This article covers a new Wells Fargo lawsuit alleging the San Fransisco-based bank of racketeering and fraud regarding auto insurance charges made against unsuspecting borrowers.
Wells Fargo & Co. (NYSE:WFC) customers accused the bank in a lawsuit of forcing them to pay for unnecessary auto insurance that drove some of them far into a financial spiral. This lawsuit, headed by Paul Hancock (a marketing consultant in Indianapolis), comes at a difficult time for shareholders.
The new Wells Fargo lawsuit follows the bank's previous scandal over unauthorized checking and credit-card accounts. In the previous scandal, according to Bloomberg, bank workers opened possibly 2.1 million accounts without customers’ permission over about 5 years. The bank paid $185 million to regulators to settle.
Outlook Following Wells Fargo Lawsuit
To be clear, WFC stock maintained stability in the initial scandal involving the unauthorized opening of customer accounts. However, the new Wells Fargo lawsuit seems legitimate. If it is true the bank wrongfully charged unsuspecting customers for auto insurance, Wells Fargo's financials may be called into questioning. Financial institutions rely on confidence and trust to succeed in markets. When that trust is broken, customers transfer to better institutions. Furthermore, investors lose confidence in the quality of earnings and the accuracy of asset valuations.
In the case of Wells Fargo, it is difficult road ahead for the company and shareholders alike. The first Wells Fargo lawsuit appeared to possibly be an idiosyncratic event. But, this new Wells Fargo lawsuit provides strong evidence the company has a severe problem with its culture. Compared to other bank holding companies, WFC trades at a relatively conservative valuation. However, it is impossible to determine the monetary outcome of this new Wells Fargo lawsuit. Additionally, earnings may decline due to less cross-selling and other sales pressure.
WFC Stock Rating
Therefore, we are adding Wells Fargo stock to our Bearish List. We expect Wells Fargo to experience significant backlash in the near future. Moreover, if Warren Buffett cuts his stake in WFC stock, there may be a panic from long-term investors in addition to pressure from shorts.