Wells Fargo faces whistleblower lawsuit over Wachovia's banking practices

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Spencer A Brown

John Stumpf, Wells Fargo's chairman and CEO.

Mark Calvey

Senior Reporter- San Francisco Business Times

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Whistleblowers, including one from the Bay Area, are suing Wells Fargo alleging improper accounting controls and banking practices in Wachovia's investment bank ahead of the 2008 financial crisis, the Charlotte Observer reported.

The suit, filed in 2011 in federal court in New York, was under seal until this week.

In July, the U.S. Justice Department declined to officially join the suit but said the whistleblowers could continue the case on their own, the Charlotte newspaper reported. No reason was given for the government's decision.

The litigation is worth watching, but it appeared to be of little concern to investors Wednesday. Wells Fargo shares are up about 15 percent this year and gained 39 cents, or 0.75 percent, to finish New York Stock Exchange trading Wednesday at $52.17. The Federal Reserve chairman's comments Wednesday on the official end of its quantitative easing program may have given bank shares a lift as investors expect the central bank is moving closer to raising rates. That could expand the profit margins for lenders.

The suit was filed by whistleblowers Paul Bishop, a Bay Area resident and former mortgage loan officer at Oakland-based Golden West Financial, and Robert Kraus, a former Wachovia controller who lives in North Carolina.

Wachovia purchased Golden West, parent of World Savings, in 2006 as the historic housing bubble was deflating. In 2008, Wells Fargo (NYSE: WFC) cut a deal to buy troubled Wachovia — in an "open bank" vs. a failed bank transaction — even as the North Carolina bank was on the verge of failure. Wells has succeeded by focusing on financial services for customers on Main Street.

Mark covers banking and finance.