On Friday, Wells Fargo disclosed that it had agreed to pay $590 million to settle class-action lawsuits brought by investors concerning bonds sold by Wachovia, which Wells Fargo acquired in October 2008.

Among the claims in the suits: that Wachovia misrepresented the quality of a mortgage portfolio it bought from Golden West Financial, a California-based savings and loan. The founders and chief executives of Golden West were Herb and Marion Sandler. Herb Sandler is ProPublica's board chairman, and the Sandler Foundation is ProPublica's founding and largest donor. The Sandlers are not accused of wrongdoing or named as defendants in the suit.

In a statement emailed to reporters, a Wells Fargo spokeswoman said the settlement did not constitute an admission of liability or any violation of law by Wachovia.

"Wells Fargo agreed to this settlement in order to avoid the distraction, risk and expense of on-going litigation," she said.

Accounting firm KPMG LLP, in a separate settlement, agreed to pay $37 million to the investor class to settle claims arising from its role as Wachovia's accountant.

The settlement will go to pension funds and individual investors that bought bonds offered between July 26, 2006 and May 29, 2008. The named plaintiffs include the Southeastern Pennsylvania Transportation Authority, the Louisiana Sheriffs' Pension and Relief Fund, the Hawaii Sheet Metal Workers Pension Fund and the Orange County Retirement System in California. The bonds had a total face value of more than $35 billion.

The three class-actions, which were consolidated into a single case, did not claim that Wachovia had engaged in fraud. Instead, investors alleged that Wachovia failed to disclose the true quality of its bonds and the bank's financial health at the time of the purchases. In particular, the lawsuit focuses on a $120 billion portfolio of loans Wachovia purchased from Golden West, an $8 billion portfolio of collateralized debt obligations, and $15 billion of "goodwill" Wachovia recorded on its balance sheet from the Golden West acquisition.

In order to establish that Wachovia should have known that what it was selling was impaired, the consolidated complaint, filed in federal court in Manhattan, marshaled more than 50 unnamed former employees of Golden West and Wachovia. Their statements, sprinkled through the complaint, paint a graphic picture of a precipitous drop in standards that coincided with the peak of the housing bubble.

The suit focused heavily on so-called "Option ARMs," an adjustable rate mortgage product marketed by Golden West and then Wachovia under the brand "Pick-A-Pay," which allowed borrowers to defer payments on their loans. If the borrower failed to pay the interest, it was added to the principal. The lawsuit alleges that by 2006, Golden West's underwriting standards had declined. Many of the borrowers who purchased Pick-A-Pay loans did not meet income and other qualifications, the suit contends.

The Sandlers declined to comment on the allegations in the complaint.

Once Wachovia purchased Golden West for $24.3 billion, it rapidly grew the Pick-A-Pay program, the lawsuit said. The Golden West sale was announced in May 2006 and closed that October. In 2007, Wachovia extended an additional $33.4 billion of these loans. As part of this push for growth, Wachovia even marketed loans to borrowers that Golden West had rejected.

In January 2009, upon acquiring Wachovia for $12.7 billion, Wells Fargo declared $59.8 billion of the bank's Pick-A-Pay portfolio credit impaired and wrote down $25.5 billion of it. It isn't clear how much of the decline in value was due to the alleged faulty underwriting and how much to the general collapse of the U.S. housing market.

The settlement, the result of a three-year legal battle, is among the largest to date for a class-action lawsuit over the sale of securities in the run-up to the financial crisis. The plaintiffs' attorneys will divide up to $103 million in fees and litigation expenses up to $1.8 million.

In regulatory filings, Wells Fargo stated that the payout, which must be approved by a judge, will "not have a material adverse effect on [the bank's] consolidated financial position."

Class-action attorneys vow more such legal actions are to come against other financial institutions. "This is potentially the tip of the iceberg with respect to the credit crisis generally," said Darren Robbins, one of the attorneys involved in the case.