Wells Fargo, one of the largest banks in the United States, engaged in an egregious, years-long, illegal practice of ripping off millions of customers. It fraudulently opened and funded millions of bogus accounts with stolen customer money. In addition to falsely inflating revenue, profits and bonuses, these activities almost certainly manipulated the bank’s stock price.
The Whitewash and Cover Up
You wouldn’t know that from the carefully crafted Report released this week by the independent members of the bank’s Board of Directors. That Report whitewashed away with misleading Orwellian language these many pervasive illegal and possibly criminal activities. The Report conceals more than it reveals.
It is not surprising that an investigation conducted by a Board exonerates the Board and its handpicked CEO while blaming virtually everything on two senior executives no longer at the bank. What is surprising is how the Report ignores likely criminal conduct while detailing more than a decade of incomprehensible levels of incompetence, negligence and dereliction of duty by the Board, the current CEO and dozens of other executives and supervisors.
The scope and scale of the illegal activities are staggering: it started more than 15 years ago when, by 2002, the bank had to create a “sales integrity task force” due to “sales practice violations” that included “issuing credit cards without customer consent.” This required – in 2002 – the “mass termination” of employees for breaking the law, including “almost an entire [bank] branch in Colorado.” The former CEO, John Stumpf, was aware of these mass firings and, the Report mentions in passing, “Stumpf [also] received numerous customer and employee complaints about sales practices and sales pressure….”
In the fifteen years since then, thousands of Wells Fargo employees in hundreds of branches around the country appear to have engaged in illegal, indeed, possibly criminal business practices involving fraud, identity theft, falsification of the banks’ books and records, fabrication of customer account information, and the unauthorized charging of fees and debiting of accounts, all in connection with opening as many as two million bank and credit card accounts their customers did not know about.
Tellingly, the Report never mentions the words “crime” or “criminal activity.” Rather, it repeatedly minimizes the conduct by referring to “sales practice issues” or abuses, bad or inappropriate conduct, and banalities such as “gaming” or “unusual funding.” This is nothing less than a cover-up of pervasive negligent, illegal and likely criminal conduct.
For example, the Report speaks of “simulated funding,” which was “the phenomenon in which bankers used customer funds from one account to surreptitiously fund another account.” This would appear to be theft, embezzlement and fraud pure and simple: bank employees took one customer’s money and gave it to another customer, falsifying innumerable bank and customer records along the way, for potentially up to 1,534,280 deposit accounts. To call that “simulated funding” is like saying a bank robbery is an “unauthorized withdrawal.”
The Report also misleadingly minimizes and understates the critical senior roles previously held by the Board’s handpicked current CEO, Tim Sloan; fails to disclose critical information regarding his conduct, knowledge and duties, including being the bank’s point person with Wall Street; and totally ignores his repeated failures and deficiencies. Sloan was Wells Fargo’s Chief Financial Officer (CFO) from February 2011 to November 2015. This is a very powerful position, particularly at a bank.
CEO Sloan’s Claims to Know Nothing Aren’t Credible
The epicenter of what can only be described as a crime spree at the bank was Carrie Tolstedt’s Community Banking division, which generated roughly 60% of the bank’s revenues and profits for each year from 2010 to 2016. Yet the Report indicates that it’s okay for Sloan as CFO to have known virtually nothing about what was actually happening in this critical business line.
That can’t be true because the entire point of all this illegal activity was to create the appearance of a thriving business and successful strategy that produced increasing revenue and profits for the bank. This was the bank’s cash cow and it was the foundation of the stock price, which was manipulated by the illegal business practices giving the false impression of success. As a primary contact for Wall Street and the capital markets, Sloan as CFO had to trumpet the Community Bank and its multi-product model as a wild success. Sloan’s discussions with Wall Street required him to have detailed knowledge of the Community Bank division, its operations, revenues and profits, which appear to have manipulated the stock price for many years.
Yet, during Sloan’s 5-year tenure as CFO, the illegal activities were rampant and widespread; employee terminations from illegal irregularities consistently topped 1,000 each year; multiple lawsuits had been filed by former employees who had raised alarms about Wells’ sales practices; and, the bank was quietly refunding millions of dollars to customers who were ripped off. Moreover, the bank’s proxy statements each year from 2012 to 2015 specifically acknowledged the problems of employees “gaming” the system to meet their sales quotas.
The Report suggests that Sloan knew none of this when he was CFO, including when, in 2013, he stated to the LA Times that he was "not aware of any overbearing sales culture" at the bank. If this were true, then Sloan as CFO had to be grossly negligent or willfully blind.
But, this does not appear to be true because, according to the Report, Sloan as CFO was aware of -- if not working with -- others at the bank understating and misrepresenting to the LA Times (and, by extension, the public, the bank’s customers, the stock market, the bank’s employees, the bank’s Board, etc.) the extent of the illegal activities and the thousands of firings that resulted from them. For example, Sloan participated in an “an email exchange on November 8-9, 2013,” a month before the LA Times story broke, stating Tolstedt and others “are trying to limit the damage of further [terminations] in the short term hoping the LA Times story doesn’t become national.” The exchange with Sloan also stated that “then the larger sales practice review needs to be done, although [Tolstedt] is already trying to find ways to reduce pressure – goals, referrals, etc.”
This appears to directly contradict what Sloan told the LA Times and the Report’s many claims that Sloan as CFO was unaware of the illegal practices, mass firings and related activities.
CEO Sloan’s Involvement in the Cover Up
But that’s not all. Sloan’s questionable conduct continued when he was promoted to President in November 2015, when he was handed supervisory responsibility for Tolstedt. Almost immediately, Sloan rejected the urging of Board members to terminate her, according to the Report, even though he was well aware of the pressure, illegal activities and mass firings at least since late 2013. Just a few months later, Sloan then led the negotiations that resulted in her receiving a golden “retirement” parachute reportedly worth more than $125 million, announced in July 2016.
Sloan’s golden parachute negotiations with Tolstedt appear to have happened at exactly the same time as the bank’s negotiations and settlement with the CFPB, other regulators, and prosecutors, announced just a few weeks later in September 2016. Given how overly generous the bank was to Tolstedt, this raises serious questions regarding Stumpf’s and Sloan’s conflicts of interest and motives in connection with Tolstedt’s retirement terms and the settlement itself.
After all, Tolstedt’s package of $125 million was 25% higher than the CFPB’s $100 million fine, which was the largest fine ever imposed by the CFPB. Was this intended to be hush money and part of a cover up? Tolstedt reported directly to Stumpf and then Sloan. Their conversations would be among the most critical evidence in all the lawsuits and investigations.
The Board of Directors’ Dereliction of Duty
This, of course, all leads to the Board of Directors. Remarkably, the Report concedes that, after more than 15 years of thousands of terminations, illegal actions, whistleblower complaints, lawsuits and direct complaints to CEO Stumpf, bank executives and the Board only started to take any of this seriously after the LA Times’ report in December 2013. Indeed, the Report admits that the Board only “first began to appreciate the potential for sales practices to cause financial harm” in May of 2015 after the LA City Attorney filed a lawsuit.
Former CEO Stumpf was also the Chairman of the Board of Directors. What specifically did he, Sloan and others tell – or not tell – the Board members regarding the years-long illegal activity, the negotiations and settlement with prosecutors and regulators, and the virtually simultaneous golden parachute deal with Tolstedt? The Report doesn’t disclose this information, but, perhaps without meaning to, clearly suggests that Stumpf and Sloan seriously misled the Board.
Misled or not, the Report makes clear that the Board members acted as passive recipients of superficial and general information, taken at face value, as the bank continued year after year to rip off its customers. Indeed, the Report gives no indication that the Board is aware, even today, that what they refer to as “sales practice abuses” were in fact widespread illegal and possibly criminal actions and practices. Moreover, the Board seems totally unaware of what a CFO is supposed to know and do as the most senior financial executive or his relationship to Wall Street and the stock price. If they think Sloan’s conduct as CFO was adequate, then he and they are a grave danger to the bank and the public stock markets today.
The CEO and the Board Must Go for the Protection of Customers, Investors and the Public
Genuine accountability starts at the top with the Board and the senior executives, including most importantly the CEO and Chairman of the Board of Directors. Anyone involved in or aware of any of these activities who did nothing, whether due to lack of understanding, passivity, incompetence, dereliction of duty or worse, should be immediately removed from the bank. They present a clear and present danger to the bank’s customers and the public.
The shareholders should vote to reject all Board members on the bank’s ballot for the April 25th Annual Meeting and take all other actions necessary to replace the CEO and the Board. Finally, the Department of Justice and the SEC should immediately accelerate their investigations to protect the bank’s customers and the public from the threat posed by such deficient conduct in the management and supervision of one of the country’s largest too-big-to-fail banks.