Stumpf Parachutes Out of
Wells Fargo Amid Scandals

| published October 15, 2016 |

By R. Alan Clanton and Earl Perkins, Thursday Review editors

After more than a month of intense fallout from a banking scandal now consuming the massive financial institution over which he presided, Wells Fargo CEO John Gerard Stumpf has called it quits after decades with the San Francisco based banking giant.

Stumpf has been with Wells Fargo for 35 years, and has served as chairman and chief executive since 2007, guiding the bank through rocky and dangerous waters—the Great Recession, the Wall Street financial crisis of 2008, and a meltdown in home values nationwide.

The veteran banker survived all of that only to be crushed by the hubris of his own company’s ethical implosion—a scandal which placed him in the hot seat in front of Congress twice in 30 days and which has generated a hurricane-like lashing of his venerable, centuries-old company.

In an announcement this week, Wells Fargo and Stumpf say the 63 year old chairman will retire, taking with him a $134.1 million in his parachute. That exit-payment made of gold and platinum will no doubt make his departure easier to stomach for a CEO who just saw roughly $41 million in bonuses and salary clawed-back from his 2015 and 2016 paychecks after a soul searching discussion with his board weeks ago. Congress took a dim view of Stumpf’s pay and bonuses, and even dimmer view of other top execs who departed with large bags of cash or company stock.

Stumpf will be replaced immediately by Tim Sloan, a senior VP who was also head of the division responsible for corporate lending and business relationships—a segment of the San Francisco bank not involved, as it turns out, in the unfolding scandal now impacting hundreds of thousands of banking customers.

Sloan’s task is nothing less than Herculean: he must turn around the shattered confidence of the public, Congress, and various state and federal regulators now angry at what will no doubt be a costly and vexing problem for bank account holders and the American taxpayer. Mr. Stumpf’s walking papers and hefty retirement package will almost surely spark more outrage in some circles.

Stumpf’s exit comes after two weeks of heated Congressional sessions—one in the Senate, the other in the House—in which the embattled CEO faced the wrath of Republicans and Democrats alike. Wells Fargo employees—by some estimates thousands of them—under extreme pressure to meet strenuous sales quotas, crafted a scheme in which they created fake accounts using the personal information and personal data of existing customers.

Wells Fargo employees generated more than 2 million phony credit card and debit card accounts spread out over a six year period. In the vast majority of cases, customers were not aware that the accounts had been created, but paid fees and charges nevertheless embedded craftily in monthly, quarterly or annual statements. To meet the intense sales quotas imposed by management, some Wells Fargo employees created as many as seven accounts per household.

Rank and file employees, many paid between $10 and $12 per hour, who failed to meet the sales requirement were, in some cases, forced to work long unpaid hours on nights and weekends to make up the difference. Ex-employees who have talked to Washington lawmakers say they were written-up, disciplined or fired for either failing to reach the stated goals or for refusing to participate in the schemes. Some supervisors and managers were apparently fired when their warnings about the schemes went unheeded by upper management, or when such unethical practices were passed along to Wells Fargo’s human resources department.

The more intense the sales pressure, the more complex and outrageous the phony account scheme became. Some ex-employees who spoke to the media and to members of Congress describe management’s more-or-less “official” policy being an expectation of at least seven accounts per household and dozens of new accounts every workday—grounded in what numerical reality independent banking experts are unsure. Emails and internal correspondence seems to back up the prevailing view that pressure came from above, and that the most extreme form of pressure was to open credit cards. Some employees told members of Congress they felt so much pressure that they took to badgering members of their extended families.

Others, however, quickly bought into the fake account scheme. Using the existing information of a customer with, for example, a simple checking account, the employee would generate anywhere from two to six credit card or debit card accounts, making sure that the account generated as little direct bank-to-customer interaction as possible. Each phony credit card would require a “hit” to one of the major credit data agencies—Experian or Trans Union, for example—behind the scenes activity for which the customer would be unaware. Customers would often only question the additional shadow accounts in the event they spotted those monthly fees, quarterly fees, or annual charges, which could range from $5 up to $45.

But adding to the misery that the scandal has now unleashed are those millions of hits to the credit bureaus—a collective problem which could lower credit scores and negatively impact customers seeking loans in the near future. The problem will be most troublesome for those straddling the boundary between good credit and fair-to-middling: too many attempts to open new accounts will impact one’s credit negatively, even if cards are not issued and even if the existing cards involve no spending. Security experts also worry that all those extra credit cards and debit cards—rarely seen by the customers whose names appear on the account—will be easy targets for hackers and identity thieves. Shooting tuna in a barrel, say some cyber sleuths.

Wells Fargo is now fighting a complicated multi-front war. Lawsuits are sprouting up across the country, the plaintiffs being some of those 5,300 rank-and-file employees and midlevel supervisors fired by Wells Fargo for participating in the creation of phony credit card accounts. But some of those ex-employees say that far from being fired for their ethical lapses, they were—in fact—terminated for refusing to go along with the scheme. Others were fired for not attaining those daily and weekly quotas, even after reporting to managers and supervisors that others among them were meeting the draconian goals by generating fake accounts.

Actions by state regulators are just getting started. Following California’s lead, where Treasurer John Chiang suspended all its relationships with Wells Fargo in late September, Illinois enacted similar measures. Illinois Treasurer Michael Frerichs suspended $30 billion in state investment activity with Wells Fargo last week, the second state in what could be a domino effect of costly punishments by state governments as public outrage continues to grow.

California put the home state bank on double secret probation, prohibiting the bank from any municipal bond activity, raking it from most state employees’ 401k and IRA accounts, terminating several massive state public works projects for which the San Francisco bank was to back, and even recommending that state employees and contractors sever their own relationships with Wells Fargo and close accounts. At least six other states are considering similar action, even as some members of Congress grumble that neither Stumpf nor his colleagues were contrite enough while on their forced visit to Washington.

Some critics of the U.S. banking system, especially those skeptical of the widespread deregulation of the 1990s and early aught years, suspect that Wells Fargo’s unraveling may be just the start: it is not a long walk to arrive to the conclusion that such barely-short-of-illegal practices made their ways into the halls and offices and cubicles of other major banks bent on embracing the culture of sales and products. A few score ex-Wells Fargo workers could have imported the fake account scheme to other financial institutions where the pressure to drive up sales numbers have ramped up in recent years.

The storm at Wells Fargo will also have an impact on millions of IRAs, 401ks and retirement accounts, and will skew investments for years. Along with the other elements in the punishments, California officials announced last month that its $75 billion portfolio would not be tapped by Wells Fargo for at least one year while the bank sits in the penalty box.

"Wells Fargo is just the most recent example of the craven abuses that can be perpetrated when a financial institution comes to serve itself rather than its customers," Chiang said.

Stumpf, the bank's embattled but now exiting chief executive, has over the years often stated that his goal was for each Wells Fargo customer to have at least eight accounts with the company, which has made his bank the darling of Wall Street even as it created extreme internal pressures. In front of members of the Senate and the House, Stumpf pointed the finger of blame squarely at low level employees, whom, he insisted, concocted the phony account scheme and perpetrated it without managerial or supervisory approval.

Which leads us back to the 5,300 employees who were coerced or browbeaten into setting up illicit accounts, but now we also have those who claim they were fired or demoted for remaining honest, though they failed to meet the unrealistic sales goals. Many of those in the latter group, claiming they were punished for actually doing their job right, are joining one of two lawsuits which are seeking class-action status. The first lawsuit was filed last week in Los Angeles, with former Wells Fargo workers claiming that while their colleagues created unauthorized accounts, they did not but were nevertheless terminated for refusing to do the same.

A few weeks ago, a federal lawsuit was filed in the United States District Court for the Central District of California, representing current and former Fargo employees nationwide who suffered similarly.

“These are the people who have been left holding the bag,” said attorney Jonathan Delshad, who represents workers in both suits. “It was a revolving door. If you weren’t willing to engage in these types of illegal practices, they just booted you out the door and replaced you.”

And in pure public relations drivel, Wells Fargo quickly responded with a statement: “We disagree with the allegations in the complaint and will vigorously defend against the misrepresentations it contains about Wells Fargo and all of the Wells Fargo team members whose careers have been built on doing the right thing by our customers every day.”

Dennis Russell was a dutiful worker for half a decade, attempting to make chicken salad out of... Well, you get the idea. The 62-year-old former Orange County, California telephone banker handled incoming customer service calls, with managers expecting him to refer 23 percent of all callers to sales representatives for additional product sales. Many of his wonderful leads had mortgages in foreclosure, credit cards in collections, or cars being repossessed for overdue loan payments. He was rewarded for his yeoman work by facing the ax in 2010.

“The people calling didn’t have assets to speak of,” Russell said. “What products could you possibly offer them in a legitimate way?”

Christopher Johnson, a plaintiff in the recently filed case, lived a similar hell following his separation from Wells Fargo. Later he hesitated getting involved in the lawsuit because it brought back memories of “a very dark time in my life.”

During extensive company training, managers stressed the company's code of ethics and urged employees to contact a confidential hotline if inappropriate actions were observed, according to Johnson. The 28-year-old business banker was on the job just two weeks at a Malibu, California Wells Fargo branch when his manager pressured him to open accounts for friends and family.

The managers didn't care whether or not the account holders knew about their new accounts, and the bogus accounts were routinely opened, Johnson said. He did what he was told during training, but soon thereafter Johnson reported the improper practices to Fargo's ethics hotline. He was fired in 2008 after working there just five months. In employee training sessions, company reps repeatedly emphasized the importance of its ethics code and urged employees to call a confidential hotline if they observed anything inappropriate, Mr. Johnson said.

But just two weeks after he started working as a business banker in a Wells Fargo branch in Malibu, California his manager began pressuring him to open accounts for friends and family. Johnson soon realized his colleagues routinely open unauthorized accounts for people they thought wouldn't notice. He did what he was told during training, but eventually called the ethics hotline.

After being criticized for not being a team player, three days later he was fired for "not meeting expectations." He has since lost almost all his possessions. First he went broke, then, found himself evicted from his home. He spent the next seven month followed by living in his truck. The final straw came after he placed all his possessions in a mini-storage warehouse, eventually losing them through the inability to pay the monthly bill.

He now works as a writer, but has recently come forward to tell his story, at the urging of his mother. "She was like, ‘Your story needs to be told. You got fired because you tried to do the right thing,’ ”

Russell also lost his home following the Wells Fargo debacle. Then, unable to find further employment in the banking industry, eventually settled on a part-time gig at a Costa Mesa, California church, where he helps with an outreach program for the homeless. Topping off all his other maladies, he then watched in disbelief as Wells Fargo's Stumpf passed the buck before the Senate Banking Committee, insisting the company never urged employees to violate its ethics policies to meet sales goals.

“It’s a crock,” Russell said. “They established the culture that made this happen—it comes down from the top. I was sitting there in a rage. The people who had a conscience, the employees who refused to go along, they deserve vindication.”

Meanwhile, Stumpf’s $134 parachute is coming under intense scrutiny in the context of all those lawsuits by former employees. Most say they were fired for not playing ball with the scheme to create fake credit card accounts. Stumpf says he knew nothing of the sales scam until 2013, at which time the housecleaning began. But business reporters and Wall Street analysts question how a CEO of Stumpf’s stature could have presided over such a massive fraud carried out with the apparent consent of hundreds of local managers and bank supervisors. Stumpf will walk away with a weighty nest egg more valuable than the lifetime earnings of any 100 of his former employees.

Stumpf also walks away from what could be a messy process of unraveling those 2 million phony accounts, a problem which could trouble the economy, the markets, and the credit reports of millions of Americans for years.

Related Thursday Review articles:

Wells Fargo's Expanding Scandals; Keith H. Roberts; Thursday Review; October 1, 2016.

Wells Fargo Ex-Employees: Fired for Shunning Fake Account Schemes; Keith H. Roberts; Thursday Review; September 25, 2016.