United States District Court, D. Minnesota
Securian Financial Group, Inc., Securian Holding Company, and Minnesota Life Insurance Company, Plaintiffs,
Wells Fargo Bank, N.A., Defendant.
Jeanette M. Bazis, Esq., Kathryn N. Hibbard, Esq., Mark L. Johnson, Esq., Megan M. Walsh, Esq., and Robert J. Gilbertson, Esq., Greene Espel PLLP, counsel for Plaintiffs.
Bart H. Williams, Esq., and Manuel F. Cachan, Esq., Munger Tolles & Olson LLP; Elizabeth V. Kniffen, Esq., Daniel J. Millea, Esq., Lawrence T. Hofmann, Esq., Lindsey A. Davis, Esq., Michael R. Cashman, Esq., Richard M. Hagstrom, Esq., and Rory D. Zamansky, Esq., Zelle Hofmann Voelbel & Mason LLP, counsel for Defendant.
MEMORANDUM OPINION AND ORDER
DONOVAN W. FRANK, District Judge.
This matter is before the Court on the following motions: (1) Plaintiffs Securian Financial Group, Inc. ("Securian Financial"), Minnesota Life Insurance Company ("Minnesota Life"), and Securian Holding Company's ("Securian Holding") (together, "Securian" or "Plaintiffs") Motion for Partial Summary Judgment (Doc. No. 158); and (2) Defendant Wells Fargo Bank, N.A.'s ("Wells Fargo" or "Defendant") Motion for Partial Summary Judgment (Doc. No. 165). For the reasons set forth below, the Court denies Securian's motion and denies Wells Fargo's motion.
I. The Parties
Minnesota Life is an insurance, pension, and investment products firm that provides its services to individuals and families. (Doc. No. 123, Third Am. Compl. ("TAC") ¶ 8.) Minnesota Life is the administrator for a number of accounts, including what it refers to as its "General Account" and "Separate Accounts." ( See id. ¶¶ 8, 28, 30.) Securian Financial is an insurance and financial services firm with over 13 million clients. ( Id. ¶ 6; Doc. No. 168 ("First Millea Decl.") ¶ 2, Ex. 6.) Securian Financial is the parent corporation of Minnesota Life. (TAC ¶ 6.) Securian Holding is the parent holding company of Securian Financial. ( Id. ¶ 7.)
Advantus Capital Management ("Advantus") is a registered investment adviser and is wholly owned by Securian Financial; Advantus manages certain Securian investment portfolios. ( Id. ¶ 9.) Advantus provided asset management services to Minnesota Life and Securian Holding. (First Millea Decl. ¶ 2, Ex. 10.) Advantus has billions of dollars in assets under its management and its professionals have significant experience in the investment industry. ( Id., Ex. 7.) The Advantus Series Fund, Inc. ("Series Fund") is a registered investment company whose investments backed certain Minnesota Life products and was comprised of multiple investment portfolios. (TAC ¶ 9.) Advantus was the investment advisor and manager of the Series Fund's portfolios. (First Millea Decl. ¶ 2, Ex. 8.)
Wells Fargo is a national banking association. (Doc. No. 124, Answer ("Ans.") ¶ 10.) Wells Fargo began offering its Securities Lending Program (the "SLP") in 1982. ( Id. ¶ 18.) Through their SLP, Wells Fargo acted as an agent to loan its clients' securities to brokers. ( Id. ¶ 14); see also Blue Cross & Blue Shield of Minn. v. Wells Fargo Bank, N.A., Civ. No. 11-2529, 2013 WL 2434838, at *1 (D. Minn. June 4, 2013) (" BCBS "). Brokers provide collateral, usually in the form of cash, to the investor/lender while the securities are on loan. (Ans. ¶ 14.) Wells Fargo then invests the collateral on behalf of its clients and in a manner consistent with relevant guidelines. ( See id. ¶ 14); see also BCBS, 2013 WL 2434838, at *1.
II. The Program and Investments
Plaintiffs were institutional investor clients of Wells Fargo's SLP. (TAC ¶ 1; Ans. ¶ 1.) There is no dispute that the Securian Plaintiffs and Advantus are experienced in a number of types of asset management, including "traditional asset management, " but they do not administer any SLPs. ( See Hibbard Aff., Ex. 5 ("Moeller Dep.") at 61.) Wells Fargo marketed the SLP as involving investments in "short term money market instruments" that "maximize[d] earnings, while taking minimal risk." (Doc. No. 177 ("Hibbard Aff.") ¶ 2, Ex. 2 ("Proposal") at WFSECURIAN00083359.) The program had the primary goals of principal preservation and liquidity, with yield and return taking a secondary role. ( Id. at 008358.) The program used professional credit analysis teams that executed these primary goals. ( Id. at 083342, 083358.) Investments were to be made in accordance with "individual clients' account guidelines, " which were built into Wells Fargo's securities lending system. ( Id. at 008357, 008351.) According to Plaintiffs, the securities lending business is very complex and requires specialized knowledge and processes. ( See Doc. No. 176 at 2-3 (citing Hibbard Aff., Ex. 1 ("Blount Expert Report") at ¶¶ 38, 41, 49, 61, 65).)
When pitching the SLP specifically to Plaintiffs, Wells Fargo prepared "Advantus Talking Points for August 6th Meeting" ("Talking Points Memo"). ( See Hibbard Aff., Ex. 6.) The Talking Points Memo addressed risks and safeguards against risk with respect to the SLP. ( Id. ) A Senior Portfolio Manager provided investment expertise at that meeting and addressed investment guidelines and Wells Fargo's compliance. ( Id.; Doc. No. 161 ("First Ernstene Aff.") ¶ 2, Ex. 6 ("Smith Dep.") at 12.)
When parties participate in the SLP, they sign a Securities Lending Agreement ("SLA") that designates Wells Fargo as having sole investment discretion and management responsibilities. (Hibbard Aff., Ex. 3.) Here, Plaintiffs and Wells Fargo entered into a number of SLAs, and Plaintiffs paid Wells Fargo approximately $5 million for its securities lending services. (First Ernstene Aff., Exs. 3-5, 9.) The parties agreed that Wells Fargo would invest cash collateral in accordance with Plaintiffs' specific investment policy limitations. (Hibbard Aff., Exs. 2, 8.) Plaintiffs assert that they fully and reasonably relied on Wells Fargo to operate the SLP in accordance with the parties' SLAs. ( See Doc. No. 176 at 10-11 (citing First Ernstene Aff., Exs. 6, 8; Hibbard Aff., Exs. 12-14).) Advantus monitored and oversaw Wells Fargo in its role providing securities lending services to Plaintiffs. ( See, e.g., First Ernstene Aff., Ex. 9.) Wells Fargo provided regular certifications to Advantus that it was performing its services in accordance with the requirements and restrictions outlined in the governing documents. For example, Wells Fargo provided signed compliance checklists ( see, e.g., id., Exs. 29, 32); signed compliance certifications ( see, e.g., id., Ex. 45); and quarterly compliance certifications ( see, e.g., id., Ex. 35). Plaintiffs reviewed and analyzed aspects of these certifications and reports. ( See, e.g., Hibbard Aff., Ex. 15 ("Gunderson Dep.") at 24, 60-68, 174-79.) Plaintiffs also communicated with Wells Fargo about compliance through questionnaires and other means. ( See, e.g., id., Exs. 16-18.) Advantus also visited Wells Fargo's operation and requested additional information on occasion. ( Id., Exs. 5, 19-21.)
In this case, the parties entered into the following SLAs:
1. In February 2000, Minnesota Life and Wells Fargo entered into an SLA relating to Minnesota Life's General Account ("Minnesota Life General SLA"). (First Ernstene Aff., Ex. 3.)
2. In February 2000, Minnesota Life and Wells Fargo entered into an SLA relating to Minnesota Life's Separate Accounts ("Minnesota Life Separate Accounts SLA") ( Id., Ex. 4) (Minnesota Life General SLA and Minnesota Life Separate Accounts SLA are together, "Minnesota Life SLAs").
3. In March 2000, Securian Holding and Wells Fargo entered into an SLA ("Securian SLA"). ( Id., Ex. 5.)
4. On June 30, 2000, the Series Fund, Advantus, and Wells Fargo entered into an SLA ("Series Fund SLA"). ( Id., Ex. 9.)
The SLAs included a number of investment restrictions and other requirements. The two Minnesota Life SLAs and the Securian SLA included one such restriction in the form of a prohibition on investments "in any obligation, or other evidence of indebtedness of any business entity not organized under the laws of the United States or any state thereof, or the Dominion of Canada...." ( Id., Exs. 3-5 at ¶ 2(f).)
As a registered mutual fund, the Series Fund-related SLA required a Statement of Additional Information ("SAI") and Prospectus filed with the Securities and Exchange Commission ("SEC"). ( See id., Ex. 9.) The SAI delineated the types of investments permitted. ( Id., Ex. 7 ("Adams Dep.") at 226-27 & Ex. 8 ("SAI").) The Series Fund SLA required compliance with the SAI and Prospectus. ( See id., Ex. 9.) The SLA also attached Collateral Guidelines. ( Id. at Ex. D.) The SAI, Prospectus, and Collateral Guidelines were to prevail if they conflicted with other standards. ( Id. ) Further, the Series Fund SLA allowed for commingling of the participating Series Fund portfolios into a single account ("Joint Accounts") and was approved by the SEC through an "Exemptive Order." ( Id., Exs. 9, 12 ("Exemptive Order").) Under the Exemptive Order, "[a]ny Short Term Investment made through the Joint Accounts will satisfy the investment policies and restrictions of all Funds participating in that investment." (Exemptive Order at SFG0000374.) Thus, the investments needed to satisfy requirements of all participating portfolios. According to Plaintiffs, three of the five portfolios included in the Joint Account were not permitted to invest in asset backed securities, and two were permitted to do so. ( See First Ernstene Aff., Exs. 8, 21, 22.)
Wells Fargo invested certain collateral in securities issued by structured investment vehicles ("SIVs"). SIVs are described as "investment organizations" that issue debt instruments, such as medium-term notes ("MTNs") to generate funding to invest in "various forms of financial assets." ( See id., Ex. 7 ("Adams Dep.").) Specific to this case, Wells Fargo invested certain Securian collateral in MTNs issued by the SIVs Victoria and Cheyne. First, on September 5, 2006 and November 3, 2006, Wells Fargo invested Minnesota Life and Securian Holding collateral in MTNs issued by Victoria. ( Id., Ex. 56.) On April 12, 2007 and July 25, 2007, Wells Fargo invested Series Fund joint account collateral in MTNs issued by Victoria. ( Id., Ex. 60.) On approximately January 10, February 26, and July 10, 2007, Wells Fargo invested Minnesota Life and Securian Holding collateral in MTNs issued by Cheyne. ( Id., Ex. 67.) On February 26, 2007, Wells Fargo also invested Series Fund collateral in a Cheyne-issued MTN. ( Id., Ex. 69.)
Victoria invested assets and engaged in hedging transactions. ( Id., Ex. 49 ("Victoria Offering Circular").) Victoria Ltd. was previously known as Stanfield Victoria Ltd. and was organized "under the laws of the Cayman Islands." ( Id. ) The Victoria Offering Circular includes a section entitled "Certain Considerations Relating to the Cayman Islands." ( Id. ) Victoria Ltd. jointly issued debt instruments with its wholly owned Delaware-based subsidiary, Victoria USA. ( Id. ) Victoria USA co-issued debt "solely as an accommodation to [Victoria]." ( Id. ) According to Bloomberg,  Victoria Ltd. is the obligor on the MTNs. (First Ernstene Aff., Exs. 52-55.) Bloomberg also lists the United States as the "Country" and "Country of Domicile" for Victoria. ( Id. ) Victoria was placed on default status on January 8, 2008, and a Cayman Islands trust took possession of the assets and issued new notes to Victoria investors. ( Id., Exs. 64-65.)
Cheyne was "a special purpose vehicle which was established for the limited purpose of carrying on business as an investment company and issuing asset backed securities." ( Id., Ex. 66 ("Cheyne Information Memorandum") at WFWCRA00443142.) Cheyne PLC was organized under the law of the Republic of Ireland. ( Id. ) Cheyne USA was Cheyne's wholly-owned subsidiary. ( Id. ) The Cheyne Information Memorandum lists Cheyne USA as the Issuer. ( Id. at WFWCRA00443079, WFWCRA00443142.) The Cheyne Information Memorandum states that "[t]he Notes will be obligations solely of the Issuer and will not be guaranteed by, or be the responsibility of, any other entity including Cheyne Finance PLC...." ( Id. at WFWCRA00443079.) Cheyne USA's obligations were "limited to the payments received by [Cheyne USA] on the Corresponding Underlying Note, " and Cheyne USA had no obligation to issue any Note to an investor unless Cheyne PLC had issued a Corresponding Underlying Note. ( Id. at WFWCRA00443100.) Cheyne USA's "sole business" was "the purchase of Euro Senior Notes from Cheyne Finance PLC and the issuance of U.S. Senior Notes." ( Id. at WFWCRA00443142.) Bloomberg lists Cheyne PLC as the "obligor" on the Cheyne MTNs. (First Ernstene Aff., Exs. 75-77.) Bloomberg also lists the United States as the "Country" and ...