Wells Fargo’s Expanding Scandals

| published October 1, 2016 |

By Keith H. Roberts, Thursday Review contributor

The problems facing U.S. banking giant Wells Fargo do not appear to be going away anytime soon. Top executives for the largest bank still face a storm of questions over how its internal culture led to tens of thousands of its employees being driven to meet stringent sales quotas—a sales-dominated environment which would ultimately lure employees and managers alike to create millions phony accounts using the information of existing customers. Members of Congress and regulators have called the scandal nothing less than fraud and identity theft on a grand scale.

Over a six year period, Wells Fargo employees and managers created upwards of 2 million fake credit card and debit card accounts for unsuspecting customers. Those bogus accounts generated fees and charges which were largely unseen by Wells Fargo customers. The phony accounts also increased the exposure of customer data to hackers and credit card thieves, and may have spawned a decade of headaches for millions of Americans whose credit scores and credit records have been impacted.

Wells Fargo CEO John Stumpf faced another long session of intense grilling before Congress this week—an official round of sometimes uncomfortable questions in which Stumpf was forced to explain how a culture of sales quotas drove the company into such widespread misbehavior. Stumpf was also on the hot seat for the company’s now widely disseminated statement that it has fired thousands of employees and supervisors for the scheme to generate fake accounts, when, in fact, some of those ex-employees were in Washington to say they were fired for just the opposite—for not generating adequate new accounts and for refusing to participate in schemes to create bogus accounts. Some had copies of employee evaluations and emails to prove it.

Many ex-employees—and plenty of current ones as well—say that the bank became so focused on the selling of additional products that it lost touch with what was important to its customers’ needs, and that it forced employees to seek out-of-the-box solutions to generate accounts—or lose their jobs. Some say they were reduced to tears, asking friends and family members to sign up for unneeded and unnecessary multiple accounts as a way to avoid disciplinary action or termination. Others, after consulting with supervisors, began using the “secret” method of creating accounts without the permission of customers. The development of phony accounts became so useful a tool at avoiding the wrath of the draconian quotas that, with some managers looking the other way, the scheme quickly became widespread throughout the companies thousands of branch offices.

Wells Fargo says the program to generate new accounts has come to an immediate halt, months earlier than its original plan in the aftermath of the breaking scandal. And Stumpf has very publicly said he will—after the board’s recommendations—forfeit roughly $41 million in pay and personal bonuses as a way of demonstrating his concern over the scandal, and as a way to reassure angry customers who were hit with additional fees and charges, and whose personal information was exposed in the process of creating new accounts. Wells Fargo has also paid $185 million in fines imposed by regulators.

But Stumpf, who faced the ire of angry lawmakers of both political parties in the House of Representatives this week in Washington, was unable to convince members of Congress that he was taking all the necessary steps to make the situation right again for consumers. In fact, his grilling in the House was even more intense and heated than what he faced last week in front of the Senate.

Calling the scandal “financial fraud” and “identity theft” on a grand scale, both Democrats and Republicans appear to want to see Stumpf’s head on a stick, and asked the embattled CEO why he still has his own job, and why 5,300 rank and file workers—most of them paid between $10 and $12 an hour—lost theirs. A few have echoed Senator Elizabeth Warren’s (D-MA) call to issue Stumpf an orange jumpsuit and toss him in a jail cell for a few years—if nothing more than to set an example to other financial titans who might be tempted to subvert basic banking principles in favor of fast bucks via sales incentives and a culture of constantly evolving products.

In addition to the growing evidence that the scandal has its roots not in 2010 and 2011, but perhaps as far back as 2008, Wells Fargo faces challenges on all legal fronts and from all directions.

Last week the state of California officially severed all its financial relationships with the San Francisco-based Wells Fargo. The Golden State—the largest issuer of municipal bonds in the country—has suspended banking transactions with Wells Fargo, barred the bank from underwriting California loans, stripped it from state and employee investment accounts, and cancelled two major municipal deals totaling more than half a billion in value. In effect, California had placed Wells Fargo on probation for at least 12 months, at which time the banking giant must demonstrate that it has met every criteria necessary to tentatively re-start its business with the state. Wells Fargo may face similar punitive actions in other states as well.

Making matters worse, Wells Fargo ran afoul of laws crafted to regulate how banks lend to veterans and military service members—bank executives apparently ignoring rules which cap interest on such loans and packages. After a Justice Department investigation determined that the problem was deliberate, Wells Fargo agreed to a $20 million settlement and offered another very public apology. The bank also was forced to pay back about $4.1 million to active duty military personnel for vehicles seized when soldiers and sailors fell behind on auto loans. Neither of these unrelated but untimely incidents sat well with Washington lawmakers already angry at the banking giant for what is being described as systematic fraud.

Adding to Wells Fargo’s woes: early last week, multiple lawsuits were set in motion in varying jurisdictions, with ex-employees suing Wells Fargo for wrongful termination of employment. In most cases, the former workers say they were fired not because they were participating in the creation of fake accounts, but because they either refused to play ball or simply failed to generate the requisite number of phony accounts to stay out of trouble with managers.

According to several former Wells Fargo employees interviewed a week ago on CNN, they were fired specifically for their unwillingness to set up fake credit card accounts. Those employees, which number about a dozen, confirm what has already been widely disclosed in the scandal—that intense pressure was brought to bear internally to “cross-sell,” the process of getting existing customers to open up additional accounts or accept additional banking products. When customers balked at establishing new lines of credit, many Wells Fargo employees were encouraged by supervisors to create phony accounts using the existing information of those customers. But those ex-employees say that in their cases they were fired after refusing to go along with the scheme, or after they failed to meet specific sales quotas imposed by managers and supervisors.

Two weeks ago, two former high-ranking employees filed suit in Los Angeles superior court, alleging that the bank fired them specifically for their failure to achieve high quotas in an internal campaign to get as many customers as possible to sign up for credit card accounts. Attorneys for Alexander Polonsky and Brian Zaghi say that they were under intense, constant pressure by senior managers to meet “impossible quotas” which in some cases and in some markets included dozens of sales pitches each day, and a goal of up to eight products or accounts per household.

Polonsky and Zaghi say that Wells Fargo is being patently dishonest when it now claims to federal and state regulators that it never officially sanctioned the internal campaign to generate as many accounts as possible.

Other employees have filed suit in other jurisdictions, claiming that they were unfairly fired for the improvised process of creating phony accounts, suggesting that scores of supervisors and managers were fully aware that thousands of employees were using existing customer data to create fake accounts as a way to meet the impossible demands of the sales goals set by district or regional managers. In at least two of the lawsuits, former employees allege that regional managers would require employees who failed to meet the demands of the grueling quota system to work long hours, often at night and on weekends—without pay—in an effort to make up for sagging numbers. Polonsky and Zaghi say that their dismissals were meant as a signal to other Wells Fargo employees to shape up or face similar fates, and that employees who fell short of the sales demands must turn to the process of setting up those now infamous phony accounts.

But the embattled Stumpf denies all that, and in front of the House last week he stuck to the same story he presented to the Senate just one week earlier: all 5,300 of those fired were terminated for their participation in a scheme neither authorized nor approved by the company. Stumpf insists there was no managerial consent or conspiracy to encourage employees to create phony accounts, and that most of those who were terminated were rank-and-file workers or their immediate supervisors. Stumpf has told disbelieving members of Congress that it was, in effect, an example of how a few bad apple employees could eventually infect the larger barrel, though he has consistently stumbled when attempting to explain how the unethical practice became so widespread right under the eyes and noses of those same allegedly watchful managers and supervisors.

For Stumpf, the acknowledgement that middle management or higher-echelon supervisors were in on the long-running scam would be to agree that the bank was complicit in massive fraud on a scale unprecedented. Such an acknowledgement could cost Stumpf his job, and from what he has told legislators in Washington, he has no intention of voluntarily leaving his post, though in fairness he stresses that the Wells Fargo board of directors does have the power to ask him to leave.

Some business analysts suggest that if the toxic environment of the scandal fails to subside soon, the Wells Fargo board may be forced to do just that: cut Stumpf loose in a very public dismissal, making him one of the highest-ranking bank chiefs ever to be sacrificed in order to save the reputation of a financial institution.

To those members of the House, Stumpf also added what is now common knowledge: the Wells Fargo board took back about $41 million in pay, bonuses, and stock, and even hacked off a percentage of Stumpf’s nearly $3 million base pay for this year and next. Stumpf has hoped that these financial punishments have been enough to quell anger at the bank.

Stumpf admits that the scandal may be deeper and more complex than originally suggested. Independent probes and several media investigations have concluded that the roots of the phony account scheme might be traced as far back as 2007 and 2008, before the mortgage crisis and prior to the start of the Great Recession. This would lend some credence to the notion that many of those fired employees were terminated for reasons other than the creation of fake accounts, and it has forced Stumpf and the company to take a deeper look into the processes that spawned the pressure to generate sales in the first place—an ironic twist for a bank generally seen in the media as having not been one of the guilty parties (Lehman Brothers, Merrill Lynch, others) whose reckless policies helped trigger the mortgage meltdown in the first place, and one of the few banks reticent to accept the massive cash injections proposed by the Fed and banking regulators when the meltdown was in its darkest days and hours.

Wells Fargo is officially in the complex and time-consuming process of contacting its millions of customers. Some 20,000 have been contacted so far, with about 5,000 responding that they had no knowledge of some of the accounts presented in each letter. Still, that’s only about 5,000 customers out of some 725,000 who may have been affected. By Wells Fargo’s own admission, at least 1.5 million bank or savings accounts were created fraudulently and at least 575,000 phony credit card accounts generated. That’s a lot of fees and charges to be repaid.

Some economists and credit analysts suggest that the collateral damage to the economy could reverberate for years as consumers awake—at some point in the near or distant future—to the fact that their credit reports show requests for products they never asked for, with potentially costly results to credit scores.

Meantime, Wells Fargo continues its almost daily efforts to contain the damage and minimize the unfolding public relations disaster that the scandals have wrought. After years of an intense high-pressure culture to drive customers into new products and new accounts, the bank’s worst fears may be realized as customers walk away in large numbers, moving their cash and savings to other banks where their identities will be safer and where the tyranny of hidden fees won’t chip away at their hard-earned money.

Related Thursday Review articles:

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

Wells Fargo Faces Penalties in Banking Scandal; Thursday Review staff writers; Thursday Review; September 9, 2016.