Pomerantz LLP

Other Shoes Keep Dropping At Wells Fargo -- But Is It Enough?

Attorney: Tamar A. Weinrib

Though every attempt was made at first to “blame the little guy,” Wells Fargo executives have finally been called to task for an egregious scandal over fraudulent accounts, with the CEO fired and over $182 million in executive compensation rescinded.

As the Los Angeles Times first revealed back in 2013, and as the Monitor has recently reported, a pervasive culture of aggressive sales goals at Wells Fargo pushed thousands of workers to open as many as 2 million accounts that bank customers never wanted. This happened because low-level, low-wage employees had to meet strict quotas for opening new customer accounts, or risk their positions. To meet these quotas, the employees opened unneeded accounts for customers and forged clients’ signatures on documents authorizing these accounts. Wells Fargo employees called the bank’s practice “sandbagging” and a “sell or die” quota system. More recent reports have surfaced based on sworn statements signed by former Wells Fargo employees that indicate their former bank superiors instructed them to target Native Americans, illegal immigrants and college students as they sought to open sham accounts to meet the bank’s onerous sales goals.

Once the scandal hit the media, rather than placing accountability on those at the helm responsible for the corporate culture that fostered the scheme, Wells Fargo fired 5,300 low-level employees for creating the unauthorized accounts. However, that all changed after Wells Fargo agreed to a $185-million settlement in September 2016 with Los Angeles City Attorney Mike Feuer, the Consumer Financial Protection Bureau and the Office of the Comptroller of the Currency, to end investigations into the unauthorized accounts. Feuer had conducted his own investigation and then sued Wells Fargo, saying the bank’s impossible sales quotas had encouraged “unfair, unlawful, and fraudulent conduct” by employees forced to meet them. Notably, the bank did not admit any wrongdoing as part of the settlement, but apologized to customers and announced steps to change its sales practices. The $185 million settlement consisted of $100 million to the Consumer Financial Protection Bureau—the largest fine the federal agency has ever imposed—as well as $50 million to the city and county of Los Angeles and $35 million to the Office of the Comptroller of the Currency.

Also in September 2016, Wells Fargo CEO John Stumpf appeared before the Senate Banking Committee, where he was grilled by Senator Elizabeth Warren of Massachusetts. Berating Stumpf and noting the shocking lack of accountability, Senator Warren stated: “So, you haven’t resigned, you haven’t returned a single nickel of your personal earnings, you haven’t fired a single senior executive. Instead, evidently, your definition of accountable is to push the blame to your low-level employees who don’t have the money for a fancy PR firm to defend themselves. It’s gutless leadership.” In March 2017, Wells Fargo reached a $110 million preliminary settlement to compensate all customers who claim the scandal-ridden bank opened fake accounts and other products in their name.

Moreover, the independent directors on Wells Fargo’s board created an Oversight Committee to investigate the improper sales practices and to make recommendations to the independent directors. The investigation, assisted by outside counsel Sherman & Sterling, resulted in a detailed 110-page report that the bank released on April 10, 2017. The report laid the blame squarely on the shoulders of former CEO Stumpf and former head of the bank’s community banking business, Carrier Tolstedt— both of whom resigned in the fall of 2016 shortly after the Senate Banking Committee session. As a result of the report, the Wells Fargo Board was determined to clawback approximately $75 million in compensation from the two executives, which is in addition to the $60 million in unvested equity awards Stumpf and Tolstedt agreed to forfeit at the time of their ouster. The claw backs are reportedly the largest in banking history and one of the biggest ever in corporate America. They’re also unprecedented in that they are not called for by either Sarbanes -Oxley or the Dodd-Frank Act, both of which provide for claw backs only in the event of a restatement of financial results. The board also required the forfeiture or clawback of an additional $47.5 million in compensation from other former bank executives, bringing the total amount of compensation that the board has reclaimed to $182.8 million. This is apparently the second-largest clawback of executive compensation in history; and its massive size underscores how high executive compensation was at this bank. The bank also assured the public it has ended its sales quota program.

However, even though repercussions have appropriately made their way to the executive suite, many say it’s not enough. Specifically, angry shareholders claim that the board itself needs to be held responsible for what happened here. Indeed, in April 2017, Institutional Shareholder Services, which advises big investment firms about corporate governance issues, recommended that Wells Fargo’s shareholders oppose the re-election of 12 of the bank’s 15 board members at the bank’s annual meeting. Ultimately, all the board members were re-elected, but some by very small margins, even though they were running unopposed. Shareholders also asked why KPMG, Wells Fargo’s auditor, didn’t discover the phony accounts. Senator Warren and Senator Edward Markey agreed, and called upon the Public Company Accounting Oversight Board, which sets standards for audits of public companies, to review KPMG’s work for Wells Fargo.