Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-3_05-cv-04518/USCOURTS-cand-3_05-cv-04518-54/pdf.json

Nature of Suit Code: 850
Nature of Suit: Securities, Commodities, Exchange
Cause of Action: 28:1331 Fed. Question: Securities Violation

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United States District Court

For the Northern District of California

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IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF CALIFORNIA

RONALD SIEMERS, individually and on

behalf of all others similarly situated,

Plaintiffs,

 v.

WELLS FARGO & CO.,WELLS FARGO

FUNDS MANAGEMENT, LLC, WELLS

CAPITAL MANAGEMENT, INC., WELLS

FARGO INVESTMENTS, LLC, STEPHENS,

INC., and WELLS FARGO FUNDS TRUST,

Defendants. /

No. C 05-04518 WHA

ORDER GRANTING

CLASS CERTIFICATION

AND CONFIRMING

CLASS REPRESENTATIVE

AND CLASS COUNSEL

INTRODUCTION

In this securities-fraud action, this order certifies the following class: 

All purchasers of shares (of any class) bought between

November 4, 2000, and June 8, 2005, in any of the following

mutual funds: Wells Fargo Advantage Small Cap Growth Fund,

Wells Fargo TR Montgomery Emerging Markets Focus Fund, and

Wells Fargo Diversified Equity Fund. 

STATEMENT

The fact pattern and remaining claims in this action are summarized in the orders dated

March 9, April 17, and May 23, 2007. In brief, the Wells Fargo defendants sponsored a number

of mutual funds. As advisors and managers, they took money out of the funds in the form of

fees. The fees were usually a percentage of the size of the fund. It was thus to their

advantage to attract more and more investors and thereby increase the fee base. To this end, the

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Wells Fargo sponsors allegedly made cash payments to various brokerage houses to induce

them to steer their clients into the Wells Fargo funds irrespective of the merits of the

investments. 

Via a crackdown on this practice by the Securities and Exchange Commission, payments

of this type have come to be known as “revenue sharing,” i.e., the fund advisor “shares” its

“revenue” with the broker-dealers with direct access to the investing public. Because such

payments resemble kickbacks and because such payments incentivize broker-dealers to violate

professional standards requiring objective recommendations, all parties to such arrangements

had motives to keep them secret. As described by the Commission (and in the March 9 and

April 17 orders cited above), one of the evils of revenue sharing has been that the sponsors have

been tempted, given the magnitude of the revenue-sharing load, to use the investors’ money

rather than to use their own to finance such ongoing distribution. One legitimate way to do so

is through so-called Rule 12b-1 fees, which are expressly allowed for that purpose. On the

other hand, the Commission has denounced any sham increase in advisory (or other) fees as a

conduit for financing ongoing distribution and/or the use of directed brokerage to reward the

brokerage firms for steering their clients into the funds. 

Over time, the Wells Fargo revenue-sharing payments grew in size and reached large

magnitudes. The Wells Fargo sponsors allegedly had strong incentives to keep their advisory

fees high in order to finance their ongoing revenue sharing, i.e., to maintain excessive fees in

order to use the investors’ money to finance ongoing distribution rather than to use their own

money to do so. The Wells Fargo program grew to include $372 million in “kickbacks” to

472 brokers over a five-year period — or so it is alleged. 

Through its prospectuses and otherwise, Wells Fargo promoted its mutual funds but

allegedly made a point of concealing as much as possible about the nature and scope of its

revenue-sharing arrangements. During the class period (November 4, 2000, through June 8,

2005), successive versions of the prospectuses included more and more hints at the

arrangements but none ever came clean and disclosed the full story — or so it is alleged. 

In essence, the primary concealments were (i) that some portion of the advisory (and other)

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fees imposed on the fund (and thus the investors) was not for the stated purpose but was a

charade and really just a conduit for financing the undisclosed program of revenue sharing

and (ii) that the undisclosed revenue-sharing program had reached such magnitude that the

advisors had a conflict of interest in extracting fees from the fund, having a duty to subtract

only justifiable fees. As the Commission has said in somewhat similar circumstances, it was

incumbent on the sponsors to disclose the large-scale program so that investors could decide

for themselves whether to place their money in the hands of a fiduciary under such conflicting

financial pressure. See, e.g., Mass. Fin. Srvs. Co., Inv. Advisers Act of 1940 Release

No. 2,224/Inv. Co. Act of 1940 Release No. 26,409 at ¶¶ 24–25 (Mar. 31, 2004).

Ronald Siemers was one such investor. He invested in the three Wells Fargo funds

stated above. He is the lead plaintiff. 

* * *

Five prior rounds of substantive motions have been addressed. Defendants’ first round

of motions to dismiss were ruled on in an order dated August 14, 2006. That order allowed a

significant portion of the case to go forward, specifically the claims brought under Sections 12

and 15 of the Securities Act of 1933 and Sections 10 and 20 of the Securities Exchange Act

of 1934. The claim under Section 36 of the Investment Company Act of 1940 was dismissed

for lack of standing. Lead plaintiff Siemers, however, was allowed to cure this defect by

alleging that he had standing by virtue of his continued ownership in any of the funds at issue. 

Counsel filed a second amended complaint.

Defendants’ second motion to dismiss was directed, in significant part, at the issue of

standing. An order dated October 24, 2006, held that lead plaintiff Siemers had not adequately

alleged standing as to mutual funds he did not own. Counsel were allowed to cure this claim

by attempting to find other potential class representatives who had owned other funds that had

engaged in revenue sharing. Counsel were directed to move for leave to file a third amended

complaint and to propose further named plaintiffs. They did so. 

Extensive briefing and several rounds of supplemental briefing were directed at the

motion for leave to file a third amended complaint. It was not until that point that the vastness

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of counsel’s agenda emerged. An order dated March 9, 2007, laid out a comprehensive

discussion of the entire case and set forth why counsel’s proposed case would be entirely

unmanageable. Thousands of individual funds — the vast majority having nothing to do

with Wells Fargo fund sponsors — would be potentially at issue. For reasons covered in detail

in that order, the Section 10 claims against the broker defendants were dismissed and all claims

related to non-Wells Fargo funds were severed and stayed. Only one proposed named plaintiff,

Forrest McKenna, was allowed to join as a potential class representative, Mr. McKenna having

represented that he had purchased several Wells Fargo funds. Plaintiffs were then allowed to

file a third amended complaint in an attempt to strengthen the pleading allegations, in

accordance with the March 9 order, as to the more limited universe of claims.

Following the filing of the third amended complaint, defendants filed a third motion to

dismiss, directed only at the Section 10 claims. By order dated April 17, 2007, the Court denied

defendants’ motion. The order sustained, for pleading purposes, the Section 10 claims as to the

remaining defendants. 

Just prior to the filing deadline for the motion for class certification, defendants filed a

motion for judgment on the pleadings, directed at the claims under the 1933 Act. By order

dated May 17, 2007, defendants’ motion was granted in full. Because lead plaintiff Siemers

had not suffered any rescissionary damages — the only measure of damage allowed under

Section 12 — he had no damages claim under the 1933 Act. Moreover, all of McKenna’s

1933 Act claims were time-barred. Following ruling on that motion, the only remaining claims

were those brought under Sections 10 and 20 of the 1934 Act and Section 36 of the 1940 Act. 

Finally, one issue raised by defendants in opposition to the pending motion has already

been addressed. All agree that no defendant in this case had issued any mutual fund shares in

any fund acquired by McKenna. McKenna, both sides agree, is not an appropriate class

representative in this case. His motion to represent the class was denied by order dated May 23,

2007, leaving only Siemers as the putative class representative. 

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ANALYSIS

The remainder of this order explains why the class set forth on page one is now certified

under Rule 23. 

1. RULE 23(a)(1) — NUMEROSITY.

This requirement is satisfied, given the thousands who purchased the three funds during

the class period. Defendants do not dispute this conclusion. 

2. RULE 23(a)(2) — COMMON QUESTIONS.

The necessary elements of a Section 10(b) claim were summarized in Dura

Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336, 341–42 (2005) (citations omitted): 

(1) a material misrepresentation (or omission); 

(2) scienter, i.e., a wrongful state of mind; 

(3) a connection with the purchase or sale of a security; 

(4) reliance, often referred to in cases involving public

securities markets (fraud-on-the-market cases) as “transaction

causation”; 

(5) economic loss; and 

(6) “loss causation,” i.e., a causal connection between the

material misrepresentation and the loss. 

By now, the undersigned has a tolerable appreciation for the fact pattern of this case,

given counsel’s vigorous motion practice. Much of what will be presented at trial pertains to

issues common not only to the three funds but to all 100+ Wells Fargo funds. The overall

Wells Fargo revenue-sharing program and secret payments of $372 million to the web of

broker-dealers, for example, will be common proof as to all 100+ funds. The wording of the

prospectuses for the three funds will be common, not only to the three but many others as well,

namely in what was omitted as stated above. Thus, the first three elements of a Section 10(b)

claim, as set forth in Dura, lend themselves to common class-wide proof. 

One contested issue is reliance/transaction causation. Normally, plaintiffs have the

burden to prove reliance by all class members via some acceptable method of class-wide proof. 

Plaintiffs seek to do so by characterizing this case as primarily relying on omissions rather than

affirmatively false statements, invoking Affiliated Ute Citizens of Utah v. United States, 406 U.S.

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128, 153–54 (1972). To see why Affiliated Ute is critical here, we must remember how this case

differs from the routine securities-fraud case. In the routine case, a fraud comes to light and the

stock price plummets. In such a case, the class invokes the fraud-on-the-market presumption to

establish reliance and transaction causation, as set out by Basic Inc. v. Levison, 485 U.S. 224,

242 (1988). Once a plaintiff proves that the shares were traded in an efficient market, the rule

presumes that all available public information was factored into the market stock price. 

Thus, even if a stock purchaser neglected to read and rely on a prospectus, he or she was

nonetheless entitled to rely on the pending market price as reflecting all available public

information. If the market was misled, then all who have relied on the market price were also

misled. It does not matter whether the fraud was an omission or a positive statement. The Basic

presumption is the workhorse of the class part of most securities class actions. 

With respect to mutual funds, however, the Basic presumption does not fit, for there is no

stock-price drop. The mutual fund is, instead, priced by the net asset value method. This is

based on the daily market closing prices for the underlying portfolio (such as portfolio shares in

General Motors, Exxon Corporation, etc.). The net asset value of the portfolio as a whole is then

divided by the number of shares outstanding in the mutual fund to derive the daily share value. 

Bad news about the management of a mutual fund may lead to a downgrading by Morningstar,

but it will not provoke a precipitous drop in the net asset value of the fund itself. The underlying

portfolio will retain its inherent value despite any such bad news about the fund management. 

The rise and fall of the daily share value in a mutual fund, therefore, does not capture the

publicly available information about the management of the fund in the way contemplated in

Basic. The Basic presumption of reliance does not fit our case — plaintiffs so agree. 

Given the inapplicability of the usual presumption, the importance of Affiliated Ute

to the maintenance of this suit as a class action is thus apparent. Affiliated Ute itself was not a

class case, but it did hold that reliance need not be proven when there is a material omission. 

The Ninth Circuit expressly extended Affiliated Ute to class cases in Blackie v. Barrack, 524

F.2d 891, 905–07 (9th Cir. 1975). That decision also noted that “materiality directly establishes

causation more likely than not.” Id. at 906 n.22. In 1999, however, the Ninth Circuit limited the

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class-wide use of Affiliated Ute to any case that “primarily alleges omissions.” Even if an action

is a “mixed case” involving both affirmative falsehoods as well as omissions, Affiliated Ute may

not be applied unless the district court properly finds that the action “primarily alleges

omissions.” Binder v. Gillespie, 184 F.3d 1059, 1064 (9th Cir. 1999). 

Applying this test to our own record, it is true that this action is a “mixed case.” 

Both omissions and affirmative falsehoods are asserted. Some of the allegations highlight

omissions (Compl. ¶¶ 4, 5, 25, 36, 44, 51, 59, 68, 130, 140, 161). Others reference affirmative

misrepresentations (Compl. ¶¶ 44, 51, 59, 68). Having been immersed in this case through so

many hearings, the Court is convinced that this action is primarily concerned with a key

omission — the alleged studied refusal of the Wells Fargo sponsors to disclose their massive

system of revenue sharing and its consequent financing such ongoing distribution from the

investor’s common fund (via sham fees) rather than from the sponsor’s own money. 

Therefore, this case meets the Binder/Blackie test for class application of the Affiliated Ute rule. 

Defendants say their evidence will demonstrate that few ever read any prospectuses. 

Without reaching all the issues this proffer suggests, it is enough to remember that Blackie v.

Barrack expressly rejected arguments of this type, stating: 

The right of rebuttal, however, does not preclude the

predominance of common questions. Causation as to each class

member is commonly proved more likely than not by materiality. 

That showing will undoubtedly be conclusive as to most of the

class. The fact that a defendant may be able to defeat the showing

of causation as to a few individual class members does not

transform the common question into a multitude of individual

ones; plaintiffs satisfy their burden of showing causation as to

each by showing materiality as to all. 

Blackie, 524 F.2d at 907 n.22. 

When, however, it comes to establishing that the sponsors really did impose sham fees as

conduits to finance ongoing distribution, proof on a class-wide basis will not be as simple as

plaintiff has proposed. On this issue, class counsel will need to prove — fund by fund, fee by

fee — that a sham was afoot. Each fee must be judged under the excessiveness factors set forth

in Gartenberg v. Merrill Lynch Asset Management, 694 F.2d 923, 929–30 (2d Cir. 1982),

there being no Ninth Circuit authority on point. The Gartenberg method of proof will require a

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case-by-case analysis before the jury. (Of course, other broader themes may also be presented,

such as the overall size of the allegedly secret program and Wells Fargo’s allegedly desperate

need to find ways to finance it.) Significantly, each case study will identically cover many

hundreds, if not thousands, of investors, so even this method of proof will do common duty. 

With respect to loss causation and damages, defendants are wrong to argue that a

stock-price drop is the exclusive method for proving damages and loss causation. In churning

cases under Section 10(b), for example, the Ninth Circuit has specifically approved a measure

of damages based on the excess in commissions due to churning in an investment account. 

Nesbit v. McNeill, 896 F.2d 380, 385 (9th Cir. 1990). This is analogous to our case. It is true,

of course, that Dura Pharmaceuticals called out a stock-price drop as one usual way to prove

damages and loss causation. But the decision did not limit plaintiffs to that single method,

instead saying that “it should not prove burdensome for a plaintiff . . . to provide a defendant

with some indication of the loss and the causal connection that the plaintiff has in mind.” 

Id. at 347. Using the Gartenberg factors, the churning analogy approved by the Ninth Circuit

may be employed herein on a class-wide basis. 

3. RULE 23(a)(3) — TYPICALITY. 

This order finds that the claim of lead plaintiff Ronald Siemers is typical of those by

other members of the class, including those who bought other “classes” of the same funds as did

he, for they were all victims to greater or lesser degree of the same undisclosed (alleged) scheme. 

Contrary to defendants, a class representative does not have to have the exact liability

claim as all other class members under Article III. Rather, once the class representative

establishes his own Article III standing, such that there is a concrete case or controversy, then

the issue shifts to whether his claims are sufficiently typical of absent class members such

that they would be afforded due process by letting him, in a representative capacity, litigate

(and potentially lose) the absent-member claims. Cal. Rural Legal Assistance, Inc. v. Legal

Services Corp., 917 F.2d 1171, 1175 (9th Cir. 1990). With respect to the Class A versus

Class B versus Class C shares (all in the same fund), the variations in claims are so minor that

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due process would not be offended in allowing our lead plaintiff to press all such claims to

judgment, however well or poorly it may end. 

The Article III argument has more traction when it comes to whether, as plaintiffs

contend, the class should be extended to the 100+ funds sponsored by defendants. As to 97+ of

the funds, our lead plaintiff was not an investor. Nonetheless, his claims are typical to a degree. 

For example, the overall massive program of revenue sharing will be common to all 100+ funds. 

A major difficulty flows from the necessity to prove on a fund-by-fund and fee-by-fee basis that

excessive/sham fees were imposed. Out of some concern for insufficient typicality but out of

more concern for manageability, as will be discussed below, this order declines to extend the

class to all 100+ funds. (Nonetheless, other investors in other funds may derive some

collateral-estoppel benefit from any findings made in favor of the more limited class certified

herein.) 

4. RULE 23(a)(4) — ADEQUACY OF REPRESENTATION.

For all of the reasons set forth in the order appointing Mr. Siemers as the lead plaintiff,

which reasons are now reaffirmed, this order finds that he will adequately and fairly represent

the class. 

The main new attack on Mr. Siemers is his alleged conflict of interest. Because he is also

pursuing a Section 36 claim under the 1940 Act on behalf of the Wells Fargo Advantage Small

Cap Fund (but not as to the other two funds), there is a potential conflict. Under Section 36,

the recovery would go back to the fund and thus would benefit all current investors. 

Under Section 10(b), the recovery goes to individual purchasers who bought within the

Section 10(b) limitations period, some of whom may have sold and some of whom may still hold

the shares, i.e., the recovery does not go into the fund. 

The supposed conflict is not as embarrassing as defendants claim. The Section 36 claim

will be bifurcated and stayed. If the jury finds in the Section 10 trial that excessive fees were

charged, then that finding will do double duty as the predicate for a later Section 36 trial. 

The total amount of any excess fees can be divided neatly between those who are eligible for

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Section 10 recovery with the balance eventually going to the fund itself for the benefit of extant

investors. 

5. RULE 23(b)(3). 

This order finds that the questions of law and fact common to the members of the

certified class predominate over all questions affecting only individual members and that a

class action is superior to other available methods for the fair and efficient adjudication of the

controversy. Three of the factors called out by the rule need only brief consideration. 

With respect to “the interest of members of the class in individually controlling the prosecution

or defense of separate actions,” it is plain that there are no such other separate actions. 

The amounts involved are modest per investor. No single investor could hope to recover more

than it would cost to prosecute an individual suit. With respect to “the extent and nature of any

litigation concerning the controversy already commenced by or against members of the class,”

there is none other than the present suit, as stated. With respect to the “desirability or

undesirability of concentrating the litigation of the claims in a particular forum,” it seems

undisputed that this venue, being the home of Wells Fargo, is a desirable and convenient place to

concentrate the litigation, no other venue having been suggested. Again, there are no competing

similar suits against these defendants. 

Cutting a much larger figure is the final factor: “The difficulties likely to be encountered

in the management of a class action.” This factor decidedly militates against the massive class

proposed by plaintiffs, a proposal to include all purchasers in all 100+ Wells Fargo mutual funds

over the five-year period. To include such a large agenda would mean examination at trial of the

fee structure and justifiability of one hundred or more separate funds over five years. It is true

that many of the funds had similar fee structures and all had the same board and advisors. 

Yet, what might be an excessive fee for one fund might be fair for another. The difficulties and

risks of advising and managing one fund versus another must be considered. The multiple

Gartenberg factors must be weighed, fund by fund, fee by fee. And, the varying prospectuses

(with their progressively better disclosures) for the 100+ funds, although many were identical

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while others differed, would be a mess to track, even more so to track and to overlay on the fee

scenarios. This can be managed for three funds but not for 100+ funds. 

A jury must decide this case. A jury must be able to comprehend and to keep straight the

evidence and the contentions. In the Court’s judgment, it would be very hard for a jury, however

conscientious, to manage the massive program served up by counsel. It would also be extremely

difficult for the Court to manage such a project. It is not so simple as proving up liability and

then later allowing a claims process. Proving up the amount of any excess/sham fee is and will

be part of the liability case at trial, for if there were no sham fees then there can be no liability

in the first place. Therefore, the Court will limit the class to the purchasers of the three funds

actually purchased by our lead plaintiff. 

* * *

This is a good place to address the extent to which reinvestment of dividends should be

included in the class recovery. This order holds that dividends automatically reinvested in the

same fund will be part of the class-wide purchases at issue as long as the shares from which the

dividends were derived were purchased within the class period. Dividends derived from shares

purchased beforehand will not be part of the class-wide purchases at issue, even if the

reinvestments occurred in the class period. For example, if an investor purchased shares only

in 1999, then he is out of the class — totally, including automatically reinvested dividends made

during the class period. On the other hand, if the investor purchased within the class period,

then his reinvested dividends (within the class period) will be part of the class. To try to enlarge

the class to pick up all reinvestments within the class (including for pre-class purchasers) would

be festooned with accounting headaches, would be confusing to class members, and would lead

to minuscule recovery checks (if any) for those whose only stake was derived from reinvested

dividends. Also, there is a potential statute of limitations problem in allowing those who decided

to invest before November 4, 2000, to recover anything. 

* * *

At the eleventh hour, plaintiff has attempted to represent a fourth fund — the Wells

Fargo Money Market Fund — that has never before been included in any of the lead plaintiff

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certifications filed in this case. This will not be allowed. In the April 2006 consolidated

amended complaint, Siemers did not identify the Wells Fargo Money Market Fund as one of

the funds at issue. The lead plaintiff certification filed therewith listed Wells Fargo Advantage

Small Cap Growth Fund, Wells Fargo TR Montgomery Emerging Markets Focus Fund, and

Wells Fargo Diversified Equity Fund as the only Wells Fargo funds purchased by Siemers. 

Plaintiff then refiled the same certification with the August 2006 second amended complaint

and the March 2007 third amended complaint. Moreover, in December 2006, plaintiff was

instructed to submit the final versions of any of the proposed plaintiffs’ certifications. 

Siemers filed the exact same certification (again leaving out the Money Market Fund) as before. 

Plaintiff blames prior class counsel, the Milberg Weiss firm, for omitting the Money Market

Fund from Siemers’ original certification, which counsel blindly attached as the final

certification to each of the operative complaints in this case. This is bogus. Attorney Reese was

the former partner at Milberg Weiss who made the original filing and who continued to represent

plaintiff on behalf of current class counsel, Gutride Safier Reese LLP, when he changed firms. 

Finding no good cause, the Court rejects plaintiff’s last-minute attempt to add another fund,

which may be subject to any number of unique defenses that could have been addressed in prior

motions. 

CONCLUSION

For the foregoing reasons, the class described on page one is now CERTIFIED under 

Rule 23. This order REAFFIRMS lead plaintiff Ronald Siemers as the class representative and the

lead plaintiff’s choice of counsel as class counsel. By NOON ON JUNE 8, 2007, counsel shall

meet and confer and submit a proposed form of class notice in plain English, a proposed method

of serving and/or publication, and a timetable for effecting notices and receiving back any

opt-outs, all to be done consistently with the case schedule previously set. 

IT IS SO ORDERED.

Dated: June 1, 2007. 

WILLIAM ALSUP

UNITED STATES DISTRICT JUDGE

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