The Consumer Financial Protection Bureau (CFPB) announced in September that Wells Fargo had agreed to pay a $185 million fine for its fraudulent practices that led to the opening of millions of unauthorized accounts. Because of its significance and ramifications, we are going to write in some detail about Well Fargo’s messy situation. The announcement of the fine was just the beginning of a mountain of troubles on the horizon for Wells Fargo.
The latest of these troubles finds Wells Fargo at the center of a Securities and Exchange Commission (SEC) investigation about its practices. The SEC is investigating whether Wells Fargo violated rules relating to investor disclosures and whistleblower protections, among others. Members of the Senate Banking Committee previously called on the SEC to investigate Wells Fargo’s Sarbanes-Oxley reports and to determine whether the bank committed securities fraud by failing to disclose problems of unauthorized accounts while promoting its “cross-selling” strategy to investors.
In addition to the SEC, numerous other entities launched investigations into Wells Fargo, including the Department of Justice (DOJ), the Department of Labor (DOL), several Congressional committees, and state attorneys general and prosecutors’ offices. California’s Attorney General launched a criminal investigation into Wells Fargo over allegations of false imprisonment and identity theft related to the unauthorized account scheme. “As government authorities examine Wells Fargo, it is likely they will find abuses in other parts of the bank beyond retail customers,” said Harvey Pitt, former chairman of the SEC. If Wells Fargo stays on this course, the SEC investigation likely will not be the last.
Investigations are not the only woes Wells Fargo faces in response to the CFPB announcement. Lawsuits are piling up against the bank as well. Even in 2015, before the CFPB announced the $185 million fine, a class action was filed on behalf of consumers against Wells Fargo for opening unauthorized accounts, and the Los Angeles City Attorney filed a complaint as well. After the CFPB announcement, another class action was filed in Utah District Court on behalf of consumers who were victims of the Wells Fargo scheme. The 2015 cases settled, but the consumer case in Utah is still ongoing.
Wells Fargo employees also join in the mix of lawsuits. Lawyers at Beasley Allen are involved in a suit on behalf of Wells Fargo employees claiming that the fake-account scandal is jeopardizing their retirement accounts. Wells Fargo employees have seen the value of their 401(k) retirement plan plunge during this disaster because the plan is heavily invested in the bank.
In fact, Wells Fargo’s matching funds are in the form of Wells Fargo stock. The lawsuit alleges Wells Fargo hid the truth from its employees and violated fiduciary duties owed to the plan participants. Another set of cases brought by Wells Fargo employees deal with employees who were fired or demoted over the last 10 years for refusing to open bogus accounts to meet Wells Fargo’s aggressive sales goals.
Wells Fargo shareholders have also brought actions since the CFPB announcement. A shareholder suit filed in California alleges Wells Fargo misled investors about its financial performance and the success of its sales strategies causing stock to trade at inflated prices. The suit alleges violations of the 1934 Securities and Exchange Act, including allegations of insider trading. Another shareholder suit filed in California names numerous Wells Fargo directors and officers and claims they should be held responsible for incentivizing the misconduct and failing to monitor sales practices.
Wells Fargo recently found itself out tens of millions of dollars to settle additional, unrelated matters as well. In September, Wells Fargo also agreed to settle a class action accusing the bank of violating the Telephone Consumer Protection Act (TCPA). Wells Fargo agreed to pay $16.3 million to resolve allegations that it violated the TCPA by contacting consumers’ cellular phones without their prior express consent. On Oct. 31, Wells Fargo agreed to pay $50 million to hundreds of thousands of members of a class action to settle claims alleging the bank improperly marked up fees for third-party appraisals. The class alleged that Wells Fargo could pass through the costs of getting broker price opinions (BPOs) (a type of informal home appraisal prepared by a real estate broker that a lender will typically demand once a borrower defaults) from third-party real estate brokers, but Wells Fargo secretly charged class members more for the BPOs than it actually paid for them.
Also in October, Wells Fargo agreed to pay $4.1 million to resolve allegations that it improperly repossessed vehicles owned by members of the military. The Servicemembers Civil Relief Act (SCRA) requires Wells Fargo to obtain a court order before repossessing the vehicles, a step which it allegedly failed to follow. In a related action, the Office of the Comptroller of the Currency assessed $20 million in penalties and restitution for alleged violations of the SCRA.
The CFPB announcement outlined the millions of unauthorized accounts and the high-pressure sales tactics underlying the fraud, but since that announcement more devastating details have developed about what those at Wells Fargo knew and when they knew it. Details emerging from former employees and various documents indicate that the fraudulent activity has likely been occurring at Wells Fargo for nearly a decade, maybe longer. As early as 2006, a Wells Fargo branch manager tried to warn leadership about unauthorized accounts by sending a letter to Carrie Tolstedt, who was head of Wells Fargo’s regional banking at the time. He warned Tolstedt of “gaming in opening new accounts” and instances where employees applied for loans far greater than what the customer actually requested. His letter further explained that upper management was aware of the misconduct. Not long after the date of this letter, Tolstedt became head of Wells Fargo Community Banking.
Better Business Bureau Backs Out
Adding to the list of troubles, the Better Business Bureau (BBB) pulled Wells Fargo’s accreditation in October. The CEO of Better Business Bureau of Southern Piedmont stated, “Nobody can recall a company of this size, this scope, losing their accreditation.” The BBB now lists Wells Fargo as “not BBB accredited” with a grade of “C-.” The BBB’s website lists “Government actions against the business” as the reason for accreditation loss. Wells Fargo can apply for accreditation again in three years, which is how long the actions stay on its BBB files.
States Sever Services
Some states decided it was time to take a break from Wells Fargo after finding out about its rampant misconduct. California, Illinois, and Ohio announced that they will stop doing business with Wells Fargo for the time being. California Treasurer John Chiang announced suspension of state business with Wells Fargo for at least a year, citing the bank’s “venal abuse of its customers.” Ohio Governor John Kasich said the state will take a one-year break from allowing Wells Fargo to partake in new state debt offerings and financial services contracts initiated by state agencies under his authority. Gov. Kasich is also asking to exclude the bank from participating in debt offerings initiated by the Ohio Public Facilities Commission. Likewise, Illinois Treasurer Michael Frerichs announced his office is suspending its annual $30 billion in investment activity with Wells Fargo for at least one year.
In wake of the scandal, Wells Fargo leadership changed. Tolstedt is one of the key players at the heart of the scheme. As head of retail banking operations, she touted the cross-sell strategy and used sales volume as the ultimate measure of performance. Prior to the unauthorized account debacle becoming public, Tolstedt announced that she would retire at the end of 2016. In her July retirement announcement, not one word was mentioned about the unauthorized accounts that would soon top the headlines. Tolstedt ultimately left Wells Fargo in late September.
Following Tolstedt’s exit, John Stumpf announced his departure as Wells Fargo’s CEO around Oct. 12, 2016. Stumpf had been CEO of Wells Fargo since 2007 and worked for the bank for nearly 34 years. Stumpf’s announcement came soon after he was grilled by Congress about the fraudulent account scheme. During Congressional hearings, Stumpf apologized yet failed to take any responsibility for the misconduct. This drew criticism from lawmakers. Stumpf also resigned from his Board of Directors positions at Chevron and Target.
The Wells Fargo Board of Directors named another insider, Timothy Sloan, as the new CEO. Sloan, however, is far from an innocent bystander in the fake-account fiasco. He has spent nearly 29 years with Wells Fargo, and he was present in leadership throughout the past decade when the Wells Fargo culture allowed fraudulent conduct to fester. Sloan has held numerous leadership positions at Wells Fargo, including Senior Executive Vice President, Chief Financial Officer, head of the Wholesale Banking Group, and he was named Chief Operating Officer in November of 2015.
U.S. Senators Elizabeth Warren and Robert Menendez sent a letter to the Wells Fargo Board asking how it decided to choose Sloan; whether he was questioned about his knowledge of the creation of unauthorized customer accounts; and any actions he might have taken in response. They also asked if the Board conducted “an independent investigation of whether Mr. Sloan knew about or took appropriate actions to prevent this scandal” and if so, what that investigation showed. The Senators said in their letter:
It is difficult to believe that he had no knowledge of or bears no responsibility for the actions of thousands of Wells Fargo employees creating fake accounts under his and other top executives’ watch.
In fact, the announcement of Sloan as CEO expressly stated that he “knows Wells Fargo’s operations deeply.” Congresswoman Maxine Waters, ranking member of the House Committee on Financial Services, had this to say:
I remain concerned that incoming CEO Tim Sloan is also culpable in the recent scandal, serving in a central role in the chain of command that ought to have stopped this misconduct from happening.
Arbitration Accentuates Abuses
The Wells Fargo fiasco also shed some light on the unfairness of binding arbitration. Wells Fargo includes a binding arbitration clause in its contracts with consumers that requires any dispute to be handled in arbitration instead of in the courts. Paul Bland, a lawyer at Public Justice, has called Wells Fargo’s arbitration clause “one of the most anti-consumer, egregious” clauses in the industry. Adding insult to injury, Wells Fargo has unapologetically used its arbitration clause to throw out consumers’ lawsuits about its fake-account scheme. Worse, courts have allowed it. Considering the factual situation, this should shock even our most conservative readers.
Judges have ruled that the arbitration clauses customers signed when opening their legitimate accounts prevent them from suing Wells Fargo over separate, fraudulent accounts that were opened without the customer’s knowledge. A federal judge recently ruled that a case over unauthorized accounts must go before an arbitrator, noting that Wells Fargo’s arbitration clause is broad enough to cover “any unresolved disagreement between or among you and the bank.” Does this shock you?
Interestingly, the very question of whether a dispute is subject to arbitration was itself an issue for the arbitrator (who gets paid by the case) to determine. In fact, that’s really more than just “interesting.” The consumers appealed that case to the Ninth Circuit but settled before any ruling was made. As the Los Angeles Times noted, “Theoretically speaking, if Wells [Fargo] tried to take your first-born child in settlement of an overdraft, it would be up to an arbitrator to split the baby.”
Arbitration proceedings overwhelmingly favor corporations over consumers. Arbitrators are not required to follow precedent, can make decisions without a hearing, and their income depends on being rehired by the companies. The proceedings are kept secret, which allows a company, like Wells Fargo, to keep a scandal away from the public for years. During the Senate Banking Committee hearing, Senators asked Stumpf whether he planned to cease enforcement of the arbitration clause for unauthorized accounts. Not surprisingly, the then-CEO, stated that he would have to “talk to [his] legal team.” “Ending forced arbitration would not only help the victims of this Wells Fargo scandal, it may prevent the next one,” wrote Alliance for Justice.
At press time we learned that Wells Fargo is attempting to have a class action lawsuit filed by customers dismissed. The bank says that the customers’ claims must go to arbitration. With all of its problems and so many folks hurt, this move is beyond bad. It shows Wells Fargo has no compassion for their victims.
Now, What’s Next?
After all is said and done, the fraudulent scheme is expected to cost Wells Fargo $99 billion in lost deposits and $4 billion in lost revenue over the next 18 months. Before the scandal broke, Wells Fargo was worth an estimated $240 billion – a value that will be negatively impacted over the coming months. It remains to be seen how the bank will bounce back from this scandal and how it will rebuild its worth, reputation, and trust with its customers. In my opinion, Wells Fargo has a very steep hill to climb – stay tuned!
Sources: Law360, Wall Street Journal, The Consumerist, CNBC, Los Angeles Times, Alliance for Justice
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