Wells Fargo CEO John Stumpf may come to regret believing his own PR. The bank chief backed himself into a corner by insisting that the creation of over 2 million of bogus customer accounts over a four year period was the doing of a whole posse of rogue employees, no one had any incentives to do bad stuff, Wells has a perfectly upstanding corporate culture and senior management had no idea what these bad apples were up to. And Stumpf was so confident that this scandal would blow over that he managed to let the executive who supervised the operation in question retire while the settlement talks with regulators and the Los Angeles City Attorney were at an advanced stage, with her nearly $125 million payday intact.
But now the Department of Justice, and critically, the elite Southern District of New York (along with the Northern District of California) are in the early stages of an investigation. As the Wall Street Journal, which broke the story, reported:
While in early stages, the investigation by federal prosecutors is focusing on whether someone senior within the bank directed employees to falsify documents in conjunction with the opening of accounts and products without consumers’ knowledge or authorization.
Prosecutors are also focusing on whether there was willful blindness to sales practices on the part of executives at the bank, these people said.
The fees generated by this brazen fraud were chicken feed, a mere $2.4 million, which means that was not the point of this exercise. The object was to meet targets so that the bank show continued growth in the number of accounts and in the average number of products sold per account, both of which were metrics the bank touted with analysts. In other words, the targets were the mechanism to drive staff to show numbers to analysts to keep Wells’ growth story alive and well. And they delivered! Too bad the numbers were sometimes lacking in substance.
In other words, senior management benefitted directly from this chicanery, far more than branch staff did (although keeping from being fired for not meeting your goals is plenty motivating).
The story that Stumpf is peddling to the media, and presumably to the DoJ and the Senate Banking Committee, is that employees were gaming the system. Adam Davidson, the Lord Haw-Haw of the 1%, dutifully chimes in to claim that it’s impossible “for a large bank to monitor every one of its quarter million employees,” when in fact it was doing just that with the staff in question as far as their sales metrics were concerned.
The reason this scandal has gotten traction is that it is obvious that a supposedly well run bank could not miss the creation of millions of phony accounts, particularly when many had clearly bogus Wells Fargo e-mail addresses like firstname.lastname@example.org, email@example.com, or firstname.lastname@example.org. Reader Clive describes how banks, even back to the stone ages of paper-based systems, had checks to catch instances of employees selling customers bank services they hadn’t intended to buy. Hoisted from comments (emphasis original):
Opening up fake products to claim a sale is a trick which goes back to when a TBTF tried to sell Noah Ark insurance. When I started in retail at a TBTF nearly 30 years ago, senior management (as a minimum the VP or equivalent in charge of a geographical area) would get reporting from the internal compliance or risk function about the number of accounts opened which had low turnover. A low turnover account is a serious red flag for either mis-selling or even (as was the case that has been exposed at Wells’) the salesforce boosting their figures by robo-applications. It was easy enough (and sufficiently widespread there were operating procedure to check on it) in the days of paper applications. You’d just, during the course of a sales interview, present the customer with another thing to sign, usually at the end when they wanted to leave, in a flurry of other paperwork that needed them to put pen to paper.
With digital fulfilment of many retail products in branch (sorry, I should say “store” if we’re talking about Wells Fargo shouldn’t I) it is even easier. You walk the customer through a myriad of screens, let’s say for a loan application. The CRM [customer relationship management] system will already have been spamming the bank employee and the customer to sell them anything and everything else they’re eligible for. If, for example, they are pre-approved by their FICO score for a credit card product with a line of credit built in already, it’s often enough to just tick a box on screen to complete that product sale as part of the sales process for the loan. At the end, the printer will spew out a load of paper for the Terms and Conditions, the product details and (if required) a space for a signature. If a (as in my illustration) credit card product has been added, and the bank employee doesn’t tell the customer then it is highly likely the customer won’t be aware. If they notice later, maybe when they’re back home filing the documentation, they may think to themselves “oh, that’s a mistake, I didn’t ask for that” and make a mental note to contact the bank to tell them and maybe cancel the product. They’ll more than likely forget or have better things to do with their time.
Even if they do make that call, they’ll get put through to the “customer retention” team who will try their level best to talk them out of cancelling the product.
Of course, it all comes out in the wash eventually — the customer didn’t want the product in the first place and if they didn’t want it, they almost certainly won’t use it. This will result in a low (or no) activity account.
Simplistic attempts are generally made in the bank’s operations to prevent this kind of sales practice. The most common is that if within in a certain timeframe (a month or 6 weeks is usual) there hasn’t been a transaction on the account or the card hasn’t been activated, the account will be closed and this low activity account sale will be clawed back from the salesforce. But of course, this is widely known in the bank employees, so the standard ruse is to diarise a follow-up customer service call, tell the customer some cock-and-bull story about how the bank employee has noticed a potential security issue with one of their cards and could they phone the security team just to confirm the card is still in their possession. Or another variation is to tell the customer If they want to call into the branch, they can sort the “problem” out, while in the branch they get the customer to phone the activation line, then “check” everything is okay by doing a cash advance at the counter on the card (they’ll even refund the fee, how kind!).
These are just some tricks, readers can get the gist of how it works and probably even think of their own alternatives.
But there’s still a trail of evidence which the bank should be following — accounts which are very light in transactions after 6 months or dormant in a year. These are always investigated, not for the customer’s benefit but because it costs the bank money to maintain the account. They are invariably force-closed due to low activity (this will be in the product’s standard Terms and Conditions, to give the bank the ability to do this). This management information is collated and picked over endlessly by the P&L accountants. Too many customers attracted to the brand, sold product to, but who then walk away are value-destructive. Senior management (one part of the senior management team, anyway) are all over this metric like a rash.
Of course, another “arm” of senior management — those who’s bonus is simply determined by sales volume, not long-term profitability — don’t care and unless the one at the top (and I do mean the top, the CEO is the only one who can wield the big stick in this sort of management turf war) has his or her finger on the pulse and determines to stop the rot, the rot will go on and get rottener and rottner until the stench (the stinkyness being the Average Revenue Per Customer declines) becomes too obvious to ignore.
Notice the key issues here:
1. Because maintaining accounts costs money, banks close accounts with low activity. In other words, if industry-standard procedures were in place, the bogus accounts at Wells should have been flushed out pretty quickly. That in turn would result over time in the staff members and branch managers who opened up too many dodgy accounts getting dinged. While that may have happened at Wells (as in it is conceivably true that they fired 5,300 employees for opening fake accounts), this was at a scale that it was an ongoing issue that it was never cleaned up because it benefitted management. In other words, the individual and branch targets were so high that they required cheating to meet them, as reports from ex employees indicate. But rather than lower the targets to something achievable, Wells instead churned employees who did what they felt they had to to keep their jobs, and kept the bezzle of the fake accounts going in their reports and analyst calls.
2. Retail banking at large institutions is run through metrics, all the way down to the employee level. It is inconceivable that senior management didn’t see the increase in low/no activity to total accounts while this con was underway. That means they were actively complicit.
The Department of Justice should not find it all that hard to establish senior management culpability if they are serious about this case. The SEC and DoJ have been reluctant to use Sarbanes-Oxley-based theories of action, but this would seem to be an ideal situation, since both the CEO and CFO repeatedly certified the accuracy of financial reports and the adequacy of controls. Sarbanes-Oxley was drafted so as to facilitate cases that were launched as civil actions to easy be flipped to criminal cases if discovery unearths serious enough dirt. I hope the lawyers in the commentariat will discuss what other angles the DoJ might pursue, in addition to securities fraud.
However, given the proximity to the elections, Wells management would normally regard time as its friend and will do everything in its power to drag the investigation out, on the assumption that changes in personnel in the Administration and the DoJ will work in their favor. But investors and the board may not tolerate having the sword of Damocles of a possible criminal case hanging over the bank for long. Stay tuned.
“although keeping from being fired for not meeting your goals is plenty motivating” this is another fascinating example of upstair-downstair differences we’re starting to see more and more.
When you’re downstairs, “not meeting your goals” means you get fired.
When you’re upstairs, “not meeting your goals” means you get smaller bonus.
“Not getting caught acting like an embezzler [or a stagecoach bandit, eh Wells Fargo?] in front of the entire nation” is one of those C-suite goals that may be just shy of being met. Looks like it’s time for another restructuring…oh, wait. At least the bazillion Federal wire fraud counts, prima facie, will mean serious consequences for…um…at least the BSA/AML’s Suspicious Activity Reports really broke this wide-o…really? Not a one?
Is there any chance that they’ll actually go after senior bank officers on this one? Let’s just hope that Comey isn’t involved in this investigation.
The obvious person to string up is someone we’ve mentioned in earlier posts, Carrie Tolstedt, the head of community banking during the entire period of the fraud. She curiously retired at the end of July, which could either mean the regulators and Los Angeles City Attorney got her head (but not nay of her $125 million vested/deferred comp payout) but Wells negotiated that this be kept under wraps, or more likely, that she decided to get out while the getting was good. Making Tolstedt the most senior target would mean that no current exec at Wells would suffer.
If that’s the case, then she would have to be willing to “take one for the team,” wouldn’t she? I think it was suggested elsewhere on this site that she might be able to tie this to senior executives at the bank. If so, then what is her incentive to play ball, if the feds come after her? My guess is, whatever penalties she faces will be nothing more than a slap on the wrist, which will keep most of her fortune intact.
Someone should go to jail for this, but it won’t happen because the Justice Department under Obama has shown a remarkable aversion to locking up white collar criminals. Unlike a lot of street gangs, no banker will take the rap to protect higher-ups, if jail is threatened. This investigation is nothing more than a publicity exercise, because they have to show that something is being done.
Of course, I could be wrong. The optimist in me is hopeful that the hammer will fall on senior execs at Wells Fargo. We’ll see.
That’s my take too. It’s all kayfabe. Lynch won’t go after the criminals any harder than Holder did, which is to say not at all. The DOJ is a partner to the fraudulent bankers, not a check on them. I’d have though we’d all have that figured out by now.
While normally I would agree with your 1000% that Lynch and the DoJ will piss and moan about an investigation….the factor that is NOT being mentioned in the discussion is that Wells DOESN’T have the teflon ‘get out of jail’ free card that all the other money center banks do. In many ways it is the political outsider at the party.
For example…how many Wells Fargo alumni do you see in gov’t? Compare that to all the other money center banks and you will get an idea of the position of weakness that Wells finds itself in. Its expertise is retail banking….not investment banking…and it has managed to keep up the growth through acquisition and expanding its retail operations (partially through overly aggressive (and illegal on occasion)) sales tactics. Wells upset the entire financial community (and specifically gov’t bureaucracy and FED officials) when they bought Wachovia during the 2008 financial crisis despite Hank Paulson trying to use Wachovia to prop up the failing Citigroup. The New York financial crowd has never forgotten or forgiven Wells for standing up to the financial powers that be and taking Wachovia’s assets away from the Wall Street mafia. (I personally think Wells drank from a poisoned goblet by acquiring Wachovia but it has paid off in this environment of TBTF…)
I spent over a decade at Wells Fargo (laid off 5 years ago btw so I’m no major fanboy)…and while I would freely admit that there are some bad apples there (finance attracts alot of flies)…I would stand up Wells employees and their business culture up against ALL of the other major money center banks. $2.5M in extra fees charged to customers on 2 million unauthorized/fraudulent products sold over an 8 year period AND the bank can show it fired 5,300 people for it BEFORE getting their dirty laundry aired in public?? Frankly that should probably be considered pretty good compliance. (I’m not excusing the fraud…btw…but 100% compliance is impossible.) Goldman and JP Morgan Chase cheat that much out of clients in a period of 15 secs…based on the implications I take from their SEC and DoJ settlements over the past year….and have directly fired HOW MANY for fraudulent paperwork or representation of deals to other investors?
Regardless….the reason that Wells is getting the media raking over the coals is because they have been the most highly reputable bank that all their competitors hate and envy…and its easy and fun to drag down the guy who’s been doing the right thing (most of the time)….than to raise the game against the major criminals.
PS – I do think Stumpf needs to offer to resign….but if I were on the BoD I wouldn’t accept it. I think the Consumer Banking gal who retired will get part of her bonus clawed back…but certainly not all… That said….her (and other executives’ ) compensation IS obscene.
Interesting history. I’m not sure what to make of your comment. Are you saying:
1. Wells is more at risk of prosecution than the TBTF’s because it isn’t as large and well connected?
2. People shouldn’t be too hard on Wells because they aren’t as bad as the other TBTFs?
imo, the banks have gotten away with victim blaming for years. Wells is getting media attention because it’s impossible to pass off this fraud as the fault of the victims.
My comment is
1) that due to lack of political patronage….YES…Wells Fargo is much more likely to be prosecuted that the other money center banks.
2) that the behavior which Wells Fargo is being criticized for in this article (i.e. opening accounts and providing new products to customers) IS EXTREMELY SMALL POTATOES compared to other abuses and actually reflects pretty good compliance since Wells actually caught it internally and fired the people who got caught doing it. (We can argue the merits of the high pressure sales tactics and culture separately from the actual fraudulent actions.)
These abuses include the very one that Yves mentions in a subsequent post: rampant mortgage foreclosure documentation fraud…which is still ongoing in my opinion. Since Wells is the largest player…it is undoubtedly one of the guiltiest players there courtesy of the Golden State and Wachovia (and other subsequent) acquisitions which changed the old style retail banking culture at Wells to something more attuned (but not fully attuned) to Wall Street banks.
I’m not defending Wells as lily white (there are no banks I have found which are not guilty of taking advantage of customers when they can….law or no)….and I total agree with Yves about the mortgage fraud problem (at Wells and all other money center banks).
However the perception (rightly or wrongly) has been that Wells is the most reputable player….and everyone below loves to knock the king off their throne.
Frankly….if Wells were being raked over the coals for their mortgage foreclosure practices….I wouldn’t be posting…..as they would deserve to be thrown to the wolves for it….but the media is instead raking Wells over the coals for actually taking the correct actions for the situation that occurred (admitting guilt, repaying the defrauded customers, paying a much higher penalty than the direct damages caused, AND getting rid of the sales incentives that led to the abusive behavior.)
Compare that to any of the other settlements you have read about concerning the Wall Street money center banks over the past 8 years….
Wells employees opened millions of fake accounts in the names of real customers to meet sales goals. Sales goals that were unrealistic, but served to up metrics that benefited the c-suite guys. And management knew nothing about this? Doesn’t pass the laugh test. Maybe Wells is too big to manage properly. Maybe Wells needs to be broken up into more manageable sized spin-offs. Maybe a few c-suite execs need to face prosecution. As a deterrent to others. After all, the bad incentives are still in place at Wells.
The suggestion that Wells wasn’t the worst so should get a pass isn’t a legal standard, as far as I know.
I don’t disagree that sales goals may have been unrealistic….but that isn’t a criminal offense. Its the individual performing the fraud that are guilty….not the ones that set up the environment in which the EMPLOYEE FEELS (!!) they were ‘driven’ to break the law….which is where we seem to disagree. NOTHING DROVE them to break the law but their OWN PERSONAL INCENTIVES…not management’s incentives. Employees who broke the law felt they could do so and not ultimately face the consequences of it…or they would have quit.
As Dumbledore stated in Harry Potter….individuals have the choice on whether to do what is right or what is easy. Quitting a job where you feel you are pushed to break the law to meet their monthly performance requirements isn’t EASY….but it’s the RIGHT thing to do. As a result of enough people quitting, the employer EVENTUALLY gets the message (via lost profits based on high employee turnover) to change their expectations….OR THEY choose to eat the turnover costs. Pushback is a normal and welcome feedback mechanism especially in the job market. (This whole media episode is a good example of the pushback and costs it can ultimately impose….as Wells will pay heavily in lost customers over the next month….including my accounts)
And I’m not suggesting Wells get a PASS….I’m saying that the media is actively trying to make a mountain out of THIS ISSUE…while ACTIVELY and DELIBERATELY ignoring the continuing (going on a decade) erupting volcano of fraud in mortgage banking for example…. a typical diversionary tactic by current mainstream media to hide the most important problems no one wants to address.
Yes….what Wells employees did was bad…and management needs to realize that (and why employees felt they HAD to do it)….so some coverage is deserved…but Congressional hearings? Sigh…..someone needs to prioritize issues facing the country better.
Who knows….maybe the mainstream media will do its job for once and uncover proof that management knew its requirements was resulting in fraud of its customers and actively encouraged employees to engage in fraud. (Something I highly doubt given the training programs designed to discourage this…) At that point…I may eat my words.
BTW – I happen to personally agree with you that ALL the money center banks (and the regionals) should be broken up…including Wells….as they ARE too big to effectively manage with any real accountability.
I call bullshit. The reason Wells appeared better than the other TBTF banks is retail banking is more tightly regulated than capital markets activities, where the rules assume customers are better able to watch out for themselves. Their business mix gives them less opportunity to misbehave.
You must not have worked in the mortgage area. Wells’ conduct was worse than that of other banks (foreclosure fraud abuses) because they were more systematic about it and had far fewer excuses (i.e., acquiring banks that had missing records). For instance, we had whistleblowers tell us how banks were cheating on the Independent Foreclosure Review. BofA went through the motions (surprisingly elaborately) and then had higher level reviewers fudge the results which Wells basically lied flagrantly about their entire process.
I don’t disagree with you in the slightest regarding Wells behavior in the mortgage arena….please see my comment reply to flora above.
I appreciate your efforts to bring some reason to the industry.
This case, and others shows that most of top brass pay is mere rent extraction and the most proper adjective is OBSCENE. Obscene to their clients, their employees and the public in general.
Apparently the rent extracted from the general public in this scheme was small.
Assuming Wells does not install collection boxes in the lobbies for “Alms for Carrie”, the $125million pay package comes from the shareholder, of which Warren Buffett’s Berkshire Hathaway is a large one.
Will Buffett fight for clawback or simply go with the flow?.
Even if they did clawback as much of her pay as they could, she would still have made multiple millions of dollars. The clawback provisions are a joke, imo.
Question: Are stock awards like this from existing common shares, owned by WF… or are they newly created common shares that dilute the value of other common shares?
They’re effectively dilutive. The options aren’t bought in the open market then handed to the execs. Newly-minted shares are created for the purpose of allocating them as a bonus. So it looks as if there’s no up-front cost. Of course, each new share created increases the total pool of issued share capital so any EPS is automatically lowered.
In theory, if the execs’ interests are truly aligned to the rest of the stockholders’, it should be all good, the corporation gets to pay bonuses out of “free” money, everyone else benefits from either increased return on their investment and/or stock price increases.
Of course, as here, the execs were seemingly working a classic looting scam — setting a measure for triggering the bonus (cross-selling rates) which they could easily game (“sell or you’re fired” message to employees, who, shock-horror, then proceeded to do made-up sales, aforementioned execs didn’t then go looking for the problem and, amazingly, you’d-never-have-guessed, then failed to find it).
The whole measure which decided the level of the bonuses was phony. As a minimum, the shareholders in Wells Fargo should fire the compensation committee members for allowing it in the first place. A “sale” is worth diddly-squat if that sale doesn’t generate a profit (the amount you earn from that sale must exceed the Cost of Goods Sold (“COGS”)). The measure should have been profitability per product measured over something reasonably like the long-term (e.g. 5 to 10 years). This wouldn’t be perfect, but would be a lot better than the bonus scheme in Wells Fargo for the retail c-suite.
Using long-term profitability is also a good idea because it stops the other abuses such as cutting back on essential investment to flatter short-term results. It’s easy to goose apparent profitability by sweating the asset base. But you’re just storing up trouble and some expensive bills for later, those maintenance and asset-quality chickens always come home to roost eventually.
Buffet piffles on about such things endlessly in his hammed-up Berkshire Hathaway newsletter. He’s another one who, to quote what Yves said about Stumpf, has apparently been believing in his own PR.
Is that even possible, in practice? I seem to recall Stumpf ejecting uppity shareholders from a yearly meeting shortly after the GFC.
Thank you, Clive, for the kind of thorough response I was hoping for. I appreciate it very much.
Stock buybacks in advance of option exercise can keep the number of shares from increasing.
Of course, the money comes from the corporation’s shareholders, either from earnings being diverted into the buyback or the dilution by increasing the number of shares.
If they issue new stock, which is then handed to the employee for resale, this same stock could have been sold at the market and the proceeds invested in company R&D, plant, equipment.
During the internet bubble era, companies tried to avoid costing options, pitching them as costing them no cash.
The SEC and the FASB finally clamped down and required companies to not treat options as having no material effect on their corporations.
Thank you, John, for the great info. As with Clive’s response, this was exactly what I was hoping to learn.
The cost to the public in terms of time spent dealing with these fraudulent accounts and associated fees and the damage to individual credit history has not been quantified.
Steal $1 from a million people and the loss to any one person is low. You still stole a million dollars though.
It’s certainly enough to qualify for the felony of grand theft. And then of course there’s fraud.
It’s disappointing that the C-suite certification of controls and financials hasn’t been used more by prosecutors.
new accounts are a metric reported to Wall Street (presumably to analysts and in the body of their 10 K/Q)s;
new accounts were being fabricated; and
WF admitted to and settled these allegations.
Will Obama’s Justice Department do just enough (splashy headline backed up by spin and optics) to deflate the marginal Sanders voter’s angst by November? You bet.
Will a fine be extracted from the bank? No doubt.
Will the bank’s executives have to worry about their year-end bonuses? Nope.
Will an executive be indicted? I’m not holding my breath.
“I am shocked! Shocked to discover that there is FRAUD going in in this institution!”
“Your (campaign contribution/seven figure job) sir.”
show continued growth in the number of accounts and in the average number of products sold per account, both of which were metrics the bank touted with analysts
95% of management in corporate America is making The Numbers look pretty.
Like propaganda, the bogus numbers aren’t designed to fool critical examination but to give moral cowards an excuse not to think too much about them.
Executives and Wall Street anlaysts both pretend the numbers are real, and everyone who matters makes money.
The fact that this is WF doesn’t surprise me at all. A relative was the treasurer of a club with a WF account that was force-closed. As far as I know, there was no advance warning.
When I was in school my first year accounting prof told us that WF was the worst bank to do business with. He had so many horror stories from his clients.
I wonder about the notion that anyone could hope for a more friendly DoJ or Administration than what’s now in place. These are the same folks who, promising “Hope and Change”, proceeded to sit on their collective hands in the aftermath of one of the biggest financial frauds ever. That’s a fairly low bar, isn’t it?
“The Department of Justice should not find it all that hard to establish senior management culpability if they are serious about this case.”
I’ll be watching this case with great interest. Thanks for your reporting.
“both of which were metrics the bank touted with analysts. In other words, the targets were the mechanism to drive staff to show numbers to analysts to keep Wells’ growth story alive and well.”
Old metric: ROI -Return on Investment. A performance measure used to evaluate the efficiency of an investment or to compare the efficiency of a number of different investments.
New metric: ROT – Return on Treachery. A performance measure used by c-suite officers to evaluate the efficiency of a treachery or fraud, or to compare the efficiency of a number of different frauds.
Why not just do away with all the pretense … and refer to the above agency as ‘the Dept. of Grifting’ !
wouldn’t that be a more honest decription ?
Since when is theft and fraud not a crime? Since TBTF!
But I have a more serious question, one which I’ve had since this story broke. Does this actually fall under SOX? I see that Yves made reference to it and I trust her judgment. But my understanding is that SOX is more about the financials, and to an extent, internal control over them, than it is a culpability of all behaviors throughout the institution. (From a financials standpoint, this matter is fiscally immaterial, though not immaterial in terms of reputation and PR.)
For example, a WF branch employee punches a customer. Is the CEO culpable? Of course not, though WF itself could be sued. So where does the opening of fake accounts fall between this battery example and an misrepresentative Income Statement? Does SOX apply? Does the SEC have oversight over this sort of conduct?
(I’m squarely in the camp of those who believe Stumpf and everyone down knew about these practices. That’s a separate issue.)
As Yves noted earlier, it’s an internal control fraud. That is, the fake accounts were set up by overcoming normal internal controls – all of them, including management oversight controls. This falls squarely in the realm of SarbOx – as both the CEO and CFO must certify that internal controls both exist and are functioning – which they clearly were not in this case.
Both CEO and CFO are personally liable to ensure they have evaluated internal controls – that’s why they are required under SarbOx to certify them.
There’s a nuance: internal controls over financial reporting which includes disclosures made in their periodic SEC filings. Internal controls over compliance, for example, while vital, do not fall under SOX.
My belief is if new accounts were reported as a metric in their periodic filings, then there is a connection to SOX.
Thanks, Dean. I’m concerned that this issue isn’t as clear cut as divadab is making it out to be. I’m hoping Yves might chime in on this.
I have a colleague who has been a Sarbanes Oxley compliance expert at two TBTFs and some smaller financial concerns who begs to differ. There are two Sarbox certifications made by the CEO and CFO, one for the accuracy of financial information, the other over internal controls, as you acknowledge. The control issues include explicitly “expenditures and liabilities incurred for illegal purposes” and activities to boost income and “Fraudulently obtained revenue and assets
and/or avoidance of costs and expenses” that can result in reputational loss (see p. 76: https://www.protiviti.com/en-US/Documents/Resource-Guides/Protiviti_Section_404_FAQ_Guide.pdf). For a large bank, the internal controls certification also includes risk controls.
Perfect. Thanks, Yves.
Yves: I see the connection. But there is another nuance I’d like to raise: that of materiality. A control weakness did exist but the next step is to evaluate the weakness in terms of financial impact to the financial statements. I don’t know the dollars involved with respect to fees earned or dollars expended to obtain new accounts. I’d hazard a guess these dollars would not be material to Wells and therefore not a significant deficiency or a material weakness, merely a deficiency. Granted this is a narrow internal controls view of things.
Where a stronger control claim could be made in my opinion is in the weak control environment -one of the five COSO components evaluated for SOX- (tone at the top, incentives, code of ethics) and poor risk assessment practices -another component- not understanding what could go wrong with their incentives and mandates to create new accounts. In my opinion this is where the reputational and legal risk lay-leading to fines and penalties. I believe this connection is the strongest claim for a SOX line of inquiry.
Don’t get me wrong: I want to see a successful SOX prosecution. I just think focusing on the dollars involved (a narrow view of account fees earned and costs incurred) is not the angle because it’s not material. It’s broader and more meaningful to go after the true rot: the incentive driven culture, tone at the top, and the lack of imagination (or willful avoidance?) by not wondering “what could go wrong with this program?”
Another add: I will cede the point there is no materiality when it comes to illegal activities. However, all there is a right now is a settlement. There have been no convictions (yet…not holding my breath) so the ‘funds expended on illegal purposes’ would not appear to apply, especially since they bank admitted to no wrongdoing.
The bank did promise to change its sales culture as a result of its settlement. This is an admission the control environment (culture, tone, incentives) was flawed.
This is the DOJ’s modus operandi — old, old US government techniques applied to a new situation.
You know, for obvious reasons, during the Second World War, one of America’s most important strategic goals was to screw up the railway system across Europe. Broadly speaking, there were two ways to do this. One involved P-38s. They was unquestionably effective, but had significant drawbacks. Air raids put precious pilots and expensive airplanes at risk. Moreover, the Germans necessarily knew right away exactly where and how the damage had been done.
To pursue the other approach, the Office of Strategic Services put together a short masterpiece called the “Simple Sabotage Field Manual” and put it in the hands of covert operatives dropped into occupied Europe. (Conveniently, it was declassified in the spring of 2008.) A few of the many sage bits of advice for American sympathizers working, for example, in railway management:
•Insist on doing everything through “channels.” Never permit short-cuts to be taken in order to expedite decisions.
•Be worried about the propriety of any decision — raise the question of whether such action as is contemplated lies within the jurisdiction of the group or whether it might conflict with the policy of some higher echelon.
•Advocate “caution.” Be “reasonable” and urge your fellow-conferees to be “reasonable” and avoid haste which might result in embarrassments or difficulties later on.
•To lower morale and with it, production, be pleasant to inefficient workers; give them undeserved promotions. Discriminate against efficient workers; complain unjustly about their work.
•Act stupid. (This is a direct quote.)
This approach has several advantages over the P-38 method: the damage is not clearly obvious or even provable. The risk to American lives and property is greatly reduced. Well executed, it still snarls the movement of supplies and troops to the front in France. And P-38s could not drop paychecks to American sympathizers at Deutsche Bahn or promise them a corner office after the war.
The weakness and ineptitude of DOJ, and the dearth of banker prosecutions, makes much more sense if you know this story.
why is the Scott Walker scandal not the top story any where?
I linked to it prominently in yesterday’s Water Cooler.
But to answer your question, because he’s a provincial figure and a loser? (Adding that I have to own up to thinking he would to better than he did, because he stomped the Wisconsin Democrats viciously and effectively.)
I had a troubled friend that got tangled up with methamphetamines. She supported her habit by getting personal info on her victims, then going around opening instant-approval store credit cards in their names. Then she’d return for cash or sell online. She did 2 years in prison for identity theft. Not sure how all these fake accounts can go unpunished.
To quote Charlie Chaplin from Monsieur Verdoux:
One case of ID theft or wire fraud and they throw the book at you.
Two million and they book you on CNBC.
We opened a Wells Fargo savings account six months ago. All we came for was an account, but we had to open a savings account of our savings account, where we must transfer $25 dollars a month (and this month got our first $0.01 interest payment!). God knows what that’s for, besides a successful cross-sale. We also had to get a credit card we didn’t want and have never used. Sign-up was so confusing and tedious I’ve no idea if we paid for it or not. I learned from earlier NC posts that previous WF prez Kovacevich made this kind of cross-selling the measure of his success. Still succeeding, I guess they’ll fire the whole branch office.
That was a feature, not a bug !
And as you proved, these “cross sales” are worthless. Actually, they’re less than worthless, they are costs, pure and simple. As an indicator (sorry, I don’t have U.S. figures, but they’ll not be hugely different), issuing a credit card (production of the plastic, account goods, welcome pack, setting up the account on their hosting system) is around £7-10+/-‘ish depending on the issuer’s cost base. If Wells’ costs for that card they bestowed on you was less than $10, I’d be staggered. Repeat that a couple of million times or so, and soon you’re talking about real money.
Clive, I’ve really appreciated, and learned a lot from, your comments.
I was trying to translate ‘$125,000,000’ for that retired Wells Fargo’s salary into ‘the percentage of my local public school district budget for 2016’: it came to 50%.
My local suburban school district’s 2016 budget for 20,000+ kids (including non-English speaking, severely disabled) comes to USD $242,000,000 — or half what Wells Fargo paid a single banking exec.
My school district appears to be vastly more economically productive than Wells Fargo; they sure accomplish a hell of a lot more with far, far less money.
Just to say thanks, Yves, for a great analysis. And kudos for the “Lord Haw-Haw” reference!
I dare to dream this will result in some real penalty for WF but I’m not holding my breath.
Former Bankrate executives must face SEC fraud lawsuit [Reuters]
So, in this judge’s opinion, `merely pushing’ your employees isn’t enough – you have to be `consciously, falsely creating the appearance [of] meeting [your] targets’. The case against WF, if there ever is a case,
might be based on a different legal theory, but this does sound like a steep wall for the prosecution to climb.
Any smart CEO knows how to act dumb and not leave a paper or email trail.
Someone should read the civil settlement and see if the bank officers had to specify that the multiple accounts and cards were improperly issued, or whether they were allowed to settle without admitting wrong.
If you think Wells Fargo is the only bank juicing it’s account numbers in dubious ways, think again.
Nice to see another churner here. I think the case you linked was just incompetence, not a deliberate effort. I have no idea how that user got away with that, since there were numerous reports from others who had also opened 10+ cards that BoA was closing all but 4-5 max (which is still high).
Over 10 years ago, my son’s girlfriend was a teller at Wells Fargo. She talked about how she was urged/pushed to open new accounts and sell products. She eventually opened and closed accounts in my son’s name, opened and closed credit cards in his name…. Blame senior execs for the culture and the lack of controls. She also admitted that her branch opened accounts for foreigners without documentation. Sigh.
“Retail banking at large institutions is run through metrics, all the way down to the employee level.”
“Accountability” is for mere mortals. Executives aren’t even accountable to shareholders these days.
The metric trap has ensnared physicians. This trap creates a greater doctor-patient divide when perverse incentives are created and doctors are employed by large corporations.
In health care, Kaiser Permanent has long spun their “bonuses” as “at risk compensation,” which vests physician shareholders into the corporate culture. (In order to become a shareholder, a physician must be board certified in the specialty in which the physician practices, and work a minimum of 24 hours per week.)
Obamacare’s Accountable Care Organizations have picked up on this trick.
If there are new evidence-based guidelines to decrease any “unnecessary” imaging (as was true in Oregon in 2012), all you have to do is jack up the out-of-pocket costs and voila! I pointed out that the metric for my ordering physician wouldn’t capture my refusal to get an MRI of my spine–not because our insurance didn’t cover it, but because I knew it was a worthless test. But if a poor person really needs the test, it’s likely that it’s not gonna happen. https://www.oregon.gov/oha/herc/EvidenceBasedGuidelines/Guideline%20for%20Advanced%20Imaging%20for%20Low%20Back%20Pain.pdf
Similarly, doctors are measured on how well they get patients to comply with preventive testing. But if all the tests in the world can be done for “free,” it’s a cruel irony if the patient can’t afford the subsequent care.
Great post, great comments: mazel tov to everyone for making this the place with the highest signal-to-noise ratio on the Internet.
This would seem to make Sen. Warren’s call to investigate the DoJ on issues just like this very, very timely. I’m thinking there has to be prosecution of Wells Execs on this, or the DoJ will come off looking like dunces in publice.
Likely no one will read this b/c it is a late entry … however, as an executor of my father’s estate, some years ago I called this same bank to close my father’s accounts as he had died and the money been transferred out elsewhere leaving a zero balance. What I expected would be a call of 1 minute duration turned into this protracted 20 minute experience in which the bank rep introduced all sorts of reasons why the accounts should not be closed, including how there were store card incentives which could be earned by keeping it open. Their incentives were of no interest to me but still I could not prevail on them to close the accounts. Best I could achieve after 20 minutes of argument was getting them to freeze the accounts. Ever since, once a year, they mail me a statement reporting zero funds and zero activities. I’ve often wondered why they keep up the sham of mailing an annual statement when they’re earning nothing from these accounts.
The article doesn’t really explain the incentive mismatch between duping analysts in the short term, and execs receiving RSU’s.
The issue isn’t stock grants, it’s 1. the overall comp philosophy (what percentile v. the peer group has Wells’ board set as it target, and how the board determines how well the execs have done) and the issue highlighted in the article we featured on CEO pay, that the pay measure that the SEC highlights in its Summary Compensation Table greatly understates CEO pay because CEOs are able to create and take advantage of short-term favorable moves in stock prices, as in they recognize a short term super favorable blip for what it is and cash in option or sell stock then.
I’ll give you the first part in theory–that’s maybe there is an incentive to be blind to fraud if it can get you a raise. Except, now Carrie Tolstedt is out of a job she could have had for nine more years. Safe to assume she will earn less at her next venture.
But the latter–what? These execs are ignoring fraud in order for the potential to swing trade their extra shares–after they vest three years later?
This is first undermined by the fact that company was aware of the issues of fake accounts as demonstrated by the 5300 employees who were fired over the course of five years. If executives approved of such practice, why would they fire people on an ongoing basis?
2- Is there actual evidence of insider sales that correspond with analyst forecasts (timed perfectly for sec approvals too), prior to missed earnings? Seems highly improbable. And why did the SEC miss this? Or did they have some incentive to ignore it as well?