A Sanctify Financial Technologies Case Study – Wells Fargo fake accounts scandal
Wells Fargo, the fake accounts scandal
This case study is written to showcase a use case for Sanctify ESG web app as a tool for early detection of ESG risks in a company’s behavior. In this example, we will be looking closer at the case of Wells Fargo and the major fake accounts scandal that burst in 2016 and affected the company for years to come. For the purpose of this paper, all research was made using the Sanctify ESG web app and no other means of sourcing data.
The first part of this paper will recap what happened and how one could see a scandal coming before it actually happened, the first part will then end with a recap of the consequences of the scandal for the company and its shareholders. The final part of this white paper is basically a reference list to the material found in the web app and a picture of the time series of the sentiment.
What happened?
Already in 2013, rumors circulated that Wells Fargo employees in Southern California were engaging in aggressive tactics to meet their daily cross-selling targets. Some outside observers alleged that the bank’s practice of setting daily sales targets put excessive pressure on employees. Branch managers were assigned quotas for the number and types of products sold. If the branch did not meet its targets, the shortfall was added to the next day’s goals. Branch employees were provided financial incentives to meet cross-sell and customer-service targets, with personal bankers receiving bonuses up to 15 to 20 percent of their salary and tellers receiving up to 3 percent.
A lawsuit by city attorney Michael Feuer was filed on Monday 4th May 2015 on behalf of the people of California, and an additional lawsuit was filed a week later by former customer Shahriar, accusing the bank of high-pressure sales tactics that led to deceiving and defrauding him and other customers. The suit alleges violations of the Fair Credit Reporting Act and California’s unfair competition and consumer protection laws.
After the allegations were made public, the stock price entered a negative trend for the coming 6 months, losing 23.6% of its market value.
On Oct. 12, 2016, shortly after markets closed, word came out that John G. Stumpf, CEO, was fired. The bank said he would be retired as CEO and Chairman effective immediately. Tim Sloan, an employee of the company for 29 years, was appointed CEO and Stephen Sanger took over as board chairman. The bank announced that it would be ending its controversial sales goals program that was at the centre of the allegations effective Jan. 1, 2017 and later confirmed it had fired 5,300 employees in total related to the fake account scandal.
Was it foreseeable?
For 2014, Wells Fargo announced record sales of USD 84 billion and in October the same year, Fitch Ratings rated Wells Fargo as “AA-: stable” and forecast “improvement in Wells Fargo’s operational performance in the next 12 to 18 months.” With the quote “Cross-selling was key to Wells Fargo’s outperformance of its peers.”
Sanctify ESG could point out the large risk for investors in the early stages of the case around Wells Fargo’s account activities. This is thanks to our tools’ ability to aggregate a combined view of reporting’s by leveraging its wide coverage of local, niche and global news publications. The concluding results were then, in large parts, based on the systematic risk incidents related to the bank’s mistreatment of clients, misleading advertising, corruption, and fraud.
Sanctify could during the early stages of the case indicate multiple reports of fraudulent behavior due to Wells Fargo’s unrealistic targets for cross-selling imposed on their employees, which has been well known as their core strength and main growth driver as a firm. We could also detect major red flags regarding the agreements their customers had to sign to open accounts with them. More precisely, on October 13th 2013, Sanctify ESG could pick up news regarding that approximately 30 employees were fired for opening new accounts and issuing debit or credit cards without customer knowledge, in some cases by forging signatures, to meet the bank’s sales goals, as reported by the Los Angeles Times.
And on May 5th 2015, ABC news reported that Los Angeles city attorney Michael Feuer had filed a lawsuit against Wells Fargo and accused them for illegal bank tactics such as opening accounts in customers names without their knowledge in order to reach their sales quotas. A lawsuit was then filed a week later by a former customer, mirroring the one prior, accusing the bank for “high-pressure sales that led to deceiving and defrauding him and other customers”. This news was also picked up by Sanctify ESG. The app also detected news from December 5th 2015, reporting that customers who opened a checking account with Wells Fargo Bank had to sign an agreement that prevented them from suing the company – even over allegedly fraudulent accounts created without their knowledge.
On top of this, Sanctify ESG finds and flags 8 articles between 2013 and 2015 containing major concerns regarding fraudulent behaviour inside the bank’s branches. They paint the picture of a bank with non-existent policies and routines to verify account holders identities for deposits or withdrawals and employees taking advantage of this to meet their targets. The collective picture from the flagged articles indicated systematic bad behaviour and that the root of the problem lied in the sales quotas system. The reoccurrence of the events also pointed to fail of controlling this behaviour and subsequent risks of a major scandal in the making.
Wells Fargo was at the time scoring –20 for Sanctify’s governance score, and –10 in overall ESG score – which clearly indicate risk factors!
Consequences for Wells Fargo
As aftermath of the large fraud case, the bank suffered multiple dragging penalties in form of fines and settlements and has experienced increased scrutiny ever since.
On September 8th 2016, the bank reached a $190 million settlement with U.S. authorities over its employees opening or applying for more than 2 million bank accounts or credit cards in customers’ names without their permission to hit their internal sales targets between May 2011 and July 2015. On September 14th 2016, it was announced that the FBI and federal prosecutors in New York and California were probing the bank over the alleged misconduct, a development that opened the possibility of criminal charges. Only two days later, the House of Representative’s Financial Services Committee opened an investigation into the bank’s alleged misconduct as well as “the role of Washington regulators in monitoring and investigating” the alleged misconduct.
A lawsuit was filed on September 22nd 2016 in the California Superior Court by former employees Alexander Polonsky and Brian Zaghi, seeking to represent employees or former employees who worked for the bank during the last 10 years and who, the suit alleges, were “either demoted, forced to resign, or terminated,” for not meeting “impossible” quotas the bank set as goals for employees to open accounts on behalf of customers.
On September 26th 2016, once the darling of the banking world, Wells Fargo stock hit a two-and-a-half-year low and lost its title as America’s most valuable bank to JPMorgan Chase.
October 19th 2016, California Attorney General Kamala Harris launched a criminal investigation into whether Wells Fargo employees committed false impersonation and identity theft as part of the accounts scandal and on November 3, 2016 The bank disclosed in regulatory filings that the U.S. Securities and Exchange Commission (SEC) was investigating its sales practices.
Wells Fargo incurred additional total costs of more than $1.2 billion due to refunds and lawsuits; $6.1 million in customer refunds due to inappropriate fees and charges; $142 million in customer compensation due to a class-action settlement; $480 million settlement for a shareholder class-action lawsuit; $575 million 50-state Attorney Generals (AG) settlement for a combination of opening unauthorized accounts and charging for unnecessary auto insurance and mortgage fees. In an announcement in December 2018 surrounding the AG settlement, it indicated that Wells Fargo had already paid $2.3 billion in settlements and consent orders, meaning its $575 million settlement brought the total to nearly $3 billion.
After this, the bank has been experiencing further issues with regulators as they have been under strict scrutiny due to their past behaviour. On February 2, 2018, the FED forcefully barred Wells Fargo from growing its nearly $2 trillion-asset base any further until the company fixed its internal problems to the satisfaction of the Federal Reserve.
The view from Sanctify ESG web app
A – Oct 10th 2012 https://www.rollingstone.com/politics/politics-news/u-s-sues-wells-fargo-yet-another-bailed-out-bank-accused-of-fraud-242163/
”Wells Fargo is being sued by the State for vast fraud in the mortgage markets. The U.S. Attorney in the Southern District of New York, Preet Bharara, yesterday brought a case against WF seeking “hundreds of millions of dollars” in damages for what it says is a decade of fraudulent behavior, in which WF wrongfully certified more than 100,000 mortgages as being eligible for federal mortgage insurance. Basically, Wells Fargo screwed the FHA and HUD by mass-approving loans without regard for whether they were defective or not.”
B – Sep 6th 2013 https://www.nbcmiami.com/news/local/south-florida-check-fraud-victim-suing-wells-fargo-claims-bank-has-no-system-to-track-who-cashes-checks/1927509/
“Fabelo said when he asked the bank to give him the thousands stolen back they wouldn’t. So now he’s suing in federal court alleging that “Wells Fargo has no system, policy, and/or procedure in place to verify the depositor/account holder, was entitled to cash the checks.”
C – Oct 3rd 2013 https://www.latimes.com/business/la-xpm-2013-oct-03-la-fi-mo-wells-fargo-workers-fired-20131003-story.html
”Wells Fargo & Co. has fired about 30 branch employees in the Los Angeles region who the bank said had opened accounts that were never used and attempted to manipulate customer-satisfaction surveys.
The employees were trying to take shortcuts to meet bank goals for sales and customer satisfaction, Kishner said. Wells Fargo, based in San Francisco, employs about 6,500 people at branches in its L.A. Metro region, he said. Of those, fewer than half of 1% were fired.”
D – Nov 6th 2013 https://www.nbcnews.com/businessmain/wells-fargo-settles-mortgage-bond-claims-335m-government-8c11545206
“Wells Fargo & Co. said on Wednesday that it had reached a $335 million settlement with a U.S. government agency over claims that it had misled certain investors in the bank’s mortgage bonds”
May 19th 2014 https://www.fool.com/investing/general/2014/05/19/1-reason-wells-fargo-co-will-remain-the-biggest-an.aspx
“Unlike most of its peers, Wells Fargo’s 2013 earnings were actually higher than during the pre-financial crisis peak.
Much of this is due to Wells’ ability and desire to cross-sell its services to clients – that is, to convince their customers to open multiple accounts, take out loans, and use the banks other products and services. Why is cross-selling so important, and how much more room for growth does Wells Fargo really have?
Why is cross-selling so important and effective?
Cross-selling is one of the most cost-effective ways for a bank to add to its deposit base, loan portfolio, and other businesses. According to a recent report by Fiserv, it costs banks 8-10 times more to gain a new customer than it does to sell a new product to an existing customer.
The more products each customer has with a bank, the longer the bank retains those customers. A customer who has a single product, like a checking account, with a bank stays for about a year and a half, but the average customer with three products will stay for nearly seven years. Customer retention is one of the keys to stability in banks, and cross-selling is the best way to do it.
Wells Fargo still has room for growth
Although they are universally recognized as the masters of cross-selling; Wells Fargo still has tremendous room to grow.”
E – Jul 31st 2014 https://www.news4jax.com/news/2014/07/31/former-wells-fargo-teller-pleads-guilty-to-bank-fraud/
“Drake, a Wells Fargo Bank employee, was identified as the teller who had handled every fraudulent withdrawal. The investigation revealed that the victim was not present in the bank branch on the days when the withdrawals took place, including days when withdrawals were made by counter withdrawal slips.
U.S. Secret Service agents later interviewed Drake about the fraudulent bank withdrawals. Drake said that while using the victim’s bank account number, she made multiple unauthorized withdrawals from the victim’s bank account.”
F – Feb 18th 2015 https://www.local10.com/news/2015/02/18/south-florida-couple-claims-wells-fargo-engaged-in-fraud/
”The Giourgas’ case is now in federal court. The family’s attorney is accusing Wells Fargo of misleading the couple with broken promises, acting maliciously, and breach of contract. They are seeking injunctive relief to protect the ownership and title of their home and $75,000 in damages.
“I just don’t think it’s fair, what they’re doing,” Giougas said. “I know there are other people out there that have stories similar to mine.”
According to Giourgas’ suit, “Wells Fargo, advertised to Plaintiffs a loan modification as an opportunity for homeowners struggling with their mortgage payments to become current, avoid foreclosure and save their homes. The agreement was designed to induce Plaintiffs into making thousands of dollars of additional payments that Defendants, Wells Fargo, could not otherwise collect prior to a final deficiency judgment.”
– Negative. Not specifically surrounding the accounts though.
May 14, 2015, Wells Fargo Again Accused of Opening Unwanted Accounts
Former Wells Fargo customer Shahriar Jabbari filed a lawsuit against the bank Wednesday accusing it of high-pressure sales that led to deceiving and defrauding him and other customers. The suit alleges violations of the Fair Credit Reporting Act and California’s unfair competition and consumer protection laws.
Jabbari, of Campbell, Calif., seeks class-action certification for the lawsuit. The complaint mirrors accusations in another lawsuit filed last week by Los Angeles (Calif.) City Attorney Michael Feuer.
Both lawsuits allege that the bank’s pressure tactics amounted to a “fee-generating machine” that encouraged employees to misuse customer information to open unwanted accounts. Some customers never realized they had the accounts until collection agencies began pursuing fees, according to the suit filed last week, that also alleges the bank hid fees, refused to close accounts on request and forged signatures.
G – Jun 1st 2015 https://www.wsoctv.com/news/local/man-charged-corrupting-wells-fargo-employees-fraud/52145842/
Wells Fargo stock at $57.94 (7/12/2015) and continues downwards trend to $44.28 (9/26/2016)
H – Aug 21st 2015 https://www.bizjournals.com/atlanta/news/2015/08/21/feds-bust-wells-fargo-suntrust-and-pnc-bank.html
“Through this scheme, Guy Vincent Taylor, Jeoffrey Jenkins, Vaughn Chambers, and Gary Sullivan, successfully caused the deposit of hundreds of fraudulently-obtained tax refunds into fraudulently-opened bank accounts,” the indictment says. They then used the bank accounts to buy money orders which were cashed at check-cashing businesses around Atlanta.
THE SCHEME OPERATED BETWEEN FEBRUARY 2013 AND MARCH 2014, THE FEDS SAY.
To read the full indictment, click here.”
I – Dec 5th 2015 https://www.latimes.com/business/la-fi-wells-fargo-arbitration-20151205-story.html
” Open a checking account at Wells Fargo Bank and you’ll have to sign an agreement that says you can’t sue the company — that any disputes have to go to a private arbitrator, not to court.
Kade’s client and other customers have alleged bank employees used personal information gleaned from their original accounts to open additional savings, Christmas club and even business checking accounts, costing them unnecessary fees in the process.
The bank also is facing a lawsuit from L.A. City Atty. Mike Feuer over practices detailed in the Times investigation, but the arbitration clauses are not an issue in that action, which alleges improper use of customer data. The bank’s practices are also reportedly being investigated by federal regulators.
Wells Fargo has blamed a handful of rogue employees it has since fired or disciplined for the problems, and declined to comment on the use of arbitration in cases involving the allegedly bogus accounts. However, the bank defended its general practice. “Terms and conditions are provided to customers when they open a new product or service so that customers can understand what they have opened and their relationship with the bank,” the statement read.”
Wells Fargo stock falls from $54.82 (10/31/2016) to $44.31 (2/27/2017)
Additional news articles – after the scandal became public
Sep 8th 2016 Sep https://www.nytimes.com/2016/09/09/business/dealbook/wells-fargo-fined-for-years-of-harm-to-customers.html
Sep 8th 2016 https://abcnews.go.com/Business/timeline-wells-fargo-accounts-scandal/story?id=42231128
Feb 21st 2017 (Could be interpreted differently) https://money.cnn.com/2017/02/21/news/companies/wells-fargo-fires-employees/index.html
The company announced Tuesday that it fired four employees who either work or used to work in that community banking division that’s at the center of last year’s scandal.
Feb 28th 2018 https://www.nytimes.com/2018/02/28/business/wells-fargo-fraud-closing-accounts.html
“Matthew Valles, a former fraud investigator for Wells Fargo, said the bank’s response to reports of some fraudulent activity was to simply close customers’ accounts instead of investigating what had happened.”
