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Wells Fargo & Co. on Tuesday urged a California federal judge to dismiss claims against three of its executives in a derivative lawsuit filed by shareholders. The shareholders allege that the bank's leadership failed to address discriminatory lending and hiring practices, but Wells Fargo argues that the investors did not explain why they could not have raised their concerns with the company’s board before taking the matter to court.

During a hearing before U.S. District Judge Trina Thompson in San Francisco, a lawyer for Wells Fargo argued that the second amended complaint still doesn’t explain why the investors felt there was no point in approaching the bank's board of directors with concerns related to the three executives before filing the lawsuit. The operative 170-page complaint, filed in October, lodges claims against 14 current and former bank directors, as well as four officers. The motion to dismiss seeks to dismiss three of the four officers from the lawsuit: Senior Executive Vice President and Chief Operating Officer Scott Powell; Carly Sanchez, a senior executive in human resources at Wells Fargo who served as vice president of talent acquisition and diversity recruiting from 2013 to 2022; and Senior Executive Vice President and CEO of Consumer Lending Kleber Santos.

In a letter to the parties before Tuesday’s hearing, Judge Thompson noted that the new allegations regarding demand futility addressed several counts, including breach of fiduciary duty. She pointed out that the officer defendants' oversight of discriminatory lending and hiring practices will implicate a different set of facts than the breach of duty claim against the board of director defendants, who are also named in the litigation. A lawyer for the three executives, Leonid Traps of Sullivan & Cromwell LLP, argued that, for that reason, the count should be dismissed.

Traps also argued that the allegations against the officers are not consistent with the claims against the directors, as the shareholders contend. “The directors and officers are obviously different people,” Traps said. “They make different statements on different dates, and critically, they knew different things.” The lawyer also argued that the plaintiffs had not alleged that a majority of the board “is somehow beholden to the officers,” so they can't claim that a demand to the board would have been futile.

“There are no new facts in the latest version of the suit, just arguments saying that a demand would have been futile because the claims applied the same to both the directors and the executives,” Traps told the court. “Nothing prevented plaintiffs from first making the demand, at least on these claims against the officers,” Traps said. “They did not. They never gave the directors an opportunity.”

A lawyer for the plaintiffs, Gia Jung of Cotchett Pitre & McCarthy LLP, told the court that the latest version of their complaint addressed the pleading deficiencies that the judge had highlighted in her previous motion-to-dismiss ruling. “Demand futility is a simple question,” Jung said. “Would a demand on the board be futile as to the officer defendants here? The answer is unequivocally yes.”

The discriminatory hiring statements that the court has already found to be actionable against the board members “completely overlap” with the executives’ statements and are nearly identical to statements the officers made that underlie the securities claims against them, Jung said. She argued that the board members would not be able to independently investigate claims against the officers because that would implicate their own liability. “A demand on the board as to the alleged claims against the officer defendants would be futile, because the board would be conflicted,” Jung said.

The motion to dismiss does not include CEO Charles Scharf. However, the new complaint drops two officers from the litigation: Senior Executive Vice President and Chief Financial Officer Michael Santomassimo and Vice President and Co-CEO of Corporate & Investment Banking Jonathan Weiss.

The proposed class action claims stem from a 2022 New York Times report that some Wells Fargo employees were faking interviews for positions that had already been filled in order to meet a company target on diversity. This led to an 8.6% drop in the bank’s stock price. A consolidated amended stockholder derivative complaint filed in 2024 alleges breaches of fiduciary duty and related causes of action, claiming the board failed to “meaningfully monitor Wells Fargo’s discriminatory lending and hiring practices.”

During an August hearing, a lawyer for Wells Fargo argued that its board has worked to address the concerns raised in media reports from 2022. Christopher Viapiano of Sullivan & Cromwell LLP stated that the lawsuit failed to plead specific facts showing that a majority of the board did not act on the allegations or faced the likelihood of liability due to their alleged lack of oversight over Wells Fargo’s mortgage refinancing and minority hiring practices. “The standard is that the directors have to try in good faith to put in place an information system,” Viapiano said, adding that evidence in the plaintiffs’ hands “shows that the directors tried in good faith to put in such a system.”

Lesley Weaver of Bleichmar Fonti & Auld LLP told the court during that August hearing that for years, the board did little to monitor the bank’s fair lending or diverse employment search requirements, calling the claims of oversight nothing more than “lip service” when “what’s happening internally is active discrimination.”

Wells Fargo and its executives are represented by Brendan Cullen, Sverker Hogberg, Christopher Viapiano, and Leonid Traps of Sullivan & Cromwell LLP.

The proposed investor class is represented by Lesley E. Weaver, Nancy A. Kulesa, and Derrick B. Farrell of Bleichmar Fonti & Auld LLP, Marlon E. Kimpson, William S. Norton, Joshua C. Littlejohn, Meredith B. Weatherby, and Vanessa A. Davis of Motley Rice LLC, Mark C. Molumphy, Tyson Redenbarger, Gia Jung of Cotchett Pitre & McCarthy LLP, and Francis A. Bottini Jr., Albert Y. Chang, and Anne B. Beste of Bottini & Bottini Inc.

The case is In Re: Wells Fargo & Co. Hiring Practices Derivative Litigation, case number 3:22-cv-05173, in the U.S. District Court for the Northern District of California.