Allen Warren’s bank shot

After more than a decade of fending off lawsuits from the financial institutions who loaned his development company money, North Sacramento Councilman Allen Warren is leading the charge against one of his biggest creditors: Wells Fargo Bank.

And questions about whether Warren is motivated by his civic duty or a personal vendetta against the bank that is suing him for more than $2.5 million have gone unasked by his council colleagues and city officials.

It’s not like Wells Fargo has many defenders these days.

In September, the San Francisco-based bank was forced to admit its employees had opened more than 2 million bogus deposit and credit card accounts in customers’ names without their knowledge or consent. The widespread fraud has been blamed on a corporate culture that squeezed employees to reach unrealistic sales goals at almost any cost, and has already resulted in a $185 million civil penalty against the bank, an epic congressional scolding from Sen. Elizabeth Warren and the departure of Wells Fargo CEO and Chairman John Stumpf, who jumped ship in October without his $41 million golden parachute in stock and salary. Today, the bank is facing defections from numerous state and local governments threatening to pull their assets in a metastasizing loss of faith.

At an October 13 Sacramento City Council meeting, City Treasurer John Colville revealed the city was already in the process of divesting approximately $28 million of its assets from Wells Fargo for at least a year, and possibly longer. The elected official driving this campaign was none other than Warren, whose Del Paso Heights development firm has been sued numerous times by Wells Fargo over the years. The largest of those lawsuits may be heading toward a $2 million judgment in March of next year, SN&R has learned, making for interesting timing during an unprecedented national moment.

Like President-elect Donald Trump, whose byzantine financial interests have groped their tentacles around the White House, Warren is a developer-politician with a trail of property holdings, unpaid debt and still-active lawsuits involving some of the very neighborhoods he represents as a two-term council member. And while the public may not have much sympathy for a tainted banking institution like Wells Fargo, Warren might have found an opportune time to exert political pressure on the bank—months before both sides are scheduled to appear before a judge regarding Warren’s outstanding debt.

In a phone interview, Warren drew a parallel between his personal legal problems with the bank and the revelations about its operating practices. “I first brought some of these issues to light … maybe four or five years ago … and now I think all this stuff is starting to come out,” he told SN&R.

But his push to suspend the city’s financial relationship reveals how professional disputes can shape public policy—and how policy can then reverberate back in those very disputes.

The relationship between Warren and Wells wasn’t always toxic.

As the founder and president of New Faze Development Inc., headquartered in Del Paso Heights, Warren had already built some residential subdivisions with lending help from the bank by the mid-2000s, when his boutique company began to expand into a midsize firm of 40 employees and 25 to 30 different holding companies, according to court arbitration documents. In that era, before the housing market cratered, Warren was a prolific borrower and Wells a willing lender. Their biggest deal came in November 2005, seven years before Warren was first elected to represent the city’s second district.

Warren secured two Wells Fargo loans totaling $9.5 million through a subsidiary holding company to purchase two apartment complexes—Alpine Terrace Apartments in Sacramento, for $4 million, and Vintage Faire Apartments in Rancho Cordova, for $5.5 million.

But soon the recession plunged an overextended Warren into a frantic scramble to keep numerous projects—and his company—from collapsing. In 2008, a $60 million credit line disappeared when the PFF Bank and Trust in Pomona failed, dragging two New Faze projects into bankruptcy, Warren told SN&R in June. At the same time, Warren was falling behind on loan payments to both banks and private parties. The accumulating debts spawned dozens of lawsuits, which Warren often answered with counter-claims.

Over the summer, Warren downplayed his numerous legal entanglements, chocking them up as “just business.”

“A lot of the lawsuits, most of them are probably 10 years old. If people really tracked it, they were really related to a couple banks going out of business that we were doing business with,” he told SN&R in June. “But nobody reported on that. They wanted to make it seem like somehow I failed.”

According to a review of Sacramento County court documents, Wells Fargo initiated at least five legal actions against Warren or his companies since 2010. As SN&R previously reported, a Sacramento Superior Court judge ordered Warren to pay nearly $300,000 in outstanding personal credit card debt and interest to Wells Fargo in 2012. And in June of last year, a judge ordered Warren and four of his business entities to pay the bank more than $516,000 in attorneys’ fees and other legal costs after an arbitration panel dismissed Warren’s countersuit against Wells.

Warren was seeking nearly $1.4 million in damages for what he argued was bad financial advice relating to a $1 million investment his company made in a tax shelter company back in 2005. Warren tried to argue that a Wells Fargo financial adviser misled him into thinking he could pull his money out of the company, called DCT, months earlier than he was able, and that the delay proved catastrophic, prompting “a cascade of events that caused millions of dollars in damages to New Faze,” an April 2015 arbitration ruling states.

While arbitrators concluded that Warren did lose nearly $200,000 in the deal, they determined that he was largely to blame. Calling him a “sophisticated investor,” arbitrators held Warren responsible after he admitted signing a 100-page agreement he never read because, he testified, it was “incomprehensible.” The three-person tribunal also noted Warren would have actually realized a $68,000 return on his investment if he cashed out all his shares at his earliest opportunity, in October 2007, rather than selling them in three piecemeal chunks between then and June 2009.

A Sacramento Superior Court judge upheld the arbitration panel’s ruling in June of last year. Reached for comment this past May, Wells Fargo attorney Christopher Rodriguez, of the law firm Pillsbury Winthrop Shaw Pittman LLP, emailed a brief statement: “[While] we don’t believe it is appropriate to discuss this matter in the media, Wells Fargo has prevailed to date on all issues in this case and we will continue to present our position in court.”

Warren told SN&R in a recent interview that he is appealing the decision.

Meanwhile, a more costly court battle looms.

The counter-lawsuit was just a sideshow to the main event. In August 2011, Wells Fargo filed a breach-of-contract lawsuit against Warren for allegedly failing to pay back $1.8 million he borrowed in two separate loans five years earlier. The case has dragged on for years, but a decision may be on the horizon.

On August 19, Wells Fargo, National Association, filed a motion requesting a $2,054,048.85 summary judgment in its favor. In an emailed statement, a bank spokeswoman said the amount represented both the unpaid principal and interest on the decade-old loans. The Sacramento Superior Court has tentatively scheduled to hear the matter on March 16, 2017.

When factoring in the unpaid attorney fees and other costs, the bank is asking the court to order Warren to pay out more than $2.5 million—a request that will likely expand before the hearing, the spokeswoman said.

“WF’s attorney’s fees are increasing with litigation activity in the case and, therefore, the amount we will request will be higher,” wrote Julie Campbell, vice president of corporate communications for the bank’s Northern and Central California regions.

Neither side is saying the city’s divestment process is connected to the lawsuit over Warren’s debt, but it does create interesting leverage: Could Wells Fargo decide it’s less expensive to forgive a $2.5 million loan than it is to lose the city’s business? And could Warren advise easing the political sanctions if his company gets a break?

“Questions like this point to the need for an independent ethics commission, enforcing an improved city ethics code, which would be able to advise, clear or investigate based on the facts in each case,” said Gavin Baker, the open government program manager at California Common Cause, a nonpartisan grassroots organization focused on government transparency. “These reforms, which the city council has endorsed in concept but has not yet enacted, would let voters rest assured that there is a cop on the beat.”

Asked if he saw Wells Fargo’s current troubles as a vindication for his own claims, Warren demurred, saying that was a matter to be decided by the legal system and the court of public opinion.

“You’ve got to draw your own conclusions,” Warren said. “I think the facts speak for themselves. I think it’s evident that there were a lot of things going on there. I think it’ll be sorted out in another year, maybe two. It might take longer depending on how the bank responds. I’m just fortunate that I was in a position to be able to fight back and bring it to light.”

Bring it to light he did.

Former City Manager John Shirey explained during the October 13 meeting that he had been “asked by one of the [council] members to expound … on what it is that the city is doing in response to Wells Fargo’s activities.” That brought up City Treasurer Colville, who disclosed that he’d begun the process of suspending and selling off the city’s stocks and approximately $28 million worth of bonds previously held by Wells Fargo, during an impromptu public session that hadn’t been advertised on the council’s agenda.

While Shirey didn’t name the council member who reached out to him, indicators point to Warren. Colville said he sent an email to council members on October 3 explaining what assets the city had tied up with Wells Fargo, and that Warren was the one to email Colville back asking what could be done from a policy standpoint.

At the meeting, Councilwoman Angelique Ashby lauded Warren for his leadership in working with Colville to do “the responsible thing on behalf of the city of Sacramento.”

And Warren was outspoken in his approval, deriding the bank for a “corrupt” corporate culture and implying that a one-year separation may not be harsh enough.

“I think we should be mindful of companies coming in [that] spread a little money around to get back in [good] graces … and then after a couple years they fall back into the same patterns,” Warren said at the meeting, referring to Wells Fargo’s potential attempts to rebrand its image.

“Unfortunately corporations, some of them do that, and we want to make sure we keep our eye on them,” Warren added.

Warren’s comments proved prescient.

More than a month after the meeting, Campbell’s statement to SN&R suggested a rebranding effort was already underway. She wrote that Wells Fargo was “disappointed” that the city “suspended its limited relationship with the bank” and sought to highlight the bank’s local ties, dating back to the company’s founding in 1852, as well as more recent philanthropic efforts. Those included a reported $1.1 million in contributions to “48 community development organizations in Sacramento,” Campbell wrote, and employees who volunteered “more than 30,000 hours at more than 1,000 local community organizations.”

“We certainly understand the concerns that have been raised,” Campbell’s statement continued. “We are very sorry and take full responsibility for the incidents in our retail bank. Our business with the City of Sacramento is managed by two lines of business that are separate from our retail bank: Wells Fargo Securities, which provides the city with access to U.S. capital markets, and Corporate Trust Services, which serves as trustee for Golden 1 Center. We have already taken important steps, and will continue to do so, to address these issues and rebuild trust with city leaders.”

But Wells Fargo’s campaign to stop a municipal mutiny goes well beyond Sacramento.

The biggest blow landed in late September, when California State Treasurer—and 2018 gubernatorial candidate—John Chiang suspended business dealings with the bank for at least a year. The treasurer didn’t mince words when asked about his reasons for doing so.

“We want to make sure that these horrible practices are ended—they’re permanently ended—and we send this clear and powerful signal to financial institutions that behavior inconsistent and to the detriment of their customers is not to be tolerated,” Chiang told SN&R.

While it’s unclear how much Wells Fargo stands to lose from the statewide moratorium, a treasurer’s office spokesman said the September 28 decision to stop purchasing debt securities and corporate bonds through Wells Fargo would probably prove more symbolic.

According to the spokesman, Marc Lifsher, the state had “about $800 million of bonds issued by Wells Fargo,” which the state allowed to expire and repurchased from other financial institutions. “We stopped using them as a broker dealer for buying third-party securities,” Lifsher added. “It’s unclear what that cost Wells Fargo, but we’ve engaged in more than a billion dollars worth of business with them, so it’s hard to tell what the profit would be; but it’d probably be in the high hundreds of thousands of dollars, and we no longer use them to underwrite bonds.”

Lifsher acknowledged that this amounted to little more than a slap on the wrist, financially speaking, but said it was mainly about bad PR. “It’s a way to publicly shame them,” he added.

California’s move has sparked something of a chain reaction. Illinois, Ohio, Pennsylvania, Seattle and other states have followed suit with their own divestment measures.

And on Monday, California state Sen. Bill Dodd introduced legislation that would void mandatory arbitration clauses in cases where any organization has wrongfully used consumer information to commit fraud, a move the Consumer Federation of California says would allow individual victims to sue Wells Fargo for damages.

In other words, Wells Fargo has plenty of political detractors. But how many, like Warren, have personal cause for a grudge?

Asked if Warren’s advocacy on this issue constituted a conflict of interest, Campbell declined comment.

From a legal standpoint, City Attorney James Sanchez said there was no such conflict since the council wasn’t asked to vote on anything.

“In terms of any conflicts, without having any action by the council, there really isn’t anything to talk about,” he told SN&R. “There can be no conflict when the council is not involved in the decision. That was something the [city] manager and the treasurer had done.”

Thus far, the California Fair Political Practices Commission has only one open investigation into the North Sacramento representative, for possible campaign reporting violations when Warren first ran in 2012.

“Still an open investigation,” is how FPPC spokesman Jay Wierenga put it in an email to SN&R.

As for Wells Fargo’s stated separation between its business and retail banking, that provided no reassurance to Colville.

“We [don’t] want to be involved or own stock or own bonds in a company that was fraudulent,” he told the council in October. “If they were willing to treat retail investors that way, who knows what they were doing with their institutional side?”