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Alexander B. Kranick

Wells Fargo & Co. Account Fraud Scandal

A Scandal Unfolds

Wells Fargo & Co. banking scandal was the product of a decentralized management model
derived from greed and negligence. While this unorganized structure did create a gap between
the information being shared amongst upper-level management, lower-level Wells Fargo
employees have received the brunt of the consequences faced since this scandal and further
accountability is being sought.

Wells Fargo & Co.

Wells Fargo & Company is an American international banking and financial services holding
company headquartered in San Francisco. In September of 2016 it was reported that Wells Fargo
has been creating and operating extra bank accounts without customer authorization. An
investigation found that over 1.5 million fraudulent accounts as well as over half of a million
credit card accounts were created since 2011 without consent from customers.

Internal Reporting of Fake Accounts

Wells Fargo is famous for its practice of selling new accounts to existing customers, and it is the
pressure to meet sales quotas and earn bonuses that is seen as the motive for bank employees
who set up credit-card and deposit accounts without customers’ permission.

Wells Fargo said its top executives learned in 2013 that some employees were systematically
creating illegal accounts to meet sales goals. But former employees who tried to blow the whistle
on the fraudulent activity years earlier tell a different story. In 2005, Julie Tishkoff, a Bay Area
employee, made internal complaints to Wells Fargo about account fraud she observed. Yesenia
Guitron and Judi Klosek, two employees from Northern California, both report observing
account fraud in 2008 and formally complained to Wells Fargo’s ethics hotline about false
accounts created by colleagues in 2009. During the same year, six fired employees in Montana
sue Wells Fargo for unethical practices and the case was settled in 2011. In 2010, Ms. Guitron
and Ms. Klosek are fired and sue the bank, alleging retaliation for their complaints. This case
was dismissed in 2012. In 2011, Claudia Ponce de Leon, a manager in Pomona, Calif., notifies
her district manager that bankers in her branch are falsifying bank documents and fraudulently
opening accounts. Soon after, she is fired for “inappropriate conduct,” and files a Department of
Labor complaint alleging that she was fired for whistle-blowing. The complaint is still pending.
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The bank said it would drop the aggressive sales goals that employees said led to illegal accounts
being created. It first said that it would end those goals by Jan. 1, 2017, but subsequently
changed the date to Oct. 1, 2016.

Accountability

In public statements since the settlement was announced, bank executives have acknowledged
that the accounts were created improperly. But they deny regulators’ assertions that the bank’s
internal culture and incentive system encouraged the misdeeds. The Justice Department is now
investigating whether Wells Fargo made inappropriate recommendations or referrals, or failed to
inform customers about potential conflicts of interest, the Journal reported, citing unnamed
people familiar with the matter.

The bank previously disclosed in a securities filing that it is conducting its own internal
investigation into its wealth-management business, and is reviewing the fees it charged
customers in those accounts, including potential overcharges. Both of those investigations are in
the early stages, the bank said.

The Federal Reserve put significant restrictions on the San Francisco bank citing widespread
consumer abuses. The bank is replacing four members of its board and its asset level has been
frozen by the Fed until internal controls are improved.

Separate from the sales-practices and the reported wealth-management investigations, Wells
Fargo is under investigation for potentially overcharging corporate customers in foreign-
exchange transactions as well as an investigation into its auto-lending business, where it forced
auto insurance policies onto customers who did not need them.

In July of 2016, the bank announced the retirement of its head of community banking, Carrie
Tolstedt, a longtime Wells executive who oversaw all of the bank’s branches. A spokeswoman
said Ms. Tolstedt had planned on retiring and that her departure was unrelated to the settlement
with regulators.

Since the ethics scandal erupted in public, John G. Stumpf, who became president in 2005, CEO
in 2007, and Wells Fargo’s board chairman in 2010, has testified twice in front of Congress that
he and other senior managers only realized in 2013 that they had a big problem on their hands —
two years after the bank had started firing people over the issue.

Timothy J. Sloan has been the chief executive officer of Wells Fargo since October 2016, when
he succeeded John Stumpf, having previously been chief operating officer and president.

So far, 5,300 employees have been fired for their involvement. As a result of the investigation,
the Board has terminated for cause five senior executives of the Community Bank.
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Extent of Fraud

A four-person committee of Wells Fargo’s directors investigated the extensive fraud. The
investigation reports employees pushed customers to the breaking point in regards to the quantity
of fake accounts being made. Customers were being asked to make changes to accounts
randomly and without reason. In one detail revealed by the report, a branch manager had a
teenage daughter with 24 accounts and a husband with 21. The report also notes that employees
were given a heads up when internal watchdogs would be coming to a branch which gave
managers time to fix any fraudulent data being used.

Toxic Environment

Why would a massive bank like Wells Fargo pull such an unethical stunt while in the public eye?
Current and former employees have cited an environment in which managers checked with staff
members several times a day to monitor progress toward sales quotas. Those who met sales
targets earned hefty bonuses. But how can a toxic culture develop in a way that is diametrically
opposed to everything leaders supposedly say and stand for? The answer lies in a variation on
the classic “Do as I say, not as I do” admonition. Employees will get their cultural cues not from
what management says but from what it signals.

Those signals are embedded throughout the workplace. They can appear in overt ways, such as
how compensation and recognition are done. Or they can emerge in subtler ways, as in which
metrics managers obsess over, what questions they pepper employees with and how they react to
dissenting opinions. These signals can easily overpower even the most carefully crafted
corporate statements of mission and values. They surround employees at every turn, directing
their focus and shaping their perceptions about what constitutes good versus bad behavior.

Restitution

As a result of the investigation, the Board has terminated for cause five senior executives of the
Community Bank and has imposed forfeitures, claw backs, and compensation adjustments on
senior leaders totaling more than $180 million. The Board will claw back $75 million from two
executives on whom it pinned most of the blame for the bank’s sales scandal. The Board has
taken numerous actions and supported management steps to address these issues. Wells Fargo
has replaced and reorganized the leadership of the Community Bank, eliminated sales goals and
reformed incentive compensation, and centralized control. The Board has also separated the role
of the Chairman and the CEO, strengthened the charters of Board Committees, and established
regular reporting to the Board by the new Office of Ethics, Oversight and Integrity.

The bank has refunded about $2.5 million to customers who were charged fees as a result of the
unwanted accounts.
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Further Accountability Sought

The actions at issue might seem to help struggling borrowers: Wells Fargo lowered some
customers’ monthly mortgage payments, potentially making them manageable. But there are two
huge potential problems. First, the bank did this while also extending the duration of the loans
— in one case by some 30 years. That greatly increased the total interest borrowers were on the
hook to pay over the life of their loans. Second, Wells Fargo made these changes, according to
the lawsuits, without getting the consent of either the customers or the relevant bankruptcy
courts. Wells Fargo denies this, saying it notified customers and does “not finalize a loan
modification without receiving signed documents” from the required parties.

The trouble is Wells Fargo has mucked up mortgage lending and modification in the past. It was
one of the five lenders that in 2012 agreed to a $25 billion settlement with the federal
government and 49 states to rectify poor loan-servicing and foreclosure practices. Last year it
forked over $1.2 billion to settle claims of reckless lending under a Federal Housing
Administration program. Home loans should have been precise after all that.

The Federal Reserve planned to impose tough sanctions on the San Francisco-based bank for
years of misconduct and the shoddy governance that allowed it. The executives’ mission,
according to three people directly involved in the negotiations, was to avoid further shaking
investor confidence in the bank and its management team.

Officials at the central bank had a different goal, according to people familiar with their thinking.
They wanted to send a message to the Wells board that it would be held responsible for the
company’s behavior. After three weeks of frenzied negotiations, a deal was announced during
January of 2018 that represented a milestone in the evolving relationship between regulators and
banks. Wells Fargo, one of the country’s largest banks, was banned from getting bigger until it
can convince regulators that it has cleaned up its act. The settlement is an attempt by the Fed to
impress upon banks that their boards of directors should be vigorous, independent watchdogs —
and if they fail, there will be consequences.

Wells had already replaced about half of its scandal-era directors.

The Fed wanted more change, according to people familiar with the central bank’s thinking. The
regulators had taken notice of public anger about the government’s past practice of taking actions
against corporations without holding people responsible. Senator Elizabeth Warren, a Democrat
from Massachusetts, had met twice with Ms. Yellen last year to push the Fed to force out Wells’s
directors, according to a participant in the meetings. Ms. Warren also made the argument to Mr.
Powell, the incoming Fed chairman.

While not adopting Ms. Warren’s suggestion, Fed officials emphasized to Wells the importance
of “refreshing the board,” said people who participated in the negotiations.
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Bank executives responded that they already planned to replace four more directors. That would
leave no more than three directors who had been around during the misconduct.

That appeared to satisfy the Fed.