Wells Fargo & Co., the fourth-largest bank in the United States, has agreed to pay $3 billion to settle civil lawsuits and resolve criminal prosecutions over its fake customer accounts scandal.
In 2016, it was revealed that for over a decade, Wells Fargo had been creating unauthorized bank accounts in their customers’ names (without the customers’ knowledge or consent), in an effort to boost quotas. This shocking information immediately prompted a wave of lawsuits as well as investigations by the Securities and Exchange Commission and the Justice Department.
Out of the $3 billion settlement, $500 million will be allocated to the Securities and Exchange Commission in order to compensate investors. As part of the settlement, Wells Fargo will not be criminally prosecuted, so long as the bank continues to cooperate with the authorities.
The Bank’s Conduct
In 2016, it had become known to the public that since 2002, Wells Fargo employees had created millions of unauthorized bank and credit card accounts in its customers’ names by stealing personal information, forging signatures, and also by transferring customer money.
Bank employees referred to the practice as “gaming,” which involved opening the fraudulent accounts and then moving money into them from a customer’s actual accounts. Bank staff would also create PIN numbers to access the customers’ accounts without their knowledge. By falsifying millions of bank records, Wells Fargo customers suffered damage to their credit ratings, personal data, and identities, while the bank raked up millions of dollars in fees and interest.
These actions, taken by thousands of lower-level employees, were at the behest of upper management and senior executives, in a constant competition to increase sales goals for the bank. Eventually, customers began to notice fees on accounts that they did not own. The customer complaints, in turn, caught the attention of several government regulatory agencies, which prompted an investigation into the bank’s practices. Although top managers were well aware of their employees’ unlawful practices, Wells Fargo continued to maintain the misconduct was due to “individual misconduct instead of the sales model itself.”
As the truth unraveled, Wells Fargo was fined a total of $185 million by government regulatory agencies. The company paid out over $2.7 billion to settle civil lawsuits and criminal fines, not including the recent $3 billion settlement. John Stumpf, Wells Fargo’s chief executive officer, was forced to resign amid the scandal. Stumpf was fined $17.5 million by the Office of the Comptroller of the Currency and was banned from ever working at a bank again. The bank has since admitted that it had pressured its employees to meet unrealistic sales goals.
The $3 Billion Settlement
The recent $3 billion settlement with federal authorities will mark the largest yet to be paid by Wells Fargo in connection with the scandal. It is unclear how much, if any, of the $500 million paid to the Securities and Exchange Commission will go to actual customers. But officials have stated that Wells Fargo will separately compensate its customers for any losses suffered by wrongfully charged fees or any damages done to their credit ratings. The $500 million figure will help compensate investors that were defrauded by the bank’s promotion of its “cross-sell” strategy of selling additional products and services to its existing customers.
As part of the settlement, the bank has entered into a deferred prosecution agreement—a legal promise that the bank will not commit any crimes for a three-year term and will not be prosecuted further by federal authorities. The agreement was reached with the bank itself, not with individual executives and employees that were responsible for the fraud.
The Future of Wells Fargo
The future of Wells Fargo bank is far from certain. Charles Scharf, the new CEO, has publicly addressed the settlement in a statement: “The conduct at the core of today’s settlements—and the past culture that gave rise to it—are reprehensible and wholly inconsistent with the values on which Wells Fargo is built.” The bank claims that it has enacted safety measures to prevent further fraud, such as ceasing sales goals, changing the bank’s compensation structure, and increasing company oversight.
However, it is unclear when or if Wells Fargo will completely bounce back. Its stock price has decreased by 12% this year and is not considered a wise investment at this point. As Dick Bove, a Wall Street research analyst, opines: “The turnaround of Wells Fargo is likely to take a minimum of three to five years. There are much better investments. Sell.” Bove also predicts that about 20,000 Wells Fargo employees, which represent approximately 10% of its workforce, may be downsized. The bank’s wealth management brokerage division has also experienced a decline, as negative publicity leads brokers to move their business to other banks.
The ramifications from the bank’s misconduct is far from over. Currently, there is a pending Labor Department investigation for wage theft and whistleblower retaliation for firing Wells Fargo employees who had reported the scandal to the bank’s ethics hotline. Further, in 2018, the Federal Reserve sanctioned Wells Fargo by preventing the bank from growing its balance sheet beyond $2 trillion, a move that will undoubtedly make the bank’s future growth more difficult. Likewise, Wells Fargo has other allegations to contend with, as the Consumer Financial Protection Bureau and the Office of the Comptroller of the Currency fined Wells Fargo $1 billion in 2018 for forcing its customers to pay for car insurance that they did not need, resulting in wrongful repossession of vehicles.
Overall, the future of Wells Fargo bank will largely be dependent on its ability to fix its bad publicity and earn itself back into the good graces of its customer base again.
