who was involved in the wells fargo scandal

Wells Fargo not only caused serious harm to its own customers, but serious financial harm to itself, the OCC observes. And when it all blew up, you kept your job, you kept your multimillion dollar bonuses and you went on television to blame thousands of $12-an-hour employees who were just trying to meet cross-sell quotas that made you rich. Nevertheless, in the subsequent weeks, senior management and the board of directors struggled to find a balance between recognizing the severity of the banks infractions, admitting fault, and convincing the public that the problem was contained. A lawyer for Tolstedt said she would be vindicated and that she had acted with utmost integrity and concern for doing the right thing. Lawyers for most of the others similarly declared their clients innocence. The bank also announced that it identified sales practice violations in both its auto and mortgage lending divisions. The more products that a customer has with Wells Fargo, the more information the bank has on that customer, allowing for better decisions about credit, products, and pricing. Stumpf was asked to forfeit $41 million and Tolstedt $19 million in outstanding, unvested equity awards. Its a team game here. Although the company maintains independent risk and oversight mechanisms, all senior leaders are responsible for ensuring that proper practices are embedded in their divisions: The most important thing that we talk about inside the company right now is that the lever that we have to manage our reputation is to stick to our vision and values. According to the Los Angeles Times, approximately 30 employees were fired for opening new accounts and issuing debit or credit cards without customer knowledge, in some cases by forging signatures. fargo scandal bank Geeeez, one of the security officials later said. I really dont The 1 percent that did it wrong, who we fired, terminated, in no way reflects our culture nor reflects the great work the other vast majority of the people do. The OCC report identifies this director only as the former chair of the boards risk committee, not by name. Los Angeles Times columnist Michael Hiltzik writes a daily blog appearing on latimes.com. The dollars involved in the Wells Fargo cross-selling scandal were small (less than $6 million in direct fees) but the reputational damage to the bank was massive. At the same time, it was critical of her management style, describing her as obsessed with control, especially of negative information about the community bank and faulting her for maintaining an inner circle of staff that supported her, reinforced her views, and protected her. She resisted and rejected the near-unanimous view of senior regional bank leaders that the sales goals were unreasonable and led to negative outcomes and improper behavior.. the answer is an all-purpose legal dodge known as the puffery defense. I was in the 1991 Gulf War. The risk committee chair at the time was Enrique Hernandez Jr., a Pasadena business executive who is no longer on the Wells Fargo board but serves as non-executive chairman of McDonalds. Customers with multiple products are also significantly more profitable (Exhibit 2). The unauthorized-accounts scandal at Wells Fargo is an exemplary case, and we dont mean that as a compliment. I just said [Tolstedts presentation] was, well, excuse my language. fargo wells banking awful foreclose scandal someday even years lindbergh sr charles report fraud mortgage sb bull later meet california Starting in 2012, the OCC says, the bank began monitoring the sales force for misconduct. The outlines and many details of this affair have been reported before, starting with The Times articles in 2013. According to one executive, The story line is worse than the economics at this point.. The practice also did not have a material impact on the companys overall cross-sell ratios, increasing the reported metric by a maximum of 0.02 products per household. generally found that processes and controls designed to detect, investigate and remediate sales practice violations were effective at mitigating sales practices-related risks.

Nevertheless, although the financial impact was trivial, the reputational damage proved to be enormous. On the surface, the Federal Reserve seemed really to lay the hammer on Wells Fargo & Co. for its accounts scandal and serial wrongdoing. Affected customers did not react negatively: Weve had very, very low volumes of customer reaction since that happened. Senators criticized the company for perpetuating fraud on its customers, putting excessive pressure on low-level employees, and failing to hold senior management responsible. The company used its financial strength to purchase Wachovia during the height of the financial crisisforming what is now the third largest bank in the country by assetsand emerged from the ensuing recession largely unscathed, with operating and stock price performance among the top of its peer group (Exhibit 1). Wells Fargo had the elements in place of a properly functioning governance system, including risk management, audit, legal, and human resources.

If one of your tellers took a handful of $20 bills out of the cash drawer, theyd probably be looking at criminal charges for theft. Our team members do have goals. Leadership. Carrie Tolstedt, who led the retail banking division, retired. Senator Elizabeth Warren of Massachusetts told Stumpf: You know, heres what really gets me about this, Mr. Stumpf. Hernandez didnt respond to messages left at his family business, Inter-Con Security. Group risk leaders took the lead in assessing and addressing risk within their business units and yet were answerable principally to the heads of their businesses. For example, the community bank group risk officer reported directly to the head of the community bank and only on a dotted-line basis to the central chief risk officer. Two weeks later, Stumpf resigned without explanation. At the companys 2017 annual meeting, 9 of the companys 15 directors received less than 75 percent support and 4 received less than 60 percent, including board chairman Stephen Sanger (56 percent), head of the risk committee Enrique Hernandez (53 percent), head of the corporate responsibility committee Federico Pea (54 percent), and Cynthia Milligan who headed the credit committee (57 percent). As sales goals became more difficult to achieve, the rate of misconduct rose. Of note, the report found that employees who engaged in misconduct most frequently associated their behavior with sales pressure, rather than compensation incentives., Organizational structure. In fact, the sales force was ripping off customers, sometimes saddling them with unwarranted fees and even damaging their credit reports. The document also points to the consequences of doing so; Wells Fargo, the OCC observes, has struggled to regain its reputation for integrity while also paying hundreds of millions of dollars in legal settlements and administrative costs and also facing potentially billions more. Two other former executives also settled with the OCC for a combined $3.5 million. How can a company prepare against problems that do not seem to be material in a financial sense but ultimately have a material impact on the business and its reputation? Would the program have worked better if structured differently? Lead independent director Stephen Sanger became nonexecutive chairman; and Elizabeth Duke, director and former Federal Reserve governor, filled a newly created position as vice chairman. As the OCC observes, the banks competitors have experienced healthy growth in their stock prices since the first Wells Fargo settlement in September 2016, while Wells Fargo shares have barely budged. But it designed the monitoring to minimize its findings and looked only for certain misdeeds, avoiding numerous other red flags of unauthorized account-opening. Furthermore, each of these groups wasat least to some degreeaware of sales practice violations in the consumer bank. The Wells Fargo cross-selling scandal highlights the challenge of a high-performing executive whose behavior ultimately does not align with company values. Customer complaints about unauthorized accounts flowed into the banks complaint lines. In addition, the report asserted that corporate control functions were constrained by [a] decentralized organizational structure and described the corporate control functions as maintaining a culture of substantial deference to the business units.. Wells Fargos vision is to satisfy our customers needs, and help them succeed financially. The company emphasizes that: Our vision has nothing to do with transactions, pushing products, or getting bigger for the sake of bigness. We always consider the reputational impact of the things that we do. Confident those costs would be relatively modest, the law department did not appreciate that sales integrity issues reflected a systemic breakdown.

Richard Cordray, director of the Consumer Financial Protection Bureau, criticized the bank for failing to: monitor its program carefully, allowing thousands of employees to game the system and inflate their sales figures to meet their sales targets and claim higher bonuses under extreme pressure. You should give back the money that you took while this scam was going on and you should be criminally investigated by both the Department of Justice and the Securities and Exchange Commission. Decisions were made collectively. In August 2017, the company increased its estimate of the number of potentially unauthorized consumer accounts to 3.5 million and issued an additional $2.8 million in refunds. Board of Directors. If [employees] are not going to do the thing that we ask them to doput customers first, honor our vision and valuesI dont want them here. The company hired an independent consulting firm to review all account openings since 2011 to identify potentially unauthorized accounts. The banks current CEO, Charles Scharf, the former CEO of Visa and BNY Mellon, told employees last week that the conditions outlined by the OCC were inexcusable. The companys operating philosophy includes the following elements: Vision and Values. It also maintained a whistleblower hotline to notify senior management of violations. Within 24 hours of the accounts being opened, two sales employees ordered debit cards for the customers, claiming they had spoken to the customers directly. As punitive as the sales goals were, some workers were threatened with discipline for not exceeding them. The company also published scorecards that ranked individual branches on sales metrics, including cross-selling. While corporate leaders and outside observers contend that culture is a critical contributor to employee engagement, motivation, and performance, the nature of this relationship and the mechanisms for instilling the desired values in employee conduct is not well understood. Some reached Stumpf and his underlings directly. Wells Fargo, staggered by a scandal tied to bogus consumer accounts and allegations of identity theft, is responding like most big companies with a sullied reputation: with an ad campaign promising to make things right for its alleged victims, without being too specific about how. It requires long-term persistence, significant investment in systems and training, proper team member incentives and recognition, [and] taking the time to understand your customers financial objectives. The tensions between corporate culture, financial incentives, and employee conduct is illustrated by the Wells Fargo cross-selling scandal. Tim Sloan, at the time chief financial officer of Wells Fargo, refuted criticism of the companys sales system: Im not aware of any overbearing sales culture. Wells Fargo had multiple controls in place to prevent abuse. Wells Fargo continued its efforts to reexamine all aspects of its business. Brian Tayanisa Researcher with the Corporate Governance Research Initiative at Stanford Graduate School of Business. The bank subsequently announced the resignations of 6 directors, including Sanger, who was replaced by Elizabeth Duke as board chair. Recently, attention has been paid to corporate culture, tone at the top, and the impact that these have on organizational outcomes. How can a company balance autonomy and accountability? In April 2018, the bank agreed to a $1 billion settlement with the Consumer Financial Protection Bureau and the Office of the Comptroller of the Currency to resolve auto and mortgage lending violations. while the advisability of centralization was subject to considerable disagreement within Wells Fargo, events show that a strong centralized risk function is most suited to the effective management of risk. Tolstedt and certain of her inner circle were insular and defensive and did not like to be challenged or hear negative information. A Wells Fargo spokesman responded that, We never want products, including credit lines, to be opened without a customers consent and understanding. Following the initial Los Angeles Times article highlighting potential violations, sales practices was included as a noteworthy risk in reports to the full board and the boards risk committee. Beginning in 2014 and continuing thereafter, the board received reports from the community bank, the corporate risk office, and corporate human resources that sales practice issues were receiving scrutiny and attention and, by early 2015, that the risks associated with them had decreased., Board members expressed the view that they were misinformed by a presentation made to the risk committee in May 2015 that underreported the number of employees terminated for sales-practice violations, that reports made by Tolstedt to the committee in October 2015 minimized and understated the problem, and that metrics in these reports suggested that potential abuses were subsiding.. According to former CEO Richard Kovacevich, No single person has ever run Wells Fargo and no single person probably ever will. The company takes these statements seriously. The OCC backed up its charges with a 100-page notice that adds new details to the conditions that led to the scandal and the failure of top executives and the Wells Fargo board to take action, even when articles in The Times first exposed the unauthorized-accounts practices in 2013. Why is that?

Around the same time, however, the company asserted in court that its statements that it was working to restore trust among its customers and trying to be more transparent about its scandals statements made by its then-CEO Tim Sloan were just puffery.. He received no severance and reiterated a commitment not to sell shares during the investigation. The board report also criticized control functions for not understanding the systemic nature of sales practice violations: Certain of the control functions often adopted a narrow transactional approach to issues as they arose. In September 2016, Wells Fargo announced that it would pay $185 million to settle a lawsuit filed by regulators and the city and county of Los Angeles, admitting that employees had opened as many as 2 million accounts without customer authorization over a five-year period. This is about accountability. The company also developed new procedures for verifying account openings and introduced additional training and control mechanisms to prevent violations. Following the hearings, the board of directors announced that it hired external counsel Shearman & Sterling to conduct an independent investigation of the matter. The board stipulated that additional clawbacks might occur. The independent investigation concludes that a strong centralized risk function is most suited to the effective management of risk. Is this conclusion correct? I had less stress in the 1991 Gulf War than working for Wells Fargo. Others said they were warned that if they did not achieve sales goals, they would be transferred to a store where someone had been shot and killed or forced to walk out in the hot sun around the block., The noose around our necks ha[s] tightened, another worker complained to Tolstedt and Stumpf. So I had a very negative personal reaction.

Is this assessment correct? principally on quantifiable monetary costsdamages, fines, penalties, restitution. Rather than put its customers first, Wells Fargo built and sustained a cross-selling program where the bank and many of its employees served themselves instead, violating the basic ethics of a banking institution including the key norm of trust. One useful rule of thumb when it comes to business scandals is that they often seem to get worse after the initial disclosures, even after a string of official investigations. The OCC is seeking $25 million from Tolstedt and a total of $10.5 million from the four others.

But you squeezed your employees to the breaking point so they would cheat customers and you could drive up the value of your stock and put hundreds of millions of dollars in your own pocket.

The company says it may face another $3.9 million in costs related to the scandal.

But because Wells Fargos reputation among investors was based in part on its purported success at cross-selling that is, getting customers to open multiple accounts and sign up for multiple services they turned a blind eye to the mushrooming issues. Former Wells Fargo Chief Executive John Stumpf testifies on Capitol Hill on Sept. 29, 2016, about the banks opening of unauthorized customer accounts.

Employee handbooks explicitly stated that splitting a customer deposit and opening multiple accounts for the purpose of increasing potential incentive compensation is considered a sales integrity violation. The company maintained an ethics program to instruct bank employees on spotting and addressing conflicts of interest. Tolstedt never voluntarily escalated sales practice issues, and when called upon specifically to do so, she and the community bank provided reports that were generalized, incomplete, and viewed by many as misleading. The board also announced that it would claw back an additional $47.3 million in outstanding stock option awards from Tolstedt and an additional $28 million in previously vested equity awards from Stumpf.

Its about building lifelong relationships one customer at a time. Wells Fargos success is built on a cultural and economic model that combines deep customer relations and an actively engaged sales culture. It was people trying to meet minimum goals to hang on to their jobs. They also asserted that these actions were not indicative of the broader culture: I want to make very clear, that we never directed nor wanted our team members to provide products and services to customers that they did not want. And we got very little feedback from that as well. Neither executive would receive a bonus for 2016, and Stumpf agreed to forgo a salary while the investigation was underway.

Wells Fargo response. According to the report, Stumpf did not appreciate the scope and scale of sales practices violations: Stumpfs commitment to the sales culture led him to minimize problems with it, even when plausibly brought to his attention. For example, he did not react negatively to learning that 1 percent of employees were terminated in 2013 for sales practices violations: In his view, the fact that 1 percent of Wells Fargo employees were terminated meant that 99 percent of employees were doing their jobs correctly. Consistent with this, the report found that Stumpf was not perceived within Wells Fargo as someone who wanted to hear bad news or deal with conflict.. Some outside observers alleged that the banks practice of setting daily sales targets put excessive pressure on employees. The board report and related actions did not put an end to shareholder and regulatory pressure. If the branch did not hit its targets, the shortfall was added to the next days goals. To recap, sales employees at Wells Fargos community bank that is, the retail arm responsible for consumer savings and checking accounts and credit and debit cards were discovered to have opened millions of unauthorized accounts and issued millions of unauthorized cards to meet punishing sales goals, on pain of termination. Branch managers were assigned quotas for the number and types of products sold. The independent investigation largely exonerates the Wells Fargo board of directors. As a general matter, however, audit did not attempt to determine the root cause of unethical sales practices. Five other executives, however, are challenging OCC penalties in public hearings before an administrative law judge. What could it have done differently to prevent the cross-selling issue from snowballing? fargo wells ponzi accused knowing There is no manager at Wells Fargo who is responsible for reputation risk. This type of practice guarntees high turnover [and] bankers who are really financial molesters [and] cheaters.. She showed no recognition of the extent or seriousness of the matter, the director told the OCC. The bank is still trying to regain its reputation. And sometimes they can be blinded by a goal. According to another representative, This is something we take very seriously. The report faulted the companys practice of publishing performance scorecards for creating pressure on employees to sell unwanted or unneeded products to customers and, in some cases, to open unauthorized accounts. Employees feared being penalized for failing to meet goals, even in situations where these goals were unreasonably high: In many instances, community bank leadership recognized that their plans were unattainable.