The situation raises many questions regarding the upper management and leadership of the company, as well as impacts on shareholders and next steps. John Stumpf, Wells Fargo & Co’s CEO and chairman, has stepped down and will be replaced as CEO by Chief Operating Officer Tim Sloan. Various other effects are continuing to unfurl as more information is released.
This recent scandal has caught the attention of not only bankers and financial analysts, but also much of the general public. Unlike some bank-related scandals that involve complex investing formulas, the situation at Wells Fargo is highly visible because it involves fraud of a relatively simple nature that most consumers readily understand.
Stats and Figures Related to the Wells Fargo Scandal
The statistics and figures involved in the Wells Fargo fake accounts scandal paint a picture of the scope of the fraudulent conduct involved. Some of the significant numbers include:
- About 5,300 Wells Fargo employees have already been fired in connection with the scandal
- Wells Fargo has already paid some $185 million in penalties (for instance, $50 million of which was paid to the City and County of Los Angeles for settlement purposes). Some regions, including Illinois and California, are considering imposing sanctions on Wells Fargo
- Stumpf agreed to forgo some $45 million in unvested stock awards and other pay
- Carrie Tolstedt, who oversaw community banking during the time of the scandal, has a severance package estimated at about $124 million. However, there all plans to claw back $19 million of her stock options; there are talks of stripping her of various other payments and benefits
- Wells Fargo is already reporting losses and drops in performance metrics after the release of the scandal news. For instance, consumer checking account openings dropped 25 percent in September from a year earlier; mortgage referrals from Wells’ retail branches went down 24 percent from August.
Retaliation Against Wells Fargo Employees Who Filed Reports
During the scandal, many workers reported intense pressure from upper management to open the sham accounts. In addition to such pressure, many workers faced several forms of retaliation after they reported fraudulent conduct and policies. Many employees filed whistleblower retaliation claims as early as 2009.
For instance, some employees claim that they were fired for trivial matters after filing a report about the fraud. The terminations would be based on small issues like tardiness or other misconduct. Retaliation also took the form of bullying and defamation of character, which at times resulted in the tarnishing of the employee’s credentials and securities licenses. There were also privacy violations of Wells Fargo’s in-house ethics reporting hotlines, which were supposed to be kept anonymous.
Responses and Fixes
Wells Fargo will need to implement several “fixes” if it expects to retain customer loyalty and restore shareholder trust. Some of these have already been proposed and include:
- A separation of chairman and CEO roles in order to promote more independence in the Board of Directors
- Contacting 43 million retail and small-business account holders to ensure that their accounts were opened properly
- Reaching out to customers who have in fact had accounts opened improperly
- Contacting credit bureaus to help restore FICO scores for customers with unauthorized credit cards
On the legal side, additional measures include:
- Independent investigation of the fraud committed over the years
- Reworking of ethics line reporting procedures
- Potential rehiring of employees who were fired for whistleblowing
- Instituting various automated and procedural safeguards for new customer accounts being opened moving forward
Many are questioning whether the “retirement” of Stumpf will do much to change the actual leadership culture of Wells Fargo. Julie Ragatz, director for the Center of Ethics in Financial Services at American College of Financial Services, stated, “The culprit in this case is not just the corporate culture itself.” With such widespread fraud going up and down the chains of command, it will likely take years for new changes to start seeing results, as was the case with other mega-bank cases like the Bank of America settlement in 2012.
Thus, what’s important is for Wells Fargo to foster an environment of accountability and transparency, especially at upper management levels. This is especially crucial for preventing schemes such as the ones perpetrated at Wells Fargo, which began with top-down instructions that then filtered all the way down to local branch levels.
Understanding corporate fraud and its effects on shareholder interests can be challenging. If you have any questions or concerns regarding the recent Wells Fargo happenings, contact us today at Kessler Topaz. Our litigation team has extensive experience in helping clients obtain recovery due to fiduciary violations, unfair business practices, and other complex corporate legal disputes.