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Wells Fargo & Company : Panel Rules Wachovia Securities Must Pay $852,000 To Ex-Congressman

04/23/2012 | 05:24pm US/Eastern
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   By Caitlin Nish 
   Of  
 

An arbitration panel has ruled that Wachovia Securities Inc. must pay an ex-congressman from Florida $852,000 for damages related to an alleged Ponzi scheme.

The award represents a fraction of what former U.S. Rep. Alan Grayson had sought: up to $77 million in compensatory damages stemming from "stock loan" agreements he had participated in with Derivium Capital LLC and Derivium Capital (USA) Inc. Derivium's business collapsed in 2005, leaving participants in its loan program with hundreds of millions of dollars in combined losses.

Grayson alleged that Wachovia, which was acquired by Wells Fargo & Co. (WFC) in 2008, aided and abetted in a breach of fiduciary duty related to Grayson's involvement in the loans, according to documents from the Financial Industry Regulatory Authority arbitration panel.

While arbitration proceedings can often take more than a year to resolve, this case was unusually protracted, spanning five years and 44 separate hearing days.

Grayson and his AMG Trust alleged that Wachovia facilitated the scheme by engaging in brokerage and trading activity "when it knew, or should have known, that Derivium was a 'Ponzi' scheme," Florida-based Morgan & Morgan, the law firm which represented Grayson, said in a statement Monday.

A spokesman for Wells Fargo declined to immediately comment.

Tucker H. Byrd, Grayson's attorney, told Dow Jones Newswires that Derivium's stock loan program was designed for investors to borrow against stock without incurring a tax liability by promising to lend investors 90% of the value of shares transferred as collateral. At the end of three years, the investor had the option to repay the loan and interest and receive the stock back, surrender the stock to Derivium if it hadn't appreciated more than the interest accrued or have Derivium sell the stock and pay the investor any proceeds above the value of the loan, Byrd said.

Instead, Byrd alleged, the stock was immediately sold and Derivium made loans back to the borrowers with the proceeds of the sale of their own collateral.

Since Wachovia maintained accounts for both Grayson and Derivium, "we alleged Wachovia knew the transactions were different than as represented to the investing public and they knew it from day one," Byrd said.

Grayson, a Democrat who represented Florida's eighth congressional district between 2009 and 2011, originally filed his claim against Wachovia in 2007, alleging fraud, civil conspiracy and unfair trade practices, among other claims. At the close of the hearing he requested compensatory damages ranging from $27.9 million to $77.2 million, depending on the damage calculation model utilized, as well as interest and attorneys' fees, according to the arbitration documents.

The panel found Wachovia liable only on Grayson's claim of aiding and abetting breach of fiduciary duty, ruling it must pay $852,000, inclusive of pre-judgment interest.

As is customary, the panel didn't explain the reasoning for its decision, which was dated April 2.

A South Carolina federal jury in 2009 awarded at least $150 million to plaintiffs, including $34 million for Grayson, in a lawsuit over the stock loan program, according to local media reports. Grayson, a lawyer and the first president of telecommunications company IDT Corp. (IDT), announced last summer that he is planning another run for Congress this year.

-By Caitlin Nish, Dow Jones Newswires; 212-416-2076; caitlin.nish@dowjones.com

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