Yesterday’s Senate Banking Committee hearing on Wells Fargo should have ended with CEO John Stumpf hauled off in handcuffs. In a little over two hours, Stumpf revealed enough information, combined with what was already known in public records and filings, to make a powerful case for securities fraud. Specifically, that he touted fraudulent sales figures to investors as evidence of the bank’s growth, boosting the stock price and personally benefiting by $200 million. Worst of all, Stumpf used low-paid workers as the raw materials for this scheme, and as the scapegoats when it unraveled.
Stumpf implicated himself with his own prepared testimony, when he acknowledged that by 2011, officials at the bank were actively engaged in identifying and rooting out unethical sales practices. These practices led to Wells Fargo employees opening at least two million fake accounts that customers never authorized. The Consumer Financial Protection Bureau (CFPB), the Office of the Comptroller of the Currency (OCC), and the Los Angeles City Attorney’s office fined Wells Fargo a total of $190 million for this misconduct.
Under questioning from Senator Sherrod Brown of Ohio, Stumpf admitted that he personally learned of the fake accounts scandal “sometime in 2013.” The firm informed its primary regulator, the OCC, at that time, even before reports in The Los Angeles Times laid out the entire scheme.
Wells Fargo did not, however, inform investors. In the three years after its CEO acquired first-hand knowledge of what was going on, the bank never explained how many fraudulent accounts were uncovered, how many customers were overcharged in fees on unauthorized accounts, how metrics on account sales growth were compromised by the fake figures, or even whether there was an active federal investigation into its practices. All Wells did in those quarterly reports to investors was tout expertise in “cross-selling”—signing up individual customers for multiple accounts.
The senators on the Banking Committee connected the dots. Republican Pat Toomey of Pennsylvania asked if Stumpf disclosed the investigation in Securities and Exchange Commission (SEC) filings. Stumpf said he didn’t remember, but Toomey confirmed the answer was no. That is a material misrepresentation, a clear violation of securities laws. Stumpf actually tried the alibi that, because the $190 million fine was so puny relative to Wells Fargo’s $5.6 billion in quarterly profits, the investigation wasn’t material at all!
Predictably, Elizabeth Warren drove the point home. She highlighted twelve quarterly earnings calls from 2012 to 2014 showing that Stumpf personally pushed cross-selling as a point of pride to investors, citing data on the number of accounts per household. (The target was eight per household, and in the company’s 2010 annual report, Stumpf summed it up: “Eight rhymes with great.”) “Cross-selling is all about pumping up Wells’s stock price,” Warren said.
Warren delivered the motive: John Stumpf held an average of 6.75 million shares of Wells Fargo stock throughout this time. As the stock rose $30 a share between 2012 and 2015, Stumpf pocketed over $200 million in gains. That’s more money than Wells Fargo paid in fines, and it’s not like Stumpf paid those out of pocket. Carrie Tolstedt, Wells’s former head of community banking, similarly retired with stock awards that could reach over $100 million. (The board could claw back some or all of those awards. As it happens, Stumpf is the chairman of that board.)
It’s hard to find a more clear-cut case of securities fraud. Stumpf verbally praised cross-selling metrics to investors when he, by his own admission, knew that those metrics were flawed, underwritten by fake accounts. He never corrected the record, and Wells Fargo to this day has never changed a word of its SEC filings. And fraudulent cross-selling was mostly lucrative to Wells Fargo—the fees on the fake accounts were minimal—insofar as it boosted the stock price.
“You should resign, you should give back the money you took while this was going on, and you should be criminally investigated by both the Department of Justice and the SEC,” Warren said.
That’s not all. Senator Jeff Merkley of Oregon asked the SEC to investigate Stumpf over signing certifications required by the Sarbanes-Oxley Act attesting to maintaining internal control at Wells Fargo. The bank fired 5,300 employees for creating fake accounts, a clear sign of systemic failures. “Either Wells Fargo willfully turned a blind eye, or they completely failed in their legal responsibilities to oversee their operations and to catch and stamp out fraud,” Merkley said.
Worst of all, as Warren and several other senators pointed out, low-wage workers were used as human shields in this stock-pumping scheme. Bank employees, part of a group known as the Coalition for Better Banks, had initiated complaints to state and federal regulators about impossible sales goals and pressure to boost their numbers. CFPB Director Richard Cordray said his office first heard about Wells Fargo in mid-2013 from “whistleblower tips,” which can’t really mean anyone else but front-line workers.
The average starting salary for a branch worker at Wells Fargo is around $12 an hour. The motivation to cross-sell wasn’t incentives or bonuses, but the threat of disciplinary action or termination. “I never heard of anybody being fired for aggressive sales tactics,” said Khalid Taha, a personal banker at a Wells Fargo branch in San Diego (and Iraq War refugee), on a Coalition for Better Banks conference call on Monday. If they weren’t fired for refusing to lie to meet sales goals, they had to work late to make up for missing targets, without pay. This is known as wage theft.
Because these workers had no union or bargaining power, because they couldn’t fight back against oppressive demands from the top, some of them faked accounts. A former Wells employee took to Reddit to explain the shady activities he saw: “Certain employees didn’t have a soul in their office all day but would post 10 new accounts for the day. ... Everyone knew it was bullshit, and everyone knew the management was looking the other way, no matter how many complaints because this person was a ‘performer.’”
More importantly, this was not limited to just one bank. “It was the norm at our branch to disregard the customers’ needs and only focus on sales,” said Cassaundra Plummer, a retail banker most recently with TD Bank, on the conference call. When Plummer refused to hide fees and push cross-selling, she claims the bank retaliated against her. “I thought it was my branch, but all the major banks struggle with retail sales goals.”
The only people held accountable for this sector-wide misconduct have been those low-level workers. Most banks haven’t faced even a civil fine. No executive has given back a bonus or been put under investigation. John Stumpf merely had to endure a couple hours of questioning. As Senator Warren said yesterday to Stumpf, “Your definition of accountable is to push the blame to your low-level employees who don’t have the money for a fancy PR firm to defend themselves. It’s gutless leadership.”
If the SEC and the Justice Department don’t get involved here, they might as well not even exist. CFPB’s Cordray and OCC’s Thomas Curry wouldn’t say whether they issued criminal referrals to law enforcement in this case, though Cordray hinted at it. Attorney General Loretta Lynch, if she wants to emerge from wherever she’s been hiding on this issue, has enough information to bring cases.
Will President Barack Obama’s administration end its tenure as it began, by refusing to prosecute systemic fraud in the financial markets? That’s the unavoidable conclusion so far.