Wachovia Corporation, close to extinction when it was 'rescued' by Wells Fargo in 2008, continues to pay so called "dividends" to its successor.  In this lawsuit, Wachovia was accused of misleading investors about the quality of loans sold before the financial crisis.  The $590 million settlement is one of the largest settlements of its kind stemming from the housing market meltdown.

It's a major victory for investors in a case stemming from the credit crisis.  In February, a federal judge in Los Angeles approved a $601.5 million settlement of a lawsuit against Countrywide Financial, now part of Bank of America, over allegations it misled investors about its financial health and lending practices.

Auditor KPMG LLP, also a defendant in the Wachovia lawsuit, agreed to pay $37mn to settle, bringing the total recovery for the investors to $627 million.  The settlements are subject to court approval.

Where Wachovia Went Astray.   Once the 4th-largest U.S. bank by assets, Wachovia struggled when more borrowers fell behind on some $120 billion of "option" adjustable-rate mortgages.  The mortgages, known as "Pick-A-Pay" loans, let borrowers make low payments that did not cover monthly interest, causing principal to rise. 

Wachovia pooled and securitized these loans as preferred securities and debt.  However, in its offering documents, the bank represented the "Pick-A-Pay" portfolio as being of "pristine credit quality" and that Wachovia and Golden West had engaged in "prudent lending practices."  

However, according to plaintiffs who purchased the preferred securities and debt, the "Pick-A-Pay" portfolio included about $51 billion in loans subprime borrowers.  They added that Wachovia routinely made loans to borrowers without verifying their income or job titles.  The lead plaintiffs in the case are pension funds from California and Louisiana, and a Pennsylvania public transportation system.

Wells Fargo disclosed in quarterly filing with the SEC that the settlement is not expected to hurt its financial position.   [CNBC, 8/5/11]