Wachovia Corp., which is being bought by Wells Fargo & Co., has agreed to pay $200 million to settle lawsuits claiming it profited by ignoring fraudulent telemarketers who used the bank to help them steal from consumers. Victims of the telemarketing frauds filed suit in federal court in Philadelphia in 2007, claiming that Wachovia knew of claims the telemarketers were using “demand drafts,” or unsigned checks, to steal from their victims. The suits were filed on behalf of all people in the country who lost money to the telemarketers between June 2003 and February 2006. The settlement, which must be approved by the court before it can take effect, will reimburse $163 million the victims lost to the fraud, plus bank fees. In papers filed seeking approval of the settlement it was stated: “This settlement presents the rare instance in which class members have the opportunity to be made whole from any losses resulting from Defendants’ conduct.”

The settlement follows an April agreement to resolve a probe by the Office of the Comptroller of the Currency into Wachovia’s relationship to payment processors who serve telemarketers. Under the April settlement, Wachovia agreed to offer restitution of at least $125 million to all consumers who lost money on demand drafts processed by the bank. Wachovia had lots of problems – caused mostly by greed – and this settlement reveals the corporate culture of corruption that has existed in the boardrooms of many financial institutions.

In the Wachovia telemarketer fraud suit, unscrupulous telemarketers called consumers, many of them elderly, offering worthless products, including phony coupons, gift certificates and information about government grants. The telemarketers then persuaded the consumers to disclose information about their bank accounts, which the telemarketers used to make fraudulent charges through payment processors that had accounts at Wachovia. The payment processors generated demand drafts with a notice stating “authorized by drawer” in place of a signature. The victims claimed Wachovia failed to close the accounts because it was profiting from fees imposed when many of the consumers discovered the charges and rejected the transactions.

Reimbursement checks will be sent directly to the victims, which is quite unusual, and that’s a good thing. Most similar class-action settlements require claimants to fill out and mail forms or follow other complex procedures that sometimes reduce participation in settlements to about 10%. Victims can also make claims for reimbursement of any bank fees. It will be interesting to see how this settlement works out.

Source: Bloomberg

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