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Wells Fargo Tries To Do The Right Thing For Its Customers

Wells Fargo logo After the massive $185 million fine for its phony accounts scam, Wells Fargo bank is trying to do right by its customers. The bank published this statement with promises:

"Steps we have taken to ensure our Community Bank sales culture is wholly aligned with our customers’ interests include: 1) Eliminating product sales goals for all retail bankers to make certain nothing gets in the way of doing what is right for our customers; 2) Sending customers a confirmation email within one hour of opening any deposit account and an acknowledgement letter after submitting a credit card application; 3) Contacting all deposit customers across the country to invite them to review their accounts with their banker and calling the credit card customers identified in the review to confirm whether they need or want their credit card; 4) Expanding the remediation review to 2009 and 2010; and 5) Conducting an independent, enterprise-wide review of our sales practices."

There is more. A September 27th news release by Wells Fargo stated:

"The Independent Directors of the Board of Directors of Wells Fargo & Company (NYSE: WFC) today announced that they have launched an independent investigation into the Company’s retail banking sales practices and related matters. A Special Committee of Independent Directors will lead the investigation, working with the Board’s Human Resources Committee and independent counsel Shearman & Sterling LLP. Chairman and CEO John Stumpf, a member of the Board, has recused himself from all matters related to the Independent Directors’ investigation and deliberations.

The Independent Directors have taken a number of initial steps they believe are appropriate to promote accountability at the Company. They have agreed with Mr. Stumpf that he will forfeit all of his outstanding unvested equity awards, valued at approximately $41 million based on today’s closing share price, and that he will forgo his salary during the pendency of the investigation. In addition, he will not receive a bonus for 2016. Carrie Tolstedt, until recently Head of Community Banking, has left the Company, and the Independent Directors have determined that she will forfeit all of her outstanding unvested equity awards, valued at approximately $19 million based on today’s closing share price. Ms. Tolstedt will not receive a bonus for 2016 and will not be paid severance or receive any retirement enhancements in connection with her separation from the Company. She has also agreed that she will not exercise her outstanding options during the pendency of the investigation. These initial actions will not preclude additional steps being taken with respect to Mr. Stumpf, Ms. Tolstedt or other executives as a consequence of the information developed in the investigation."

Conducting an investigation? That means the bank's senior executives still don't know what happened, or may still be happening -- or even worse, some executives know and haven't admitted important facts. Is this a bank to do business with? John Chiang, the Treasurer for the State of California announced on Wednesday that the State has suspended doing business with Wells Fargo for 12 months. Chiang issued this explanation:

"... the Treasurer oversees nearly $2 trillion in annual banking transactions, manages a $75 billion investment pool, and is the nation’s largest issuer of municipal debt... The Treasurer announced in a letter to Wells Fargo Chairman John G. Stumpf and board members that he has ordered the suspension of Wells Fargo’s participation in its most highly profitable business relationships with the State of California. Those sanctions include: i) Suspension of investments by the Treasurer’s Office in all Wells Fargo securities; ii) Suspension of the use of Wells Fargo as a broker-dealer for purchasing of investments by his office; and iii) Suspension of Wells Fargo as a managing underwriter on negotiated sales of California state bonds where the Treasurer appoints the underwriter... These sanctions take effect immediately and will remain in place for the next twelve months. Wells Fargo is expected to comply with all of the terms of the consent orders it has entered with the Consumer Financial Protection Bureau, the Los Angeles City Attorney, and the Office of the Comptroller of the Currency... The letter warns the bank that if it fails to demonstrate compliance with the Consent Orders or evidence surfaces that Wells Fargo has engaged in the same behavior it will face tougher sanctions up to and including complete and permanent severance of all ties between the Treasurer’s Office and Wells Fargo..."

Hopefully, the board will assess more penalties upon Stumpf, Tolstedt, and senior bank executives. The penalties mentioned above seem woefully insufficient, since they penalize the executives in 2016 for activities that perpetuated during the last five years.

The bank's statement was also silent about important issues: a) remedies for customers whose credit ratings were damaged by the phony new accounts, and b) compensation for customers for lost interest revenues when their money was withdrawn from interest-bearing accounts to set up the phony new accounts.

The bank's news release included this statement by Stephen Sanger, Lead Independent Director:

"... We will conduct this investigation with the diligence it deserves -- and will follow the facts wherever they lead. Our thousands of outstanding team members and millions of loyal customers and shareholders deserve no less. Based on the results of the investigation, the Independent Members of the Board will take such other actions as they collectively deem appropriate, which may include further compensation actions before any additional equity awards vest or bonus decisions are made early next year, clawbacks of compensation already paid out, and other employment-related actions. We will proceed with a sense of urgency but will take the time we need to conduct a thorough investigation. We will then take all appropriate actions to reinforce the right culture and ensure that lessons are learned, misconduct is addressed, and systems and processes are improved so there can be no repetition of similar conduct."

While clawbacks into executives' compensation during prior years sounds good, the key takeaway seems to be: the board still does not know what is happening in its bank, nor what corrective actions to implement beyond the promises listed above. And it can't rely on Stumpf to tell them. Stumpf should be fired immediately for not keeping the board informed. Same for Tolstedt. In a perfect world, both would be in prison. Fraud is fraud.

What are your opinions about Wells Fargo? Would you do business with the bank?


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Chanson de Roland

I sympathize with the our blood thirsty Editor's sense of outrage. However, even Mr. Stumpf and Ms. Tolstedt are entitled to due process, which at a minimum requires a fair and thorough procedure for adducing all of the relevant facts and a fair opportunity for them to defend themselves. Notwithstanding that, Wells Fargo has already fired Ms. Tolstedt, and Mr. Stumpf is unlikely to survive this scandal.

But what most interest me, as a lawyer, is whether facts, either direct or circumstantial, exist that show senior managers at Wells Fargo established a performance and incentive scheme for selling products at Wells Fargo's Community Baking division, where they knew or should have known that defrauding Wells Fargo's customers was a reasonably foreseeable outcome? If the answer to that question is yes, then the civil and criminal legal implications for Wells Fargo are dire, and would include, inter alia, charging Wells Fargo as a criminal enterprise under California and the United States RICO (Racketeering Influence And Corrupt Organizations Act) statutes.

Indeed the too hasty settlements between California and U.S. investigators and regulators and Wells Fargo may have had the effect and perhaps were even designed to shield Wells Fargo from the full rigor of the civil and criminal law's most severe sanctions. Neither California or the United States should have settled with Wells Fargo until a complete investigation had been conducted to determine the full extent of Well Fargo's liability under criminal law and regulations. Certainly, there hasn’t been enough time for anyone to conduct such an investigation. So by proceeding so quickly to settlement, California and the U.S. may have, I hope, unwittingly shielded Wells Fargo from full rigor of justice. If so, then California and the U.S. should return the $185 million to Wells Fargo, which is actually a tiny fine compared to Well Fargo’s assets and the harm done, proceed to conduct a thorough and exhaustive investigation of Wells Fargo's frauds, and then seek the appropriate penalties, including using RICO, not to shutdown and windup Wells Fargo, which would be an absurd and excessively harmful thing to do, but to invest a federal court judge with its full equitable powers of his office as a chancellor in equity to reform Wells Fargo's management, including its Board of Directors, and its culture.

That is what's justice requires and what the law warrants. While this may not be as blood thirsty as the Editor's justified outrage, in a choice, Wells Fargo would take the lesser effects of Editor's vengeance instead of the great rigor of the law's justice, as I've described it, supra. Yet justice, being justice, is the better and more appropriate thing.


Due process? I've worked in several Fortune 500 companies and a couple banks. When 5,000+ employees are fired for similar offenses during five years, somebody in the human resources department is paid and responsible for noticing -- unless they are incompetent (too). If not, then how many fired employees does it take before executives notice a troubling employment trend? 8,000? 10,000? 20,000? Assuming competence, red flags must have been raised by HR staff to senior managers -- and seem to have been ignored. If not, then senior HR executives probably need to be fired, too.

I've worked in companies with sales forces that had similar incentive programs. Heck, I've also worked as a sales person. There are always employees trying to game any sales incentive system. Smart, competent managers expect this, plan accordingly, and take appropriate, timely action. To not do so is foolish.

Due process? The bank's senior executives have had five years to notice, manage, and correct things. That they failed to do speaks volumes.


Chanson de Roland

Due process is fancy lawyer's talk, which means that all parties before the finder of fact and the presiding officer receive a substantial fundamental fairness in the procedures of the proceeding and the substantive rules of decision so that unfairness does not materially affect the outcome of the proceedings. As a matter of law, the U.S. Constitution only requires that the proceedings of the federal and state governments be fundamentally fair in their courts and their other tribunals in matters that determine and/or affect the rights and/or legally protected interest of the parties. However, state constitutions or state or federal law or contract may also require a fair proceeding by an employer in employment matters; if such law or agreement does not require such due process by the employer the employer, generally speaking, needn't provide any due process, and that is especially true in states, which is most of them, that permit employment-at-will.

But due process, however it arises, is a personal right, so that others having been denied it, does not diminish or in any way impair the right of a person to due process. So, if Wells Fargo denied due process to five or six thousand other employees, Mr. Stumpf and Ms. Tolstedt would still be entitled to whatever due process law or contract provides to them, notwithstanding any denial of due process to others, if there was such a denial of due process. However, my experience with HR departments and firms' disciplinary proceeding does allow that ordinary employees, those without executive employment agreements, rarely receive due process where an employer is determined to be rid of them for a motive that is ulterior to their performance at work.

Aside, however, from whatever right a particular employee has to due process, due process also benefits us all in at least two ways. First, it benefits us because injustice anywhere is a threat to justice everywhere. Martin Luther King, Jr. But due process also benefits us all by revealing the facts of a matter, as, in the employment context, the employee gets to have his have his say, adducing his evidence, for the record. And, in the matter of Wells Fargo's massive defrauding of its customers, we need as much of the relevant, non-cumulative facts as we can get. So the record developed on due process is how we all get to see whether justice was done. Which is why that I am fairly certain that, in this matter, even if it is available to them, neither Mr. Stumpf and Ms. Tolstedt will avail themselves of any due process in proceedings before Wells Fargo. If either Mr. Stumpf and Ms. Tolstedt resort to due process, it will be before a court of competent jurisdiction and not in front of Wells Fargo, where any record that they produce would be available to the prosecutor.

As for those unfortunate thousand, who may have been fired for not being willing to defraud Wells Fargo's customers in order to meet Wells Fargo's standard of performance, they are now having their day in court, which I can assure you, based on my experience with employers, will provide them with far more due process and, I believe, at least constitutionally mandated due process than anything that they could expect from any employer's HR disciplinary proceedings, especially Wells Fargo's proceedings.

Finally, the Editor raises an excellent point: That such large numbers of discharges for the same problem of not meeting sales quotas should have alerted senior management to something being very wrong in its Community Banking Division. And it probably did. That senior management ignored those large number of discharges on the similar facts for the same reason, failure to meet sales quotas, is more circumstantial evidence that the senior managers knew that their scheme of compensation was incentivizing the defrauding of Wells Fargo's customers and that Wells Fargo had become a corrupt criminal enterprise.

Chanson de Roland, Esq.

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