WASHINGTON — A Wells Fargo & Co. shareholder has filed suit against 13 top officials at the bank, alleging they committed a breach of fiduciary duty, abuse of control, and gross mismanagement by permitting the bank to continue to participate in sale-in, lease-out transactions after the federal government warned they were illegitimate tax shelters.
Robert Marshall, of San Mateo County, Calif., filed suit in San Francisco County Superior Court yesterday on behalf of the bank. In the complaint, he alleges that the bank’s top executives, as well as members of its board of directors sitting on audit and finance committees, “approved or ratified conduct by Wells Fargo which was not in the best interest of the company or shareholders.”
The complaint names former chairman, president and chief executive officer Richard M. Kovacevich, current chairman, president and CEO John G. Stumpf, as well as 11 current members of the board of directors and claims they “knew or should have known since at least 1996, that the [Internal Revenue Service] considered the types of leverage lease transactions at issue here to be dubious tax shelters.”
“The complaint alleges that the defendants allowed Wells Fargo to engage in another form of ripping off the public,” said Nanci Nishimura, an attorney with Cotchett, Pitre & McCarthy in San Francisco, which is representing Marshall.
The suit seeks an unspecified amount of damages from the defendants, which if awarded would go to Wells Fargo, according to Nishimura.
The lawsuit comes a little over a week after a federal judge strongly rejected Wells Fargo’s attempt to claim a $115 million tax deduction stemming from 26 sale-in, lease-out, or SILO, deals, 17 of which involved public transit agencies.
Judge Thomas C. Wheeler ruled that Wells Fargo was not entitled to any tax deductions stemming from the transactions, which the IRS had previously disallowed.
“If the court were to approve of these SILO schemes, the big losers would be the Internal Revenue Service ... deprived of millions in taxes rightfully due from a financial giant, and the taxpaying public, forced to bear the burden of the taxes avoid by Wells Fargo,” Wheeler wrote in his opinion. “No rational person would engage in these transactions absent the tax benefits.”
In SILOs and lease-in, lease-out, or LILO, transactions, transit or other authorities typically sell or lease equipment to banks or other private entities. The authorities then lease back the equipment from the banks, repaying them over time and often exercising an option to purchase the equipment at the end of the leases. The banks or other investors obtain depreciation, interest and transaction cost deductions.
However, the IRS concluded SILOs were abusive tax shelters in 2005, saying they lacked economic substance.
The IRS in August 2008 offered to settle with any corporate taxpayers who had participated in LILO and SILO transactions. Under the settlements, the banks would have to agree to return 80% of the tax savings they realized under lease-back transactions.
Thirty of the 45 companies targeted agreed to settle. The suit cited Wells Fargo’s rejection of the settlement as evidence that its leaders were failing to act in the best interests of the company.
A case management conference is currently scheduled for June 25, Nishimura said.