Other shoe drops on fmr WFC execs over sham-accounts scandal

Last week, Wells Fargo & Co. released the findings of an investigation into its retail banking sales practices conducted by the law firm Shearman & Sterling.  Predictably, out of the 110-page report, it was disclosure that the company would claw back another $75 million in compensation from two former top execs that grabbed the headlines.  Indeed, the lion's share of the blame was laid on the doorsteps of John Stumpf, the company's former CEO, and Carrie Tolstedt, former Executive Vice President and head of the community bank, WFC-speak for the branch network.  In some ways, in reaching its culmination, this saga has plodded along more slowly than a Wells Fargo stagecoach back in the day.

Back in December 2013 the Los Angeles Times ran a story detailing that "Wells Fargo's pressure-cooker sales culture comes at a cost."   The article pointed out that Wells Fargo & Co. was the nation's undisputed leader in selling add-on services to its customers. The giant San Francisco bank bragged in earnings reports to equity analysts of its prowess in "cross-selling" financial products such as checking and savings accounts, credit cards, mortgages and wealth management.  In addition to generating fees and profits, those services keep customers tied to the bank and less likely to jump to competitors.  In reporting a record $5.6 billion quarterly profit in October 2013, WFC said it averaged 6.15 financial products per household - nearly four times the industry average.  Independent bank consultant Michael Moebs declared that WFC "is a master at this" and that "no other bank can touch them."

But the costs were considerable.  To meet quotas, the article reported that employees have opened unneeded accounts for customers, ordered credit cards without customers' permission and forged client signatures on paperwork. Some employees pleaded with family members to open ghost accounts.  One former branch manager related that if they fell short of their sales quotas, she and her colleagues "we were constantly told we would end up working at McDonald's."  Per another unfavorable anecdote, a different former branch manager claimed that she had discovered that employees had talked a homeless woman into opening six checking and savings accounts with fees totaling $39 a month; she subsequently helped the woman close all but one account, which was needed for direct deposit of her Social Security disability benefits.

"I'm not aware of any overbearing sales culture," chief financial officer Timothy Sloan was quoted as saying.  Mr. Sloan succeeded Mr. Stumpf as CEO last October.

The story burst on the national scene on September 8, 2016 with the announcement that the Wells Fargo Bank subsidiary of WFC reached a settlement with the Consumer Financial Protection Bureau, the Office of the Comptroller of the Currency, and the Office of the Los Angeles City Attorney, regarding allegations that "some of its retail customers received products and services they did not request."  The company stated that the amount of the settlements, which were fully accrued for at June 30, 2016, totaled $185 million, plus $5 million in customer remediation.  The bank acknowledged that since 2011 its employees opened as many as 1.5 million bank accounts and 565,000 credit card accounts that may not have been authorized by customers.

Days later, WFC's Independent Directors announced "initial steps" intended to promote accountability at the Company. Mr. Stumpf forfeited all of his outstanding unvested equity awards, valued at approximately $41 million based on the closing share price at the time, did not recieve a bonus for 2016 or his salary during the pendency of the investigation.  Ms. Tolstedt left the Company, forfeited all of her outstanding unvested equity awards, valued at approximately $19 million based on the closing share price that day, did not receive a bonus for 2016 and will not be paid severance or receive any retirement enhancements in connection with her separation from the Company.  She also agreed that she would not exercise her outstanding options during the pendency of the investigation.

Earlier this month, WFC's Human Resources Committee and its Independent Directors determined that the finding made by the Board last September that cause existed for terminating Tolstedt’s employment was appropriate, resulting in the forfeiture of her outstanding stock options awards with a current intrinsic value of approximately $47.3 million.  Adding the aforementioned $19 million, Ms.Tolstedt is out some $66 million to make amends for her role in the debacle.  On top of the $41 million of unvested equity awards forfeited last fall was another $47 million worth this month bringing Mr. Stumpf's total loss to $88 million.  One might say the buck stopped there.

"None of this can make either Mr. Stumpf and Ms. Tolstedt happy," mused the New York Times.  But by focusing on just two villains, the Times contends, the clawbacks divert attention from the full extent of the bank's activities.  More than 5,300 generally low-level Wells Fargo employees were fired during the scandal, implying that there were numerous enablers in the bank's chain of command beyond Mr. Stump, Ms. Tolstedt and four lower-level executives, who were fired in February.

Contrary to its talk about restoring trust and its reputation, the NYT editorial argues, Wells Fargo moved quickly to slam the courthouse door in the face of consumers wronged in the scandal.  When some of the customers tried to sue over the sham accounts, the bank blocked the cases by invoking mandatory arbitration clauses signed by the customers when they opened accounts at Wells Fargo to cover fraudulent accounts opened in their names without their consent. That the court accepted the argument did not sway the Times, to whom it merely shows Wells Fargo's willingness to hide behind an unjust arbitration system even as it professes to take responsibility of its actions.  To date, Wells Fargo has refunded $3.2 million in fees that were charged on sham accounts.

According to the editorial, private lawsuits, if allowed, could go a long way to ensuring such redress is in line with the harm done.  Drawing parallels with the 2008 financial crisis, the editorial then prods prosecutors at the Justice Department and the Securities and Exchange Commission to pursue individual wrongdoers, civilly or criminally, as the situation warrants, finally concluding that unless and until clawbacks are combined with private litigation and public prosecutions, misconduct and negligence will endure.

Unsurprisingly, despite its determined efforts to put the horse back in the barn by tracing the roots of the problem, shuffling management and taking punitive action, the board of directors does not come off unscathed. Proxy advisor Glass Lewis recommends to its institutional investor clients that six of Wells Fargo's fifteen board members, including all of those who served on the bank's risk committee, should not be re-elected.  Rival firm Institutional Shareholder Services calls for all 12 of the bank's incumbent directors to be removed, citing signs of "a sustained breakdown of risk oversight on the part of the board," a recommendation deemed "extreme and unprecedented" by the WFC board.

Officials of two large California public retirement systems, CalPERS and CalSTRS, announced their decisions to vote against nine of 15 Wells Fargo & Co directors up for election at the bank's annual meeting next week, citing the bank's phony-account scandal.

Perhaps it is premature to conclude that this affair is finally pulling in the station.  Case studies and maybe even a book or two will be written about this story at the crossroads of business management, corporate governance and crisis management.  Meantime, it seems only fitting that Warren Buffett, whose Berkshire Hathaway (BRK.A) is WFC's largest shareholder, has the last words on the subject, at least for now.  The lesson from former WFC CEO John Stumpf's handling of the situation is that: "One should face up to a problem fast.  ‘Get it right, get it fast, get it over.’"  He also shared the advice of his long-time business partner and Berkshire Vice Chairman Charlie Munger, who says 'an ounce of prevention is worth a ton of cure.'

Robert Stead