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Is Wells Fargo CEO A Scapegoat?

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Is Wells Fargo CEO A Scapegoat?
tax-extenders

Wells Fargo CEO John Stumpf was back on Capitol Hill today to be raked over the coals by the House Financial Services Committee, after facing an angry Senate Banking Committee last week. Lawmakers are demanding answers regarding widespread fraudulent activity at the bank, activity which resulted in $185 million in fines.

The board of directors of Wells Fargo announced Tuesday that Stumpf will be stripped of his $41 million in "unvested equity awards" as punishment. The board hopes that their unprecedented "claw back" of the CEO's compensation will keep public anger focused on him, rather than the company as a whole. It's a bold move, but will it work?

Sacrificing The CEO (or, "Throw John Under The Bus")

Thrown under bus

Information from internal sources at the bank have exposed an atmosphere of acrimony and recriminations. The board of directors are reportedly "furious" at Stumpf, who they say kept them in the dark regarding the long-running fraudulent activity in Wells Fargo's retail banking division. Stumpf claims that the board knew what was going on as well as he did, and that he's being thrown under the bus in an attempt to deflect criticism of the board.

Salespeople used fake emails and other ploys to create up to as many as 2 million fee-generating bank accounts in the names of existing customers without their knowledge.* This was done in order to meet unrealistic sales quotas set by management. The fraud came to light after customers discovered fees and charges for accounts that they knew nothing about.

State of Denial

Stumpf will retain his dual roles as CEO and Chairman of the board at Well Fargo, but without pay during an internal investigation ordered by the board. The board of directors set Stumf's compensation at $19 million last year -- the most of any banking CEO in the S&P 500. Many in Congress and the public believe he should be shown the door instead of being allowed to keep his position.

Protest-528x336

Stumpf may soon be reconsidering staying on at Wells Fargo. As CEO, he gets the "joy" of facing angry lawmakers and the press. Today, it was an appearance before an incensed House Banking Committee.  Each of the 60 members were expected to take a turn at confronting Stumpf over his lack of oversight, playing to the camera for election time soundbites.

Highlights from today's Capitol Hill CEO roast include Representative Carolyn Maloney's (D-NY) description of a sale of Wells Fargo stock by Stumpf that occurred after the date he claimed to have found out about the bogus account scam as "very, very suspicious". Committee Chairman Jeb Hensarling (R-TX) told Stumpf "Fraud is fraud. Theft is theft." Maxine Waters, ranking Democrat on the Committee says that Wells Fargo seems to be too big for Stumpf to handle, so it should probably be broken up.

Stumpf denied that any of the 5,300 Wells Fargo employees that were fired from the retail banking division were fired for not meeting sales goals of eight accounts per client, or for trying to alert superiors of the ongoing illegal activity. This is contrary to statements by several employees.

Don't Cry for Me, San Francisco

(flickr.com: Pictures Of Money )

Several members of Congress have called on Stumpf to resign, or for the Wells Fargo board of directors to fire him. So far, Stumpf has refused to step down, saying that staying on and cleaning up this mess is part of taking responsibility as CEO, and the board has remained silent on the matter.

Even if he is tossed out the window of the executive suite at Wells Fargo headquarters in San Francisco, he will still land on giant piles of money. According to USA Today, John Stumpf will still receive $134 million dollars in compensation upon leaving the company, not including any severance package. this $134 million figure is after the "clawback" of $41 million in unvested equity that the board of directors took from Stumpf last week.

time-is-money-1073340_1280

Assertions that upper management knew nothing of the fraud being perpetrated ring hollow when you realize that Wells Fargo's legal department had customer's lawsuits over the illegal accounts thrown out of court by claiming that, even though the accounts were fraudulently opened in the customer's name, they  were attached to the customer's actual account, and are therefore covered under the original account's binding arbitration clause. It seems unlikely that Wells Fargo legal counsel did not tell anyone of their defense of illegal activities.

Details of these suits are likely to be found as Federal investigators serve subpoenas for records and documents related to the fake accounts, each of which cost customers an average of $50.

The state of California isn't standing idly by after Wells Fargo's latest wrongdoing.  The Treasurer of California has announced that the state will be taking sweeping action regarding its relationship with the bank, remarking "how can I continue to entrust the public's money to an organization which has shown such little regard for the legions of Californians who have placed their well-being in its care?"

These measures include no longer using Wells Fargo as a broker/dealer when buying securities (the state has purchased $1.65 billion worth of securities through Wells Fargo in the last 18 months), the bank will no longer be allowed to underwrite state bonds, and the state will no longer buy Wells Fargo debt securities.

Corporate Culture Of Corruption

moneyman

Wells Fargo CEO Stumpf has told both the House and the Senate that "managers of managers" were fired over the fraudulent scheme, but could not say who that would be. He also admitted that no high level executives had been fired.

Referring to actions taken by employees under pressure to meet unrealistic sales goals, Stumpf placed the blame for the scandal on employees, not the corporate culture at Wells Fargo.

The record tells a different story (data courtesy the Corporate Research Project's "Wells Fargo Corporate Rap Sheet") :

  • 1992: Paid $43 million for conspiring to manipulate credit card interest rates.
  • 2002: Paid $150,000 fine to the Securities and Exchange Commission for improperly switching customers between mutual funds.
  • 2005: Paid $3 million fine for improper sales of mutual funds.
  • 2007: Paid $250,000 fine for an analyst not revealing a conflict of interest.
  • 2009: Had to buy back $1.4 billion in securities from investors who the California Attorney General said had been misled by the bank.
  • 2011: Fined $1 million for failing to send required disclosure documents to customers.
  • 2011: $16 million judgement for violating the Americans with Disabilities Act.
  • 2011: $125 million settlement for misrepresenting the quality of mortgage-backed securities sold to pension funds.
  • 2011: $85 million civil penalty for steering customers with good credit into higher-interest subprime mortgages.
  • 2011: $37 million settlement for municipal bond bid rigging.
  • 2011: $2 million fine for improper sales of reverse convertible securities
  • 2011: $2.1 million fine for failure to properly supervise the sale of exchange-traded funds (ETFs).
  • 2012: One of five megabanks who agreed to a $25 BILLION settlement with the Federal government for mortgage and foreclosure abuses, including "robo-signing" and misleading mortgage holders. (assume $5 BILLION as Wells Fargo's share).
  • 2012:  $175 million to settle charges of racial discrimination in mortgage lending.
  • 2012: $6.5 million fine to the SEC for failing to fully research the risks of mortgage-backed securities before selling them to municipalities and non-profit organizations.
  • 2013: One of ten lenders who paid $8.5 billion for foreclosure abuses (Wells Fargo's share: est. $850 million).
  • 2013:  Settled lawsuit over neglect of maintenance and marketing of foreclosed homes in minority neighborhoods by spending $42 million to promote home ownership and neighborhood stabilization in minority areas.
  • 2013: Paid Freddie Mac $869 million to repurchase ineligible home loans it sold them.
  • 2014: One of ten investment banks that paid an aggregate $4 million for allowing stock analysts to solicit business in connection with a proposed Toys R Us Initial Public Offering (IPO).
  • 2016:  Joint $25.6 million settlement with Barclays over fraud charges related to Rhode Island bond offering to fund video game company.
  • 2016:  $1.2 billion penalty for misrepresenting mortgages to HUD as eligible for FHA insurance.
  • 2016: $3.6 million plus $410,000 in restitution for illegal student loan practices.
  • THIS MONTH: $100 million Federal regulatory fine, $35 million fine to the Comptroller of the Currency, and $50 million to the city and county of Los Angeles for fraudulently creating fee-generating bank accounts without customers' knowledge.

Among other actions against Wells Fargo not mentioned above are:

Note that this is far from all the legal penalties paid by Wells Fargo in recent years, nor does it include numerous fines incurred by Wachovia and Countrywide (like laundering money for Mexican drug cartels) before they were bought out by Wells Fargo.

It's Still Going On

(found on wikipedia) 011001-D-2987S-138 The Joint Service Color Guard advances the colors during the retirement ceremony of Chairman of the Joint Chiefs of Staff Gen. Henry H. Shelton, at Fort Myer, Va., on Oct. 2, 2001. DoD photo by Helene C. Stikkel. (Released) Joint Service Color Guard
(Dept of Defense, public domain)

The charges just keep on coming for Wells Fargo, as yesterday they were charged with illegally repossessing the vehicles of active-duty service personnel. Both the Justice Department and the Office of the Comptroller of the Currency are going after the bank this time. The OCC is expected to levy a $20 million fine, while the Justice Department is looking into charging Wells Fargo for violations of the Servicemembers Civil Relief Act. This is in addition to $87 million in penalties for improperly foreclosing on the homes of military families.

If the Board of Directors at Wells Fargo doesn't really change their corporate culture soon, they might run out of sacrificial executives to offer up to regulators.

 

*An earlier version of this article stated an incorrect number of accounts opened by Wells Fargo employees that may not have been authorized. We regret the error.

The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.

About the Author

Everett Millman

Steven Cochran

Precious Metals Market Analyst
BS University of South Florida (2002)

A published writer, Steven's coverage of precious metals goes beyond the daily news to explain how ancillary factors affect the market.

Steven specializes in market analysis with an emphasis on stocks, corporate bonds, and government debt. He writes a monthly review of the precious metals markets for SurvivalBlog.com.

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