Wells Fargo must face lawsuit tied to Medical Capital fraud

Wed Apr 3, 2013 12:58pm EDT
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By Jonathan Stempel

(Reuters) - A federal judge has rejected a bid by Wells Fargo & Co (WFC.N: Quote) to dismiss a lawsuit by investors who said it failed in its role as trustee for debt issued by a financing company that collapsed in 2009 in an estimated billion-dollar fraud.

A 50-page decision by U.S. District Judge David Carter in Santa Ana, California on Tuesday clears the way for a possible trial against the fourth-largest U.S. bank over its dealings with Medical Capital Holdings Inc.

The judge also ruled outright for the investors on some claims in the class action, and dismissed other claims against San Francisco-based Wells Fargo.

Investors contended that Wells Fargo was supposed to disburse money so that Medical Capital could offer financing to medical care providers by purchasing their outstanding receivables.

Instead, they said the bank failed to stop Medical Capital from diverting their money to such things as non-medical projects and excessive administrative fees.

"It is a tremendous result for us to be able to go forward on claims that could total hundreds of millions of dollars," Mark Molumphy, a lawyer at Cotchett Pitre & McCarthy who represents the investors, said in a Wednesday phone interview.

A Wells Fargo spokesman did not immediately respond on Wednesday to requests for comment.

Carter ruled six weeks after Bank of New York Mellon Co (BK.N: Quote) said it would pay $114 million to settle claims over its own role as a trustee for Medical Capital debt.   Continued...

The logo for Wells Fargo bank is pictured in downtown Los Angeles, California July 17, 2012. REUTERS/Fred Prouser