Wells Fargo agreed on February 21, 2020 to pay $3 billion to end three federal matters over sales practices that pushed thousands of employees into fraud, identity theft and falsified bank records. In the agreements, the bank admitted it collected millions of dollars in fees and interest it was not entitled to, damaged the credit ratings of some customers, and unlawfully misused sensitive personal information, including means of identification.
One payment covers all three. The criminal investigation into false bank records and identity theft ends in a deferred prosecution agreement with the U.S. Attorney’s Offices for the Central District of California and the Western District of North Carolina. Wells Fargo will not be prosecuted during its three-year term if it keeps to the conditions, including continued cooperation with further government investigations.
The second piece is a civil settlement with the Civil Division’s Commercial Litigation Branch under the Financial Institutions Reform, Recovery and Enforcement Act of 1989, known as FIRREA, which lets the government seek civil penalties against financial institutions over offenses such as false bank records. The third is a cease-and-desist proceeding by the Securities and Exchange Commission, which found violations of Section 10(b) of the Exchange Act and Rule 10b-5. Of the $3 billion, $500 million is a civil penalty the SEC will distribute to investors.
Fifteen years in the Community Bank
A 16-page statement of facts lays out conduct over 15 years in the bank’s Community Bank unit. It was then the largest operating segment of Wells Fargo and routinely produced more than half of the company’s revenue.
The trouble began with strategy. From 1998, Wells Fargo leaned harder on sales volume and annual sales growth, and the “cross-sell strategy” of selling existing customers more products sat at the center. Wells Fargo called it “the foundation of our business model.” Its 2012 Vision and Values statement said: “We start with what the customer needs – not with what we want to sell them.”
Inside the Community Bank, the admitted facts say, practice ran the other way. Employees were pressed to move large volumes of product to existing customers, often with little regard to need or expected use. The sales goals and the management pressure behind them led thousands of employees into fraud, identity theft and falsified records, and into unethical sales of products worth little or nothing to the customer.
What managers knew
Top managers of the Community Bank knew of the gaming practices as early as 2002, and they knew the conduct was growing under the pressure to hit targets. In 2004, one internal investigator called the problem a “growing plague.” A year later, another said it was “spiraling out of control.”
Some senior managers in the unit questioned how the cross-sell strategy was being carried out. Community Bank leadership still would not change a sales model with unrealistic goals and a focus on low-quality secondary accounts.
Leaders also failed to take enough action to stop the practices, according to the statement of facts. They played the problem down to Wells Fargo management and the board of directors, describing it as individual misconduct rather than a product of the sales model. Wells Fargo admitted that the unit’s senior leaders treated poor sales quality and integrity as a necessary byproduct of higher sales, merely the cost of doing business.
