Monday, December 15, 2014

Is a bigger sucker a protected consumer?

Securian Financial Group, Inc. v. Wells Fargo Bank, N.A., 2014 WL 6911100, No. 11–2957 (D. Minn. Dec. 8, 2014)

How sophisticated can you be and still be a consumer for the purpose of consumer protection law?  Pretty sophisticated, in some cases. 

The plaintiffs: Minnesota Life is an insurance, pension, and investment products firm that provides its services to individuals and families. Securian Financial, its parent, is an insurance and financial services firm with over 13 million clients, and Securian Holding is its parent.  Advantus Capital Management is a registered investment adviser wholly owned by Securian Financial.  Advantus provided asset management services to Minnesota Life and Securian Holding. Advantus has billions of dollars in assets under its management and its professionals have significant experience in the investment industry. Advantus advised and managed the Advantus Series Fund, whose investments backed some Minnesota Life products.

Wells Fargo is a bank offering a Securities Lending Program.  The SLP allows Wells Fargo to act as an agent lending its clients’ securities to brokers in return for collateral, usually cash. Wells Fargo then invests the collateral on behalf of its clients.

Plaintiffs were institutional investor clients of Wells Fargo’s SLP. They were experienced in a number of types of asset management, including “traditional asset management,” but they didn’t administer any SLPs. Wells Fargo marketed the SLP as involving investments in “short term money market instruments” that “maximize[d] earnings, while taking minimal risk.”  Plaintiffs alleged that the securities lending business was very complex and requires specialized knowledge and processes.  Plaintiffs and Wells Fargo entered into a number of securities lending agreements, and they paid Wells Fargo approximately $5 million for its services.  Further complexities ensued, involving structured investment vehicles and hedging activities; they went bad.  Plaintiffs sued for breach of contract (and ERISA violations), which I won’t discuss, and violation of Minnesota consumer protection statutes.

Wells Fargo sought summary judgment on the grounds that plaintiffs, as sophisticated merchants, were barred from bringing consumer protection claims.  Minnesota’s consumer protection/unfair trade practices laws are “generally very broadly construed to enhance consumer protection.”  The controlling state precedent didn’t bar “merchants” from bringing consumer fraud claims across the board.  “Instead, courts focus their analysis on whether a party can be considered a sophisticated merchant in the specific skills or goods at issue, and only those parties that are in fact deemed to be sophisticated merchants in the specific skills or goods at issue have been precluded from asserting Minnesota consumer claims.”  The court found that a jury could reasonably concluded that plaintiffs weren’t “merchants” for purposes of these transactions, based on disputed facts about their sophistication. 

Though it would be an uphill battle, there was enough evidence to go to a jury about whether they were sophisticated in matters of securities lending.  Plaintiffs offered evidence that they never held themselves out as having special skills or knowledge with respect to the securities lending business. To this they added an expert opinion that securities lending is a highly complex business that involves complex services, processes, and monitoring, and evidence that, “due to this complexity, they did not have the mechanisms for managing securities lending and also gave management discretion entirely to Wells Fargo for their investments.”  In addition, a jury could accept that Wells Fargo agreed that plaintiffs weren’t sophisticated in this area given the marketing materials Wells Fargo provided to them, which detailed the program and Wells Fargo’s risk safeguards.

The court also denied plaintiffs’ motion for summary judgment on their breach of contract claims.

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