Wachovia Corp. has agreed to pay $200 million to settle lawsuits over its alleged role in telemarketing schemes that resulted in the loss of more than $160 million by at least 900,000 consumers.
The proposed civil settlement, of which $163 million will go to consumers, was filed yesterday in federal court in Philadelphia. It builds on an agreement Wachovia reached in April with federal bank regulators.
The government said then that bank officials, including some in Philadelphia, had engaged in a "pattern of misconduct" and had failed to conduct "suitable due diligence" on Wachovia accounts of companies that processed payments for telemarketers.
Under that settlement, Wachovia was ordered to put $125 million into a restitution fund. Victims were required to file for a refund, which typically results in low participation.
The new settlement provides automatic compensation and requires that it be mailed directly to the consumers, said Howard Langer, a partner at the Philadelphia law firm Langer, Grogan & Diver P.C. and lead attorney in the two cases against Wachovia.
The class-action settlement, negotiated in August, before Wachovia's survival came into doubt, also boosted the amount of restitution by at least $35 million and did not limit what Wachovia, the biggest bank by market share in the Philadelphia area, might have to pay.
Wachovia, subject of a takeover battle between Citigroup Inc. and Wells Fargo & Co. that ended Thursday with Wells Fargo as the winner, denied in court documents that it was liable for the alleged claims.
"We regret that this situation occurred, and we're pleased the matter is resolved," Wachovia spokeswoman Christy Phillips-Brown said.
The agreement covered two lawsuits spurred by a 2006 case brought by the U.S. attorney in Philadelphia against a Bucks County company, Payment Processing Centers L.L.C., that printed special checks that do not need a signature.
Telemarketers who call consumers to directly pitch goods and services use PPC and other payment processors to collect money. Telemarketers are prohibited from using consumers' credit cards by federal rules designed to reduce fraud.
In such cases, telemarketers - who might tell a consumer she was eligible for a $5,000 government grant for a $298 fee - would persuade her to give her bank's routing number and account number. The telemarketers then sent that information to a payment processor, such as PPC in Newtown.
PPC then printed checks on customers' accounts and deposited them in its Wachovia account. PPC did that more than one million times from April 2005 through December 2005, according to court documents. If the check cleared, PPC would deduct its fee and pay the rest to the telemarketer.
PPC paid Wachovia $1.58 million in returned-check and other fees from March 2005 through January 2006, according to court documents.
Wachovia's total revenue from payment processors was greater than the $1.58 million because it started doing business with a predecessor to PPC in June 2003. That September, a Wachovia employee raised the alarm about that firm, Netchex.
"I know that Netchex just processes the checks, but I wonder if they should be notified that one of their accounts is being used to victimize the elderly?" Pat Hart, of Wachovia's fraud unit, wrote in an e-mail included in the court documents.
PPC was shut down by federal officials in Philadelphia in February 2006.
Laurie Magid, acting U.S. attorney, said yesterday that she was glad to see "this unique settlement in a case arising from our office's pursuit" of PPC.
Wachovia will use records obtained in the federal case against PPC to mail checks to consumers for the amounts taken in the fraudulent telemarketing schemes.
Many consumers incurred significant losses from bank overdraft fees and other bank charges. To recoup the losses, victims have two options. The simplest is to request a $35 refund after they receive notification of their membership in the class. If they can demonstrate that the fraudulent withdrawals caused bank charges against their accounts, they can get full reimbursement of the charges.
Rep. Joe Sestak (D., Pa.), who became involved in the case after the April settlement with the Office of the Comptroller of the Currency, said he was thrilled that some accountability had been inserted into the financial system.
A hearing on final approval uled for December. Subject to court approval, Wachovia will pay $15 million to Langer, Grogan & Diver.
Read the Wachovia
agreement (pdf) at