2011 but kept under seal until this week. Under the U.S. False Claims Act, the whistleblowers could be eligible to receive up to 30 percent of any damages or penalties awarded under the action.
The suit – filed against Wells Fargo, which bought Wachovia in 2008 – is the latest legal action to take on banks for their role in the global financial meltdown.
The complaint mostly targets alleged fraud that occurred in Wachovia’s Charlotte-based corporate and investment bank, which was a major player in packaging commercial real estate loans into securities. The complaint also alleges that Golden West Financial, the mortgage company Wachovia bought in 2006, had poor internal controls and inadequate underwriting practices.
Like other big banks, Wachovia began reporting billions of dollars in losses in its investment bank in 2007 after a global credit crunch spurred by a meltdown in subprime mortgages made to borrowers with spotty credit. By the fall of 2008, with losses also ballooning in its Golden West portfolio, the stalwart North Carolina institution was on the verge of failure and in need of an emergency sale to San Francisco-based Wells Fargo.
The suit says Wachovia defrauded the government of billions of dollars when it accepted payment from various federal programs while engaging in unsound banking practices, making false certifications about its financial statements and concealing “mismanagement and fraudulent practices.” Later, Wells Fargo did not “come clean” about the fraud it inherited, the suit claims.
The government “should do right by the U.S. taxpayer and recover monies from Wachovia and Wells Fargo under the U.S. False Claims Act for having bailed them out under outrageously false and fraudulent pretenses,” the complaint states.
Wells Fargo in a statement said the bank “continues to believe these claims are without merit.”