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TheStreet Open House

Wells Fargo: Fed Lawsuit Loser

Stocks in this article: WFC STI JNJ GS XLF I:BKX

NEW YORK ( TheStreet) -- Wells Fargo (WFC - Get Report) was the loser among the largest U.S. financial companies on Tuesday, with shares sliding 2% to close at $35.22.

David A. Montoya, Inspector General of the Department of Housing and Urban Development announced that the federal government had filed a civil fraud lawsuit against Wells Fargo's main banking subsidiary Wells Fargo Bank, NA, seeking damages "for more than 10 years of misconduct in connection with WELLS FARGO's participation in the Federal Housing Administration ("FHA") Direct Endorsement Lender Program."

U.S. Attorney Preet Bharara was typically colorful, saying that "yet another major bank has engaged in a longstanding and reckless trifecta of deficient training, deficient underwriting and deficient disclosure, all while relying on the convenient backstop of government insurance," and that "Wells Fargo's bonus incentive plan - rewarding employees based on the sheer number of loans approved - was an accelerant to a fire already burning, as quality repeatedly took a back seat to quantity."

Bharara added that "even after concerns were raised internally at the bank, Wells Fargo began self-reporting bad loans in a significant way, as required, only after this Office issued a subpoena last year."

Wells Fargo said in a statement that "many of the issues in the lawsuit had been previously addressed with HUD," and that the bank "is the leading FHA lender and has acted as a prudent and responsible lender with FHA delinquency rates that have been as low as half the industry average." The company also said it would "present facts to vigorously defend itself against this action."

The Dow Jones Industrial Average and the S&P 500 (SPX.X) both saw 1% declines, and the NASDAQ Composite dipped 1.5%, as investors continued to wait for Spain to request a European bailout.

Among the large-cap stock losers was Johnson & Johnson (JNJ - Get Report), which was downgraded by Goldman Sachs analyst Jami Rubin to a "Sell" rating from a neutral rating, because of "limited upside to our price target (7% total annual return for JNJ including dividends vs. our coverage group average of 14%)."

Rubin's 12-month price target for JNJ is $72. The analyst said that "although JNJ has potential for improved growth, we believe this is already captured in valuation," and that the company is "lacking transformational pipeline opportunities and less inclined to do shareholder-friendly capital allocation."

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