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The Wells Fargo account fraud scandal is a controversy brought about by the creation of millions of fraudulent savings and checking accounts on behalf of Wells Fargo clients without their consent. Various regulatory bodies, including the Consumer Financial Protection Bureau fined the company a combined $185 million dollars as a result of the illegal activity, and the company faced criminal and civil suits as well.

Wells Fargo clients began to notice the fraud after being charged unanticipated fees and receiving unexpected credit or debit cards or lines of credit. Initial reports blamed individual Wells Fargo branch workers and managers for the problem, and sales incentives associated with selling multiple "solutions" or financial products. This blame was later shifted to a top-down pressure from higher-level management to open as many accounts as possible through cross-selling.

The bank took relatively few risks in the years leading up to the 2008 Financial Crisis, which led to an image of stability on Wall Street and in the financial world, which was tarnished by the widespread fraud perpetrated by the company and subsequent coverage. The controversy resulted in the resignation of CEO John Stumpf, and an investigation into the bank led by U.S. Senator Elizabeth Warren.

Background

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Cross-selling

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Cross-selling, the practice underpinning the fraud, is the concept of attempting to sell multiple products to consumers. For instance, a consumer with a checking account might be encouraged to take out a mortgage, or set up credit card or online banking account.[1] Success by retail banks was measured in part by the average number of products held by a customer, and Wells Fargo was long considered the most successful cross-seller.[2] Richard Kovacevich, the former CEO of Norwest Corporation and, later, Wells Fargo, allegedly invented the strategy while at Norwest.[3]

Early coverage

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Wells Fargo's sales culture and cross-selling strategy, and its effect on customers, were documented by the Wall Street Journal as early as 2011.[4] In 2013, a Los Angeles Times investigation revealed intense pressure on bank managers and individual bankers to produce sales against extremely aggressive quotas.[5] In the Los Angeles Times article, CFO Timothy Sloan was quoted stating he was unaware of any "...overbearing sales culture". Sloan would later replace John Stumpf as CEO.

Fraud

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Employees were encouraged to order credit cards for customers who had been pre-approved without their consent, and to use their own contact information when filling out requests to prevent customers from discovering the fraud. Employees also created fraudulent checking and savings accounts, a process that sometimes involved the movement of money out of legitimate accounts. The creation of these additional products was made possible in part through a process known as "pinning". By setting the client's pin to "0000", bankers were able able to control client accounts and were able to enroll them in programs such as online banking.[6]

Measures taken by employees to satisfy quotas included the enrollment of the homeless in fee-accruing financial products.[7] Reports of unreachable goals and inappropriate conduct by employees to supervisors did not result in changes to expectations.[8]

After the Los Angeles Times article, the bank made nominal efforts to reform the company's sales culture.[9] Despite alleged reforms, the bank was fined $185 million in early September of 2016 due to the creation of some 1,534,280 unauthorized deposit accounts and 565,433 credit-card accounts between 2011 and 2016.[10] Later estimates, released in May 2017, placed the number of fraudulent accounts at closer to a total of 3,500,000.[11]

In December of 2016, it was revealed that employees of the bank also issued unwanted insurance policies.[12] These included life insurance policies by Prudential Financial and renters' insurance policies by Assurant.[13] Three whistle-blowers, Prudential employees, brought the fraud to light. Prudential later fired these employees,[14] and announced that it might seek damages from Wells Fargo.[15]

Fines and broader coverage

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John Stumpf, former CEO of Wells Fargo

Despite the earlier coverage in the Los Angeles Times, the controversy achieved national attention in September of 2016 with the announcement by the Consumer Financial Protection Bureau that the bank would be fined for the practice. Wells Fargo was fined $185 million for the illegal activity. The Consumer Financial Protection Bureau received $100 million, the Los Angeles City Attorney received $50 million, and the Office of the Comptroller of the Currency received the last $35 million.[16] The fines received substantial media coverage in the days after being announced, and triggered attention from parties other than the parties originally involved.[17][18]

Initial response from Wells Fargo and management

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After news of the fines broke, the bank placed ads in newspapers taking responsibility for the controversy.[19] However, the bank rejected the notion that its sales culture led to the actions of employees, stating "...[the fraud] was not part of an intentional strategy".[20] Stumpf also expressed that he would be willing to accept some personal blame for the problems.

Company executives and spokespeople referred to the problem as an issue with sales practices.[21]

Effects on Wells Fargo and management

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The bank fired approximately 5300 employees between 2011 and 2016 as a result of fraudulent sales,[22] and discontinued sales quotas at its individual branches after the announcement of the fine in September 2016.[23] John Shrewsberry, the bank's CFO, said the bank had invested $50 million to improve oversight in individual branches. Stumpf accepted responsibility for the problems, but in September of 2016, when the story broke, indicated he had no plans to resign.[24]

Senator Elizabeth Warren

Stumpf was subject to a hearing before the Senate Banking Committee on September 21st, 2016, in an effort led by Senator Elizabeth Warren.[25] Before the hearing, Stumpf agreed to forgo $41 million in stock options that had not yet vested after being urged to do so by the company's board.[26] Stumpf resigned on October 12th, roughly a month after the fines by the CFPB were announced, to be replaced by COO Timothy Sloan.[27] Sloan indicated there had not been internal pressure for his resignation, and that he had chosen to do so after "...deciding that the best thing for Wells Fargo to move forward was for him to retire...".[28] In November of 2016, the Office of the Comptroller of the Currency levied further penalties against the bank, removing provisions from the September settlement.[29] A a result of the OCC adding new restrictions, the bank received oversight similar to that used for troubled or insolvent financial institutions.[30]

Stumpf received criticism for praisng former head of retail banking, Carrie Tolstedt, upon her retirement earlier in 2016, given that the bank had been conducting an investigation into retail banking practices for several years at the time.[31] In April of 2017, the bank utilized a clawback provision in Stumpf's contract to take back $28 million of his earnings.[32] Tolstedt was also forced to forfeit earnings, though she denied involvement.[33]

The bank experienced decreased profitability in the first quarter after the news of the scandal broke.[34] Payments to both lawyers and outside firms resulted in increased expenses.[35] After earnings were reported in January 2017, the bank announced it would close over 400 of its approximately 6000 branches by the end of 2018.[36] In May 2017, the bank announced that they would cut costs through investment in technology while decreasing reliance on its “sales organization”.[37] The bank also revised up its 2017 efficiency-ratio goal from 60 to 61.[38]

Effects on others

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On consumers

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Approximately 85,000 of the accounts opened incurred fees, totaling $2 million.[39] Customers' credit scores were also likely hurt by the fake accounts.[40] The bank was able to prevent customers from pursuing legal action as the opening of an account mandated customers enter into private arbitration with the bank.[41]

The bank paid $110 million to consumers who had accounts opened in their names without permission in March of 2017.[42][43] The money repaid fraudulent fees and paid damages to those affected.[44]

On Wells Fargo employees

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Employees who worked at Wells Fargo described intense pressure, with expectations of sales as high as 20 products a day.[45] Others described frequent crying, levels of stress that led to vomiting, and severe panic attacks.[46][47] At least one employee consumed hand sanitizer to cope with the pressure.[48] Some indicated that calls to the company's ethics hotline were met with either no reaction[49] or resulted in the termination of the employee making the call.[50]

After employment at the Wells Fargo, some branch-level bankers encountered difficulty gaining employment at other banks. Banks issue U5 documents to departing employees, which contain record of any misbehavior or unethical conduct by bankers.[51] Wells Fargo issued defamatory U5 documents to bankers who reported branch-level malfeasance, indicating that they had been complicit in the creation of unwanted accounts,[52] a practice that received media attention as early as 2011.[53] There is no process in place for appealing a defamatory U5, other than to file a lawsuit against the corporation issuing the U5.

Wells Fargo created a special internal group to aid employees who were not implicated return to working at the company. In April of 2017, Timothy Sloan stated that the bank would rehire some 1000 employees who had either been wrongfully terminated or who had quit in protest of fraud.[54] Sloan emphasized that those being rehired would not be those that participated in the creation of fake accounts.[55] The announcement was made shortly after the news was released that the bank had clawbacked income from both Carrie Tolstedt and John Stumpf.

Government actions

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Senate hearing

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John Stumpf appeared before the Senate Banking Committee on the September 20th of 2016. Stumpf delivered prepared testimony and was then questioned. Senators, including Committee Chairman Richard Shelby, asked about whether the bank would clawback income from executives and how the bank would help consumers it harmed.[56] Stumpf deferred from answering some of the questions, given lack of expertise.[57]

Elizabeth Warren referred to his leadership as "gutless" and told him he should resign.[58] Patrick Toomey expressed doubt that the 5300 employees fired by Wells Fargo had acted independently and without orders from supervisors or management.[59]

Other investigations

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Prosecutors including Preet Bharara in New York City, and others in San Francisco and North Carolina, opened their own investigations into the fraud.[60] The Securities and Exchange Commission opened its own investigation into the bank in November of 2016.[61]

Reactions

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Divestitures by major clients

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In September of 2016, California suspended its relationship with the bank.[62] John Chiang, the California State Treasurer, immediately removed the bank as bookrunner on two municipal bond issuings, suspended investments in Wells Fargo, and removed the bank as the state's broker dealer.[63] Chiang cited the company's disregard for the well-being of Californians as the reason for the decision, and indicated the suspension would last for a year.

The city of Chicago also divested $25 million invested with Wells Fargo in the same month as the state of California.[64] Additionally, Chicago alderman Edward M. Burke introduced a measure barring the city from doing business with the bank for two years.[65]

Other cities and municipalities that have either replaced or sought to replace Wells Fargo include Philadelphia, which uses the bank to process payroll,[66] and the state of Illinois.[67] Seattle also ended its relationship with the bank in an effort led by Kshama Sawant. In addition to the account controversy, Seattle cited the company's support of the Dakota Access Pipeline as a reason to end its relationship.[68]

From the media

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Wells Fargo survived the Great Recession more or less unharmed, even acquiring another bank, Wachovia to prevent its failure.[69] Politicians on both the left and the right, including Elizabeth Warren and Jeb Hensarling have called for investigation beyond that done by the CFPB.[70]

Many reacted with surprise both to Stumpf's initial unwillingness to resign and the bank's laying the blame for the problem at the feet of lower-level employees.[71][72]

Notes

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  1. ^ Kolhatkar, Elizabeth Warren and the Wells Fargo Scandal
  2. ^ Smith, Copying Wells Fargo, Banks Try Hard Sell
  3. ^ Davidson, How Regulation Failed with Wells Fargo
  4. ^ Smith, Copying Wells Fargo, Banks Try Hard Sell
  5. ^ Reckard, Wells Fargo's pressure-cooker sales culture comes at a cost
  6. ^ Levine, Wells Fargo Opened a Couple Million Fake Accounts
  7. ^ Reckard, Wells Fargo's pressure-cooker sales culture comes at a cost
  8. ^ Reckard, Wells Fargo's pressure-cooker sales culture comes at a cost
  9. ^ Cowley, Voices From Wells Fargo: ‘I Thought I Was Having a Heart Attack’
  10. ^ Levine, Wells Fargo Opened a Couple Million Fake Accounts
  11. ^ Keller
  12. ^ Cowley, Prudential Suspends Sales of Its Life Policies by Wells Fargo
  13. ^ Cowley, Prudential Suspends Sales of Its Life Policies by Wells Fargo
  14. ^ Voreacos, Prudential Says Trio in Whistle-Blower Case Fired for Misconduct
  15. ^ Chiglinsky, Prudential May Press Wells Fargo as Account Fallout Spreads
  16. ^ Levine, Wells Fargo Opened a Couple Million Fake Accounts
  17. ^ Levine, Wells Fargo Opened a Couple Million Fake Accounts
  18. ^ Corkery, Wells Fargo Fined $185 Million for Fraudulently Opening Accounts
  19. ^ Corkery, Wells Fargo Offers Regrets, but Doesn’t Admit Misconduct
  20. ^ Corkery, Wells Fargo Offers Regrets, but Doesn’t Admit Misconduct
  21. ^ Agnes, Wells Fargo Is Not Addressing The Right Questions Within Their Crisis Response
  22. ^ Olen, Wells Fargo Must Pay $185 Million After Opening Customer Accounts Without Asking. That’s Not Enough.
  23. ^ Puzzanghera, Wells Fargo is eliminating retail sales goals after settlement over aggressive tactics
  24. ^ Puzzanghera, Wells Fargo is eliminating retail sales goals after settlement over aggressive tactics
  25. ^ Phillips, Wells Fargo Subpoenaed in Sham Account Case
  26. ^ Faux, Wells Fargo CEO Stumpf Quits in Fallout From Fake Accounts
  27. ^ Gonzales, Wells Fargo CEO John Stumpf Resigns Amid Scandal
  28. ^ Faux, Wells Fargo CEO Stumpf Quits in Fallout From Fake Accounts
  29. ^ Koren, Wells Fargo hit with new sanctions following fake-accounts scandal
  30. ^ Koren, Wells Fargo hit with new sanctions following fake-accounts scandal
  31. ^ Maxfield, Why Is Wells Fargo CEO John Stumpf Making These 3 Major Mistakes?
  32. ^ Keller, Wells Fargo Board Claws Back $28 Million More From Ex-CEO
  33. ^ Keller, Wells Fargo Board Claws Back $28 Million More From Ex-CEO
  34. ^ Gray, Wells Fargo counts cost of sham accounts scandal
  35. ^ Gray, Wells Fargo counts cost of sham accounts scandal
  36. ^ Keller, Wells Fargo Plans to Close More Than 400 Branches Through 2018
  37. ^ Keller, Wells Fargo Doubles Cost Slashing as Scandal Spurs Tech Push
  38. ^ Keller, Wells Fargo Doubles Cost Slashing as Scandal Spurs Tech Push
  39. ^ Levine, Wells Fargo Opened a Couple Million Fake Accounts
  40. ^ Zarroli, Wells Fargo's Unauthorized Accounts Likely Hurt Customers' Credit Scores
  41. ^ Olen, Wells Fargo Must Pay $185 Million After Opening Customer Accounts Without Asking. That’s Not Enough.
  42. ^ Lam, Wells Fargo’s $110 Million Settlement
  43. ^ Mehrotra, Wells Fargo Reaches $110 Million Fake Accounts Settlement
  44. ^ Mehrotra, Wells Fargo Reaches $110 Million Fake Accounts Settlement
  45. ^ Arnold, Former Wells Fargo Employees Describe Toxic Sales Culture, Even At HQ
  46. ^ Arnold, Former Wells Fargo Employees Describe Toxic Sales Culture, Even At HQ
  47. ^ Cowley, Voices From Wells Fargo: ‘I Thought I Was Having a Heart Attack’
  48. ^ Cowley, Voices From Wells Fargo: ‘I Thought I Was Having a Heart Attack’
  49. ^ Arnold, Former Wells Fargo Employees Describe Toxic Sales Culture, Even At HQ
  50. ^ Arnold, Workers Say Wells Fargo Unfairly Scarred Their Careers
  51. ^ Arnold, Workers Say Wells Fargo Unfairly Scarred Their Careers
  52. ^ Arnold, Workers Say Wells Fargo Unfairly Scarred Their Careers
  53. ^ Singer, Wells Fargo Hit With Punitive Damages in FINRA U5 Defamation Case
  54. ^ Keller, Wells Fargo Rehires About 1,000 Staff in Wake of Account Scandal
  55. ^ Keller, Wells Fargo Rehires About 1,000 Staff in Wake of Account Scandal
  56. ^ Chappell, You Should Resign': Watch Sen. Elizabeth Warren Grill Wells Fargo CEO John Stumpf
  57. ^ Chappell, You Should Resign': Watch Sen. Elizabeth Warren Grill Wells Fargo CEO John Stumpf
  58. ^ Chappell, You Should Resign': Watch Sen. Elizabeth Warren Grill Wells Fargo CEO John Stumpf
  59. ^ Chappell, You Should Resign': Watch Sen. Elizabeth Warren Grill Wells Fargo CEO John Stumpf
  60. ^ Protess, Wells Fargo Subpoenaed in Sham Account Case
  61. ^ Masunaga, Wells Fargo says the SEC is also investigating its accounts scandal
  62. ^ Corkery, California Suspends Ties With Wells Fargo
  63. ^ Corkery, California Suspends Ties With Wells Fargo
  64. ^ Campbell, Chicago to Pull $25 Million From Wells Fargo After Scandal
  65. ^ Campbell, Chicago to Pull $25 Million From Wells Fargo After Scandal
  66. ^ Cineas, Philly May Soon Drop Wells Fargo as City Payroll Bank
  67. ^ Yerak, Illinois treasurer: State will suspend Wells Fargo business
  68. ^ Talton, Does city divestment work? Define ‘work’
  69. ^ The Economist, Stumpfed
  70. ^ The Economist, Stumpfed
  71. ^ Lazarus, Thanks, Wells Fargo, for being such a bunch of weasels
  72. ^ Boston Globe

References

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