Wells Fargo Scandal
|Founded||March 18, 1852|
|Founders||Henry Wells, William G. Fargo|
|Industry||Financial Services |
|Headquarters||San Francisco, California|
|Number of Employees||268,531|
|Ticker Symbol||NYSE: WFC
Wells Fargo is a financial services company in the United States of America. The company’s headquarters is based out of San Francisco, California. Over the years since its founding in 1852, Wells Fargo has grown into a multinational corporation that is currently positioned as one of the largest financial institutions in the United States. Today the company is ranked as the 3rd largest bank in America, with 1.75 trillion dollars in total assets. However, this company's rise to its current economic highs has not been without controversy which can be highlighted by a 2016 cross-selling scandal, in which the fallout is still being felt today.
What is Cross-Selling?
'Cross-selling' is the sale of different products or services to a customer to increase the value of the sale. An example of this would be a banker selling a credit card to a customer when they open a new checking account. This differs from upselling which would be encouraging a consumer to purchase a high level checking account with more features than they were originally planning to get.
Cross-Selling within Wells Fargo
Cross-selling was used within the Wells Fargo organization to assess low-level employee performance. Quotas were set by upper level management and provided a daily target for employees to reach in order to optimize performance, and could potentially make up 15-20 percent of a bankers annual salary. Employee evaluations and bonuses were intertwined with these quotas, creating incentive for employees to reach the company targets by any means necessary. In the event a quota for the day was not met, the remaining portion was added onto the next day's quota. Several outsider sources criticized Wells Fargo's cross system as they believe it placed unfair pressure on lower-level employees to meet targets that in may cases were unrealistic.
- 30 employees are fired for opening accounts under customers names for the purpose of meeting ‘cross-selling’ quotas that the organization had set.
- Wells Fargo spokesperson claims hat it was an isolated incident committed by a small minority of employees, who put the needs of themselves above those of the customers they were expected to serve.
- CFO of Wells Fargo, Tim Sloan, states he was “not aware of any overbearing sales culture” within the organization.
- September 8th information arises that Wells Fargo employees had opened over two million fake banking accounts without their clients permission.
- Wells Fargo pays a 185 million dollar settlement to end a lawsuit, which was filed by creditors representing the city of Los Angeles.
- Wells Fargo's stock price falls two percent.
- 2.6 million dollars is refunded to customers who had been affected by fees stemming from unauthorized accounts.
- Wells Fargo begins relieve employees involved in the scandal from their positions. After a five year investigation the total number of employees removed exceeded 5,300.
- The head of the community banking division, Carrie Tolsted, announces her retirement.
- Wells Fargo also restructures their employee performance incentives to place greater importance on customer service, and less on cross-selling.
- Wells Fargo creates new safeguards and verifications to reduce the risk of unauthorized account creations.
- US Senate holds meetings over the next few weeks in which they criticized CEO John Stumpf for his role in creating a cross-selling program that put pressure on low-level employees by creating unrealistic goals. They also criticized the board of directors for not reducing the pay of Stumpf or Tolsted.
- The board of directors requests an external audit by the law firm Shearman & Sterling, leading to the eventual reduction of financial rewards to Stumpf ($41 million) and Tolsted ($19 Million).
- John Stumpf announced his retirement.
- Board of directors investigation finds that Wells Fargo’s sales culture, leadership and organizational structure are to blame for cross-selling scandal.
- Board of directors criticizes John Stumpf and Carrie Tolsted for their leadership failures.
- Amount of estimated unauthorized accounts created during the scandal is increased from 2 million to 3.5 million.
- Total amount of refunds for unauthorized account creation increased by an additional 2.8 million dollars.
- Wells Fargo agrees to a 1 billion dollar settlement with Consumer Financial Protection Bureau and the Office of the Comptroller of the Currency for auto and mortgage lending violations.
- Wells Fargo pays 480 million to settle a class action lawsuit stemming from the cross-selling scandal.
- Wells Fargo settles with 50 US state attorneys for 575 million dollars to amend a civil lawsuit related to cross-selling, auto lending, and mortgage lending violations.
Although it is true the sales culture at Wells Fargo on meeting unrealistic quotas resulted in millions of customers with accounts they never knew about, it wasn't the fault of a few bad employees that created the whole scandal. The employees were under extreme pressure from branch managers, who were manipulated and pressured by top executives such as John Stumpf and Carrie Tolstetd. It is the opinion of Team 2V that Stumpf was the most responsible player in the scandal given his level of authority as both CEO and head chairman of the company's Board. However, these high pressures could have been reduced by regulatory groups such as the company's Board of Directors and external auditors, but rather they failed to intervene in the fraudulent practices.
Chairman and CEO: John Stumpf
John Stumpf was the CEO of Wells Fargo from June 2007 to 2016 until the scandal had come to the public eye. Stumpf was born in 1953 in Pierz, Minnesota, and he had a humble early life being raised on a farm with ten siblings. The former CEO graduated with a finance degree from the University of Minnesota and rose to success as regional president and other various positions at Norwest Corporation. After Norwest's merger with Wells Fargo, Stumpf became CEO and in 2010 earned a seat on the board as executive chairman at Wells Fargo. The public and Securities and Exchange Commission essentially accused the former CEO of misleading various investors about the company's success amid the Wells Fargo fake accounts scandal while being well aware of the fraudulent activities. He constantly bragged to investors about his customers' array of accounts, conveniently leaving out that the accounts were fabricated by employees pressured by upper management to meet unrealistic quotas or fear being fired.
Stumpf faced numerous accusations when the scandal came to light and had involvement in the scheme as both CEO and head chairman of the board, which can often create a conflict of interest. He received an overly generous compensation from Wells Fargo of $192 million — consisting of his base salary, various stock options, bonuses, and other compensation during his tenure. For much of the duration of the scandal, Stumpf and other top executives knew of the fake accounts and cross-selling tactic and encouraged other high-ranking employees with the schemes. For example, encouraging another critical player in the scandal, Carrie Tolstedt, by stating he “was accepting of Tolstedt’s flaws in part because of her other strengths and her ability to drive results, including cross-sell".
Head of the Community Banking Division: Carrie Tolstedt
Carrie Tolstedt served as Senior Executive Vice President of Community Banking at Wells Fargo also from 2007 until July 2016 . Tolstedt had conveniently retired two months before the scandal came to light and was retroactively fired once the news came to light . Raised in a small town in Nebraska, Tolstedt had early dreams of working in the banking sector. At Wells Fargo, she rose to oversee the work of thousands of front-line workers of up to 6,000 branches . Tolstedt, just like Stumpf, largely contributed to the unethical corporate culture that Wells Fargo became.
The Community Bank head often resisted and challenged any employees within the bank who questioned her tactics, regardless of their authority within the company. The Community Banks performance management system put extreme pressure on employees to exceed their sales goals . Tolstedt was considerably responsible for the cross-selling scheme as she oversaw the conditions that led to the scandal. When asked about the scheme, she points blame to a few bad employees, but as the OCC observed, “employees were much more likely to be disciplined for failing to meet their sales goals ... than for engaging in sales practices misconduct” .
Wells Fargo Board of Directors
The board of directors at Wells Fargo consisted of 15 Individuals — Including John Stumpf as the board's head chairman. Although John Stumpf received the most backlash from the press and regulators because of his authority as CEO and the head chairman, the rest of the board was not as unaware of the situation as they first led on. Tracing back to 2002, the board's independent investigation after the audit found the board's audit and examination committee received various reports of suspicious employee and sales misconduct through calls and ethics hotlines. While it is possible that Stumpf and Tostetd hid a lot of the fraudulent activity from the board or dismissed any concerns, banking is highly regulated, and the company has tons of departments whose purpose is to identify these types of risks. It deems suspicious that the board was complacent and let all the departments, such as Tolstetds Community Bank division, carry on with business without more intervention or penalties. As it is the board's job to remain objective and investigate suspicious activity within the company, it shouldn't come as a surprise when reports blamed the board for oversight failures of allowing the bank to defraud thousands of consumers.
External Auditors: KPMG
KPMG has served as Wells Fargo's external auditors since 1931. Despite a heavy involvement of fraudulent activities, each year Wells Fargo was blessed with a clean audit report. The big four accounting firm wrote that it had become aware at least since 2013 of "instances of unethical and illegal conduct by Wells Fargo employees, including these improper sales practices". Despite said findings, KPMG said nothing about these problems in either its findings on the bank's controls or in its overall findings at all. Rather it was their view was that not every illegal or unethical practice conducted at Wells Fargo had an impact on their financial statements, and they were satisfied the appropriate members of management were made aware. Regardless of their apparent disclosure to management, this is the type of information investors and shareholders wish to be made aware of in the results of an audit. It is very evident the auditors had made numerous mistakes that likely contributed to the severity of the Wells Fargo's Scandal.
Wells Fargo own employees were the ones who began the downward spiral of Wells Fargo. This was done by creating and opening up fake accounts under customer names and transferring their money to these fraudulent accounts. This new practice was being done so employees could meet their daily targets, with the remainder of whatever wasn’t met that day added onto the next day’s quotas . Financial incentives were also put in place to pressure employees to meet these aggressive demands. Originally, back in 2013, only a small handful of employees were fired once this scandal was uncovered. However, after much investigating and prodding into the employees at Wells Fargo, the direct consequence of their actions was that over 5000 employees who took part in this were fired.
The customers are the most directly affected stakeholder in this scandal, and arguably suffered the most. Their names were used under fraudulent accounts without their permission, had their own money transferred into these accounts, and then were slammed with various unnecessary fees, for accounts they didn't know existed. As the victims of this event, all customers affected were compensated by a pay-out from Wells Fargo. Although this may have helped with the monetary issue of this scandal, the trust the customers had in Wells Fargo would never be restored. The customers are the reason behind the survival and success of many companies. Wells Fargo unfortunately used their customers to create more and more money, which in turn made them lose everything.
The shareholders and investors were another group who suffered some of the many consequences from this scandal, with being lied to and misled about the company’s financial position. The stock dropped significantly following the scandal, with it bottoming out at it's lowest point at below $45 per share in September of 2017, and has continued to plummet and and never make a full recovery . This has cost both investors and shareholders hundreds of thousands of dollars, including their trust in Wells Fargo and the company’s senior management. The share price has never restored itself to what it once was pre-scandal.
While an indirect stakeholder, the government was still quite affected by this, as it is with any fraudulent governance failure. The US Justice Department and the Securities of Commission and Exchange fined Wells Fargo a whopping three billion dollars for the significant size, scope, and length of the operation. The Office of the Comptroller of the Currency also fined Wells Fargo 250 million dollars for unsound practices, as well as another 100 million dollars owed to the Consumer Financial Protection Bureau. The legal consequences to the actions of Wells Fargo proved to be extensive.
Current Status of Case
Securities and Exchange Commission
In 2019, Wells Fargo reached a settlement with federal prosecutors and the Securities and Exchange Commission (SEC). In this settlement, Wells Fargo agreed to pay $3 billion to settle their criminal charges and a civil action lawsuit against them. Under this agreement, a large sum of the $3 billion went to the US Treasury the remainder going to the SEC. The remainder, totaling $500 million, went to the SEC where a fund was set up to compensate investors who were greatly impacted by the Wells Fargo scandal.
In addition to the penalties that the bank is required to pay, the Justice Department agreed to defer criminal prosecution of Wells Fargo so long as they meet certain conditions for three years and continue to cooperate with government legislation.
Consumer Financial Protection Bureau
In 2016, Wells Fargo was also under investigation by the Consumers Financial Protection Bureau. The investigation was due to the bank abruptly closing customers’ accounts as well as looking further into the improper fees that the bank charged its wealth management customers. Based on the search it was released that more than 2 million unauthorized accounts had been opened without customers knowledge or authorization. Due to these findings the investigation was later concluded and resulted in the bank having to pay fines of $185 million.
Class Action Lawsuits
The first-class action lawsuit was put together by customers in 2018 for $142 million. The lawsuit was for customers charged improper fees by the bank or had their credit scores negatively affected by the bank’s practices. Those who had their credit scores damaged received more in compensation as they will have to accept loans at higher interest rates due to their increased scores.
The second-class action suit was put together by the banks’ shareholders in 2016. Shareholders including the lead plaintiff Union Asset Management sued for securities fraud, stating that the Wells Fargo executives had been inflating the company’s stock price. The bank had been inflating the stock price by getting customers to sign up for numerous accounts and services that they didn’t need. During the 2014-2016 period Wells Fargo’s shares were trading for as high as $53 but closer to 2016 they dropped to around $41. In 2018 a settlement of $480 million was agreed to and was paid out to shareholders who bought Wells Fargo stock between February 26, 2014, and Sept 20, 2016.
State Attorney Generals
In 2018, Wells Fargo was also facing a lawsuit from the state’s attorney generals alongside all the other lawsuits. The suit resulted in the bank paying $575 million to 50 states, due to the conduct that caused widespread harm on a national level in bank accounts, car loans, and mortgages. The actions of Wells Fargo also resulted in the state forcing the bank to change corporate conduct laws to protect customers going forward.
To provide further force on Wells Fargo to change corporate laws within the bank, the Federal Reserve put a growth restriction on Wells Fargo. The growth restriction was only to be lifted once the bank had shown its regulators that they had made significant changes to prevent scandals like this from occurring again.
John Stumpf faced several lawsuits due to his involvement in the Wells Fargo Cross-selling scandal.
The first one is with the Office of the Comptroller of the Currency (OCC). The lawsuit resulted in Stumpf having to pay a $17.5 million fine as well as being permanently barred from ever working or being involved with an OCC-regulated bank.
The second lawsuit was from the SEC. Where Stumpf was fined $2.5 million, which the SEC redistributed amongst the harmed investors of the company.
Carrie Tolstedt the former head of community banking faced charges due to her role in allegedly misleading investors about the success of the bank. To measure Wells Fargo’s financial success, she would publicly endorse and discuss wells Fargo’s cross-selling metric. Additionally, Tolstedt signed “misleading sub-certifications as to the accuracy of Wells Fargo’s public disclosures”(SEC,2020), which she knew or was negligent in knowing that the disclosures of the cross-selling metric were materially false and misleading.
SEC sought $25 million in penalties and to ban Tolstedt from serving as an officer or a director of a public company. As of the end of 2021, the case has yet to come to a settlement.
Current Status of Company and Key Players
Wells Fargo is currently still in operation and has seen an upturn since operating under their new CEO Charlie Scharf. They predict increased earnings for the 2022 year. The Asset Management branch previously owned by Wells Fargo was recently been acquired by GTCR and Reverence Capital Partners in 2021 for just over $2 billion dollars.
Chairman and CEO: John Stumpf
John Stumpf stepped down as the CEO of Wells Fargo near the end of 2016. Since the fallout of the scandal, Stumpf has kept a relatively low profile which is common for executives involved in these kind of events. Even after the substantial amount of fines that he was required to pay, Stumpf still is expected to have over $80 million in stocks and a cumulative amount of $60 million from salary and bonuses during his time as CEO. The most impactful consequence however, can be argued to be the ban placed on him, that does not allow him to ever work in the financial industry for the rest of his life.
Head of the Community Banking Division: Carrie Tolstedt
Carrie Tolstedt was retroactively fired in 2016 when the news of the scandal came to be realized. Unlike Stumpf who settled, Tolstedt has continued to fight the SEC since 2016, and is still fighting the allegations at the end of 2021. She has attempted to have the case dismissed, but it was denied, and she has asserted her Fifth Amendment rights frequently during the case.
Wells Fargo Board of Directors
After the scandal occurred, Wells Fargo was very slow in reforming its infrastructure and risk management, and a House committee report identified this in early 2020. The result of this report was Elizabeth Duke and James Quigley both resigning from the board in March of 2020. Both these board members were found to be involved with remarks back in 2017 which questioned why certain actions needed to be taken. Based on analysis of both the 2016 and 2021 annual reports, of the 14 board members, only Suzanne Vautrinot still sits on the Board of Directors.
External Auditors: KPMG
While KPMG was reviewed as an auditor by the Public Company Accounting Oversight Board (PCAOB), there were not major consequences resulting from this. Following this review, the shareholders held their annual vote on whether or not to retain KPMG as their auditor. They voted to keep KPMG as their auditor with a large majority of over 90% . Since this scandal and the years past, KPMG has remaining the auditor of Wells Fargo and still is according to the companies 2021 annual report, with there being no signs of this changing .
There has also been a documentary covering financial scandals created by Netflix in 2018 called "Dirty Money" which covers this Wells Fargo scandal for those interesting in a more visual presentation of the events. The first episode of season two covers this scandal and explores former employees testimonies about the fraudulent practices.
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