Case 3:05-cv WHA Document 348 Filed 05/21/2007 Page 1 of

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1 Case :0-cv-0-WHA Document Filed 0//00 Page of 0 0 GUTRIDE SAFIER REESE LLP Michael R. Reese (Cal. State Bar No. 0) Kim E. Richman (admitted pro hac vice) 0 Park Avenue, Suite New York, New York 0 Telephone: () - Facsimile: () - - and - GUTRIDE SAFIER REESE LLP Adam J. Gutride (Cal. State Bar No.) Seth A. Safier (Cal. State Bar No. ) Kate J. Stoia (Cal. State Bar No. ) Douglass Street San Francisco, California Telephone: () - Facsimile: () - Court Appointed Lead Counsel RONALD SIEMERS and FORREST MCKENNA, Individually And On Behalf Of All Others Similarly Situated, vs. UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF CALIFORNIA Plaintiff, SAN FRANCISCO DIVISION WELLS FARGO & COMPANY, WELLS FARGO INVESTMENTS, LLC, WELLS FARGO FUNDS MANAGEMENT, LLC, WELLS CAPITAL MANAGEMENT INC., STEPHENS INC., WELLS FARGO FUNDS DISTRIBUTOR, LLC, and WELLS FARGO FUNDS TRUST, Defendants. Case No. 0-0 WHA PLAINTIFFS' RESPONSE TO REQUEST FOR INFORMATION REGARDING FORREST MCKENNA Date : May, 00 Time: : 00 a.m. Ctrm:, th Floor Honorable William H. Alsup Plaintiffs' Response to Request for Further Briefing Re Class Certification Case No.: 0-cv-0 (WHA)

2 Case :0-cv-0-WHA Document Filed 0//00 Page of Plaintiffs respectfully submit this Response to the Court's Notice of Hearing and Request for Information Re Forrest McKenna, dated May, 00 (Dkt. # 0).. INTRODUCTION Plaintiffs have always acknowledged that Mr. McKenna held his Wells Fargo mutual funds not in a traditional brokerage account, but rather in a "Wells Fargo Variable Annuity. (See, e.g., Plaintiff McKenna's Reponses to WFI's First Set of Interrogatories, Interrogatory No. (describing 0 all transactions at issue in the case), attached as Exhibit A to Declaration of Adam Gutride In Response To Request For Information Re Forrest McKenna ("Gutride McKenna Decl. )). There are several differences between holding a mutual fund in a traditional brokerage account and holding it in an annuity account, but Plaintiffs do not believe those differences affect the fundamental issues in this case. Nor do Plaintiffs believe that there are relevant distinctions between the Wells Fargo "mutual funds that the other proposed Class Representative Ronald Siemers held in his brokerage account and what Defendants claim were Wells Fargo "variable trust funds held in Mr. McKenna's annuity account. A "variable trust fund is simply another name for a mutual fund that is held in a variable annuity. Indeed, until Defendants made the argument in opposition to class certification, both the broker (Wells Fargo Investments) and the annuity issuer (Hartford Insurance Company ("Hartford )) took the position that the investments in Mr. McKenna's annuity account were "mutual funds identical to those held in any traditional brokerage account, with the same names 0 and ticker symbols. Indeed, Plaintiffs' counsel confirmed the identity of those investments as mutual funds by calling the annuity company (i.e., Hartford) before initiating suit on Mr. McKenna's behalf. Even now, it is undisputed that the two allegedly different types of funds had the same names, managers, distributors, and board of trustees. Notwithstanding the above, Plaintiffs take to heart the Court' s admonition at the most recent hearing that they should simplify the case for certification and trial. Plaintiffs understand that the inclusion of Mr. McKenna's purchases in this case could complicate it, requiring the parties to Case No.: 0-cv-0 (WHA)

3 Case :0-cv-0-WHA Document Filed 0//00 Page of address extraneous issues such as the similarities between brokerage accounts and annuity accounts, and the similarities between mutual funds and variable trust funds. To avoid these complications, if need be, Mr. McKenna would agree to withdraw his request to be appointed a class representative and to dismiss his claims in this case without prejudice, so that the rest of the case can proceed in a more streamlined fashion.' Plaintiffs now endeavor to answer the Court' s specific questions. II. ANSWERS TO SPECIFIC QUESTIONS. What was the connection between Wells Fargo and Fortis Benefits Insurance? Fortis Benefits Insurance was the issuer of the Norwest Passage Variable Annuity that Mr. 0 McKenna purchased from Norwest Investment Services, Inc. in October. Norwest and Wells Fargo merged in. Fortis was purchased by Hartford Financial Services Group in 00. Accordingly, Norwest Investment Services, Inc. became Wells Fargo Investments, LLC, the issuer of the annuity became Hartford, and the name of the annuity changed to the Wells Fargo Passage Variable Annuity. From the perspective of an investor who desires to invest in mutual funds, a variable annuity is very similar to a brokerage account. Once funds are deposited into the annuity, they can be used to buy and sell various mutual funds, just as in a brokerage account. The annuity owner can make the decisions as to which mutual funds to buy and sell, or he can leave those decisions to his broker, as in this instance. The annuity owner also can arrange to make additional investments into the 0 annuity, just as he might make additional deposits into his brokerage account, and to allocate into existing or new mutual funds the monies deposited. Following his reading of a newspaper article about this litigation, Mr. McKenna was the only purchaser of Wells Fargo mutual funds other than Mr. Siemers to come forward before the Court's November, 00 deadline for joining this case as a named plaintiff. Since that deadline passed, however, this case has received widespread publicity and more than 00 Wells Fargo Funds investors have contacted Plaintiffs' counsel, with 0 such persons signing certifications listing their purchases of Wells Fargo mutual funds during the class period and expressing their desire to be named plaintiffs in a securities fraud suit involving the revenue sharing scheme. Those persons purchased many different funds, and if Mr. Siemers is not permitted to represent them in a class action, it is anticipated that additional lawsuits will be filed on their behalf. Case No.: 0-cv-0 (WHA)

4 Case :0-cv-0-WHA Document Filed 0//00 Page of Despite the many similarities between brokerage accounts and annuity accounts, there are also differences. The key differences are as follows. First, while a brokerage account typically offers access to a wide variety of mutual funds, the list of funds available for purchase in an annuity is restricted to selected fund issuers and specific funds from each issuer. Second, the holder of a brokerage account containing mutual funds may need to claim taxable income, either directly because he receives dividends or sells funds, or indirectly because transactions within the mutual funds are passed through to investors. The holder of an annuity account, by contrast, does not pay tax until he actually withdraws money out of the annuity. Third, because of the tax benefits, there is a penalty for withdrawing money from an annuity within a specified amount of time after 0 establishing it. (In the second and third respects, holding mutual funds in an annuity is similar to holding them in a tax-deferred retirement brokerage account, such as an IRA account, which also offers tax-deferred savings with penalties for early withdrawal). Fourth, a variable annuity can be configured to automatically liquidate a portion of the mutual funds it holds on a periodic basis and pay the proceeds to the annuity owner over time, just as a traditional annuity would make fixed payments to its owner over time. And finally, an annuity has some aspects of an insurance policy, typically by providing a "death benefit equal to the amount of the original investment, so if the value of the mutual funds held has decreased at the time the annuity owner dies, the beneficiary gets the original amount rather than the lower amount. Because of their tax advantages, variable 0 annuities have become popular ways for average investors to invest in mutual funds; investors use annuity vehicles in much the same way they would used tax-deferred IRA brokerage accounts. (Gutride McKenna Decl. Ex. B (article from Whatever the differences between annuities and regular brokerage accounts, however, they do not affect the core issues in this case. As an owner of annuity containing Wells Fargo mutual funds, Mr. McKenna was injured in the same way as any owner of Wells Fargo mutual funds, because those mutual funds were depleted by excessive fees paid to finance revenue sharing. Had the revenue sharing amounts not been paid, the Wells Fargo mutual funds would have had higher Case No.: 0-cv-0 (WHA)

5 Case :0-cv-0-WHA Document Filed 0//00 Page of net asset values, so the value of his annuity account (just like any investor's brokerage account) would have increased. Mr. McKenna had the right to sell the mutual funds held within his annuity and to withdraw the proceeds in the same way as someone who holds mutual funds in a brokerage account (aside from the early withdrawal penalty discussed above). Mr. McKenna in fact eventually exercised this right, directing that the Wells Fargo mutual funds be sold and the proceeds invested in a money market fund, which he later liquidated and the proceeds of which he withdrew from the annuity and transferred directly to mutual fund companies other than Wells Fargo. At the time he purchased his annuity, Mr. McKenna, a retired train brakeman and conductor and prison guard, had no prior experience with investment vehicles and did not know he was doing 0 anything other than investing in mutual funds. (McKenna Depo. -, -, -,, attached as Gutride McKenna Depo. Ex. C.) He came to purchase the annuity because his pension plan had 0 paid proceeds of approximately $,000 into an IRA rollover account which he had opened at Norwest Bank (later to merge with Wells Fargo Bank). (Id. at,.) The IRA rollover account was a savings account earning nominal interest. (Id. at.) In, a representative of the bank called Mr. McKenna and invited him to come in to the branch to meet with someone who could help him get a better return on his money. He agreed. (Id.) The person with whom he met, Tyrone Sell, was an employee of Norwest Investment Services at the time, and later became an employee of Wells Fargo Investments. (Id. at -, -.) Mr. Sell told Mr. McKenna that he would invest the money on his behalf in "stocks and mutual funds and that Mr. McKenna was guaranteed to have at least a % return. (Id. at, -, -.) Mr. Sell said that the only downside would be that, if the money were withdrawn during the first five years, there would be a penalty. (Id. at -.) Other than these items, Mr. McKenna did not know what an annuity was or how it worked. Mr. McKenna had no understanding of the death benefit. (Id. at 0-.) Nor did Mr. Sell explain how Mr. McKenna would benefit by purchasing the mutual funds through an annuity rather than through a regular IRA brokerage account. (Id. at -.) Case No.: 0-cv-0 (WHA)

6 Case :0-cv-0-WHA Document Filed 0//00 Page of. What was the exact name of the variable trust in which McKenna invested? When was it established? State also who the trustor/grantor was and who the trustees were and who the beneficiaries were. During the class period, on May, 00, Mr. McKenna invested $, into the Wells Fargo Large Company Growth Fund and $,. into the Wells Fargo Small Cap Growth Fund. (Gutride McKenna Decl. Ex. D (excerpts from Ex ). Both funds were held within Mr. McKenna's Wells Fargo Variable Annuity, which he established in October. Even if it can be said that the annuity was the legal owner of the funds, there should be no dispute that Mr. McKenna, as owner of the annuity, was the beneficial owner of the funds. As for the identity of the 0 trustor, Defendants have asserted in opposition to class certification that these two funds were "variable trust funds issued by the Wells Fargo Variable Trust, a nonparty, rather than mutual funds issued by Defendant Wells Fargo Funds Trust. Plaintiffs cannot absolutely disprove the 0 assertion, but do want to make clear that it is contrary to the evidence previously known to them, as follows: First, the prospectus for the annuity describes the investments held in it not as "variable trust funds but as "mutual funds. It provides: Contract holders may choose from among a number of the different Portfolios which are listed on the cover of this Prospectus. The Portfolios are a "series type of mutualfunds which are registered with the Securities and Exchange Commission as diversified openend management investment companies under the Investment Company Act of 0. The available portfolios of these mutual funds have served as the investment media for the corresponding Subaccounts of the Separate Account since each such Subaccount commenced operations. (Gutride McKenna Decl. Ex. E (McKenna Depo. Ex., p.wfi-) (emphasis added).) Prior to initiating this litigation on Mr. McKenna's behalf, Mr. McKenna and Plaintiffs' counsel jointly telephoned Hartford to get a list of all transactions made within the annuity. Hartford representative identified the Wells Fargo funds in the annuity as the "Wells Fargo The Advantage Large Company Growth Fund and the "Wells Fargo Advantage Small Cap Growth Case No.: 0-cv-0 (WHA)

7 Case :0-cv-0-WHA Document Filed 0//00 Page of Fund Trust. both of which are the names of Wells Fargo mutual funds issued by Wells Fargo Funds (Gutride McKenna Decl. ; id. Ex. A (McKenna interrogatory answer), Ex.F (list of funds). Likewise, when it was managing Mr. McKenna's money, Wells Fargo Investments also stated that the investments in the annuity were Wells Fargo mutual funds. Mr. Sell not only told 0 Mr. McKenna that the money would be invested in mutual funds (McKenna Depo., -), but when Mr. McKenna began to be concerned about the performance of the funds and asked Mr. Sell for the ticker symbol of the Wells Fargo Large Company Growth fund held in the annuity so that he could track it, Mr. Sell provided the ticker NVLCX. That ticker is for the Wells Fargo Advantage Large Company Growth Fund mutualfund, Administrator Class. (McKenna Depo. at 0-; Declaration of Adam Gutride In Support of Plaintiffs' Replies in Support of Motion For Class Certification, May 0, 00 (Dkt. ) ("Gutride Reply Decl. ) Ex. J (McKenna Depo Ex. 0 (ticker "NVLCX provided for "WFVT Large Co. Growth )); from Gutride Reply Decl. Ex. K (printout Finally, the mutual funds and the variable trust funds have the same names, the same investment adviser (WFFM) and distributor (Stephens), and the identical board of directors. The members of the board were paid a single flat fee for supervising the entire "complex 0 of fundsboth mutual funds and "variable trust funds. (See Gutride Reply Decl. Ex. G (excerpt from February, 00 Statement of Additional Information for Large Company Growth mutual fund), Ex. H (excerpt from May, 00 Statement of Additional Information for Large Company Growth variable trust fund).) If Defendants are nevertheless correct that the funds held in Mr. McKenna's annuity were variable trust funds, then the "trustor of the funds was the Wells Fargo Variable Trust. The "trustees were the identical individuals who were simultaneously trustees of the Defendant Wells Fargo Funds Trust which issued the identically named mutual funds: Robert C. Brown, Thomas S. Goho, Peter G. Gordon, W. Rodney Hughes, Richard M. Leach, J. Tucker Morse, Timothy J. Penny, Donald C. Willeke, Karla M. Rabush, and C. David Messman. (Gutride Reply Decl. Ex. G- Case No.: 0-cv-0 (WHA)

8 Case :0-cv-0-WHA Document Filed 0//00 Page of r] H.) As for the "beneficiaries, variable trust funds prospectuses do not speak of "beneficiaries but rather are addressed to the "shareholder or potential investor. (Gutride Reply Decl. Ex. I (Large 0 Company Growth [variable trust] Fund prospectus ("`You' means the shareholder or potential investor. ).) Defendants may assert that the "investor in the variable trust fund was Hartford rather than Mr. McKenna, but if so, it is very strange that the variable trust fund prospectus written the way it is, with sections like "Important information you should look for as you decide to invest in a Fund, which implies that the "investor is the individual who beneficially owns the fund through the annuity. (Gutride Reply Decl. Ex. I.) The language is particularly striking because variable trust funds are not sold directly to individuals but only held within annuities.. What role did Wells Fargo play in inducing McKenna to invest in the variable trust? Mr. McKenna was induced by Norwest Investments (which became Wells Fargo Investments) to invest into the Norwest (later Wells Fargo) Variable Annuity. Mr. McKenna also was induced by Wells Fargo Investments to use funds within the annuity to purchase Wells Fargo mutual funds (which Defendants claim were actually Wells Fargo variable trust funds). Indeed, Mr. 0 McKenna did not play any role in directing that the monies in his annuity be invested into the Wells Fargo Large Company Growth Fund or the Wells Fargo Small Cap Growth Funds, other than asking Mr. Sell, in approximately mid-00, to find mutual funds that would perform better than the ones already being held. (McKenna Depo. -, 0-,.) If Mr. McKenna knew anything at all about the funds prior to investment, it was only their identity and that Mr. Sell was recommending them.. What is a variable trust and how does it differ from a normal investment account? Explain the "variable" part, explain the "annuity" part and explain the "trust" part. Plaintiffs believe that the first part of the Court's question was intended to be "What is a variable annuity and how does it differ from a normal investment account? Case No.: 0-cv-0 (WHA) If so, please see

9 Case :0-cv-0-WHA Document Filed 0//00 Page of Plaintiffs' answer to question, supra. In summary, while there are differences, the two vehicles are quite similar; an owner of an annuity containing mutual funds is injured by revenue sharing in the same way as an owner of a brokerage account containing mutual funds. The reason that the 0 annuity is called a "variable annuity is to distinguish it from a traditional fixed annuity. While a fixed annuity pays out a set amount on a periodic basis, the variable annuity (if configured to make payouts) does so in changing amounts, depending on the changing value of the mutual funds held in it. Alternatively, the Court may have meant to ask, "What is a variable trust and how does it differ from a normal mutualfund? If so, please see Plaintiffs' answer to question, supra. The answer is that it does not differ; a variable trust fund is simply a name for a mutual fund held by a variable annuity.. Once the variable annuity was established, to what extent did McKenna have the authority to direct investments within the trust? Plaintiffs assume that this question was meant to be "Once the variable annuity was established, to what extent did McKenna have the authority to direct investments within the annuity? The answer is that Mr. McKenna had complete authority to direct investments within the annuity, by selling the mutual funds that it held and purchasing others, provided that he purchased from a select list of mutual funds. The annuity prospectus further identifies that the selected funds come from five fund families: Fortis, Norwest (Wells Fargo), Scudder, MFS, and AIM. (Gutride 0 McKenna Decl. Ex. E, p.wfi) He also could withdraw the money from the annuity, which is exactly what he eventually did. (McKenna Depo. -; Gutride Reply Decl. & Ex. F.) Notwithstanding his authority to direct investments, however, Mr. McKenna in fact gave Mr. Sell discretion to manage the account from until mid 00. (McKenna Depo. -.) Mr. Sell made all the initial decisions about which mutual funds to purchase in the annuity, and he also sold those mutual funds and chose other mutual funds to purchase. (McKenna Depo. 0-.) (Mr. McKenna testified that at times, Mr. Sell would tell him what he planned to do and that Mr. Case No.: 0-cv-0 (WHA)

10 Case :0-cv-0-WHA Document Filed 0//00 Page 0 of 0 McKenna "approved the recommendation. (McKenna Depo..)) Mr. McKenna's only selfdirected investment came in July 00, when he directed that all the stock funds be sold and the entire annuity account balance be invested in a money market fund. (McKenna Depo. -, -.) Subsequently, he withdrew money from the annuity on three occasions, and transferred it directly to other mutual fund companies outside of Wells Fargo. (McKenna Depo. 0, -; Gutride Reply Decl., Ex. F.). To what extent did McKenna direct that the trust invest in any Wells Fargo mutual fund at issue? In doing so, was he entitled to receive a prospectus? Which one(s)? Give exact names and time frames. Plaintiffs assume that the first question here was meant to be "To what extent did McKenna direct that the annuity invest in any Wells Fargo mutual fund at issue? The answer is provided in response to question number : although the annuity was invested in Wells Fargo mutual funds, it was Mr. Sell who chose those mutual funds within the annuity. Indeed, Mr. Sell chose all the mutual funds within the annuity (with the exception of the Hartford money market fund that Mr. McKenna purchased in July 00) (McKenna Depo. -, 0-, -.). Mr. McKenna was entitled to receive prospectuses for all the mutual funds contained in his annuity. The annuity itself had a prospectus which refers to and incorporates by reference the separate prospectuses for each of the mutual funds. After listing the fund choices, the annuity 0 prospectus refers to "the Accompanying Prospectuses for these funds [which] describe the investment objectives, policies and risks of each of the Portfolios. (Gutride McKenna Decl. Ex. E, p. WFI).) It further provides that "Full descriptions of the Portfolios and their investment objectives, policies and risks can be found in the current Prospectus for each Series which accompany this Prospectus. Additional information on each Series is also available in the Statement of Additional Information for each Series. These Statements of Additional Information are available upon request. (Id., p. WFI.) Although Mr. McKenna could not recall with specificity that he received prospectuses for the Wells Fargo funds, he believes he did receive Plaintiffs' Response to Request for Further Briefing Re Class Certification Case No.: 0-cv-0 (WHA)

11 Case :0-cv-0-WHA Document Filed 0//00 Page of prospectuses for each of the funds held in the annuity and he reviewed each such prospectus. (McKenna Depo. -, -0,, ).. If not the legal owner, was McKenna the beneficial owner of any Wells Fargo mutual fund at issue? Give exact names and time frames. Why was his ownership beneficial (or not)? Yes. Mr. McKenna was the owner of an annuity which in turn owned the Wells Fargo Large Company Growth Fund and the Small Cap Growth Fund, making Mr. McKenna the beneficial owner of these funds. Both funds were purchased during the class period on May, 00, and both were sold on July, 00. At all times that he held the funds in his annuity, Mr. 0 McKenna could direct that they be sold and the cash be distributed to him (subject to tax penalties), just as with a brokerage account. Additionally, the value of the funds held in the annuity rose or fell according to net asset value, just like funds held in a brokerage account. The answer to this question would be "no only if the Court concludes that () the funds held in the annuity were variable trust funds, and () a variable trust fund is not a mutual fund.. As to each mutual fund identified in Nos. and, when if ever did McKenna sell such interest? July, 00. /// /// 0 /// /// /// /// /// /// Case No.: 0-cv-0 (WHA)

12 Case :0-cv-0-WHA Document Filed 0//00 Page of III. CONCLUSION Mr. McKenna (who is traveling to San Francisco) and Plaintiffs' counsel stand ready to 0 answer to the best of their abilities any other questions the Court may have about Mr. McKenna's transactions. Dated : May, 00 GUTRIDE SAFIER REESE LLP By: /s/ Adam Gutride Adam J. Gutride Seth A. Safier Kate J. Stoia Douglass Street San Francisco, California - and - GUTRIDE SAFIER REESE LLP Michael R. Reese Kim E. Richman 0 Park Avenue, Suite New York, New York 0 Court Appointed Lead Counsel 0 Case No.: 0-cv-0 (WHA)