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The Wells Fargo Settlement – a new twist on identity theft

Overview

On February 20, 2020 the United States Attorney’s Offices of Central District of California and the Western District of North Carolina announced a settlement with Wells Fargo & Company that included a $3 billion dollar fine. Interestingly, the two criminal statutes cited were 18 U.S.C. 1005 and 1028A. 18 U.S.C. 1005 comes under Chapter 47 “Fraud and False Statements” and is entitled “Bank entries, reports and transactions”. 18 U.S.C. 1028A is entitled “Aggravated identity theft”. One of the criminal statues Wells Fargo was alleged to have violated was identity theft. The business method of “cross-selling” was at the center of the allegations that prompted this illegal activity.

The nature of this identity theft

Most of the time I suspect people think of identity theft where some cyber thief hacks into your computer, gains information about you and then starts entering into transactions in your name. I’ve done a bit of work on identity theft and have been a victim of it myself. But the Feds charging Wells Fargo is a new one on me and does have merit.

Along with the Department of Justice’s announcement of the multi-billion-dollar settlement was the release of the deferred prosecution agreement (DPA) with important exhibits attached to the DPA that formed part of the DPA. Exhibit A is 16-page document entitled “Statement of Facts” that meticulously outlines of the violations.

It is the Statement of Facts that lays out the violations making a strong case that this financial institution engaged in identity theft to meet performance goals. MRB published a previous blog on the Wells Fargo matter ( https://mrbconsultingllc.com/2020/01/24/the-office-of-the-comptroller-of-the-currency-settles-with-fiver-former-wells-fargo-executives/ ). That article outlined the settlement with the OCC and the fining of five individuals at Wells. Prominently mentioned in the OCC settlement was Carrie Tolstedt the former Head of the Community Bank who was fined $25 million by the OCC. In the DoJ’s statement of facts Ms. Tolstedt is identified as Executive A.

Within the Statement of Facts there are disturbing allegations as it relates to identity theft. The two main charges related to the “cross-selling” of products were:

  • unlawful conduct to attain sales through fraud, identity theft, and the falsification of bank records, and
  • unethical practices to sell products of no or low value to the customer, while believing that the customer did not actually need the account and was not going to use the account.

Certain tactics included:

  • Employees created false records and forged customers’ signatures on account opening documents to open accounts that were not authorized by customers,
  • After opening debit cards using customers’ personal information without consent, employees falsely created a personal identification number (“PIN”) to activate the unauthorized debit card.
  • Employees opened bill pay products without customer authorization.

The government alleges that from 2002 to 2016, Wells Fargo opened millions of accounts or financial products that were unauthorized or fraudulent.

Representations to investors

A fair amount of text is devoted to what was represented to investors by Executive A. Executive A oversaw the Community Bank, a segment of the bank that contributed more than half of the company’s revenue from 2007 – 2016. The constant theme to investors was Wells Fargo’s cross-selling marketing effort was “needs based”. That meant that Well’s was only selling products that their clientele needed. However, the evidence provided in the DPA proved otherwise.

Much of the DPA had a familiar ring to it in terms of other DPAs. The incentive/compensation structure of the sales and marketing effort were front and center in the DPA. While Executive A was publicly touting the cross-selling effort as needs based in was clear that the compensation incentives were volume based. That was the backdrop that set the stage for the illegal conduct that permeated Wells Fargo.

Problems with the Community Bank’s cross-selling efforts had been known for years. Despite the numerous signals, warnings and complaints Executive A was still out touting to investors that all was well.  After publicly disclosing that cross-selling was the “corner-stone” of their business model Executive A consistently ignored warnings of the failure of that model and did not disclose those failures.  Despite documented investigative reports highlighting problems with the cross-selling model and an incident in 2002 whereby numerous employees were fired for “unethical sales practices” that were the result of “onerous sales” goals Executive A continued to misrepresent that facts on the ground.  

Instead what was represented to investors was the ability to execute successfully on its cross-selling strategy that provided the Company with a competitive advantage. Executive A stated that Wells Fargo “only cross sell[s] products which customers value and will use.” “[A]s we think about products per household or cross-sell, the first thing we anchor ourselves on is our vision of satisfying our customers’ needs.”

The Statement of Facts goes on to say the senior leadership of the Community Bank “led key gatekeepers to believe the root cause of the issue was individual misconduct rather than the sales model itself.”

“By failing to disclose the extent to which the cross-sell metric was inflated by low-quality accounts, Executive A sought not only to induce investors’ continued reliance on the metric but also to avoid confronting the risk of reputational damage that might arise—and eventually did arise—from public disclosure of the severity and extent of sales quality problems.”

“From 2012 to 2016, Wells Fargo failed to disclose to investors that the Community Bank’s sales model had caused widespread unlawful and unethical sales practices misconduct that was at odds with its investor disclosures regarding needs-based selling and that the publicly reported cross-sell metric included significant numbers of unused or unauthorized accounts.”

There are familiar themes

There are several familiar themes in this case. Significant problems were reported early and often with the cross-selling model that were ignored. The compensation structure was a key variable in the government’s analysis. As has been pointed out in previous posts the role of individuals is being more closely scrutinized.

An interesting phrase was used in the Statement of Facts – “reckless in not knowing”. I would keep on eye on that “standard”. As noted in previous posts there is an evolving standard directly impacting individual accountability in corporate wrongdoing. “Reckless in not knowing” sounds an awful lot like willful blindness to me. And this is/was a criminal indictment. This standard along with the definition of “agent” in the Lawrence Hoskins case point to an evolving legal standard relating to personal accountability. The fact that the government made specific notice of Executive A and senior management of knowing of the problems and not only doing nothing about them, but also misrepresenting material information should make executives take notice.

The fallout

What is also notable is that there was not an imposition of a corporate monitor. The notice of the DPA did address possibility but concluded it was not warranted because Wells Fargo, “is operating under the close supervision of its prudential regulators.”

The impact on personnel was also significant. Since the airing of this problem the Chief Executive Officer, Head of Community Bank, Chief Operating Officer, Chief Auditor, General Counsel, and Chief Risk Officer have all departed the company. In addition, eight of the thirteen independent directors on the board have also departed.

The list of federal agencies included in this investigation included:

  • Federal Bureau of Investigation,
  • Federal Deposit Insurance Corporation – Office of Inspector General,
  • Federal Housing Finance Agency – Office of Inspector General,
  • Office of Inspector General for the Board of Governors of the Federal Reserve System and Consumer Financial Protection Bureau, and
  • The United States Postal Inspection Service

The list of collateral incidences considered when determining the fine amount included:

  • The Jabbari Consumer Class Action Settlement.
  • The September 2016 Settlements with the Consumer Financial Protection Bureau (CFPB), the Office of the Comptroller of the Currency (OCC), and the City of Los Angeles.
  • The April 2018 Settlements with the CFPB and the OCC.
  • The October 2018 Settlement with the New York Attorney General.
  • The December 2018 Settlement with the Attorneys General of the 50 states and the District of Columbia; and
  • The Hefler securities class action settlement.

When this investigation was announced in September of 2016 “Wells Fargo’s stock experienced three significant stock drops that translated into an approximately $7.8 billion decrease in market capitalization.” This fine, considering the other civil and regulatory matters was $3 billion.

The cost of this transgression was far more than those financial impacts. The 36-month agreement requires Wells Fargo to comply with all components of the DPA up and until, “the conclusion of any criminal investigation or prosecution (through the entry of final judgment) of any individual relating to facts described in the Statement of Facts.” As noted in the previous blog Ms. Tolstedt did plead the fifth in the OCC regulatory matter. There was a reason for that.

Lastly, the DPA has signatures from three outside law firms in addition to the acting general counsel. The law firms that are signatories to the agreement are Sidley Austin LLP, Sullivan & Cromwell and McGuire Woods LLP.

This cost much more than $3 billion.

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