Hoisted From Comments: First Cut at Perps in Massive Wells Fargo Consumer Fraud

Yves here. Reader It’s about time identified some senior executives at Wells Fargo who had significant responsibility for the policies and operations at the heart of a fraud that led to over 2 million accounts being created with no customer consent. As both media accounts and comments on our post yesterday stressed, a hyper-aggressive cross selling culture, with insufficient quality and compliance controls was one of the big causes.

No doubt other executives played a meaningful roles in an abuse that Wells claimed led to the firing of 5,300 employees. But the public information that It’s about time cited does give good reason to believe that these two officials were important figures. If we lived in a society where highly-paid individuals were held responsible for their actions, they would at a minimum have been included in an investigation to determine who should be held to account and what punishment should be meted out. Note that both are retired, one less than two months ago. But that hardly absolves them from decision and actions that took place on their watch.

Needless to say, the speed with which members of the NC commentariat were able to identify leads at Wells Fargo confirms that the failure to name and fine any executives was a gross dereliction of regulatory duty.

By reader It’s about time:

This has been going on for some time across the Wells Fargo Bank (and Norwest) footprint. Many in the banking industry have heard the stories from former employees of Wells Fargo.

If you are looking for the people to be held accountable, the nearest to this is Carrie Tolstedt who until her announced retirement 7/13/2016 (effective 7/31/2016) was Senior EVP of Community Banking for Wells Fargo Bank. In that capacity she oversaw 6,200 branches (“stores”) and 105,000 employees. A profile of her can be found here http://fortune.com/most-powerful-women/2014/carrie-tolstedt-34/

However, the real culprit has been safely retired from Wells Fargo Bank for some years now. It is former senior Citibank executive Dick Kovacevich who came up with the bumper sticker performance metric for his bank – “The Great Eight”. Eight cross sells per customer.What a horribly failed metric he chose as a proxy for “success” in banking. Unfortunately, the fawning attention from the media and people like Buffett ensured that the banking industry would be swept up in his love for cramming product down the throats of customers. Let’s hope Kovacevich (Theranos board of directors) gets deeply linked to this scandal and the cult around him goes the way of Welch and Greenspan.

For some early history read http://archive.fortune.com/magazines/fortune/fortune_archive/1998/07/06/244842/index.htm that includes the following paragraph:

“Another of Kovacevich’s key accomplishments is “cross-selling”–getting customers to buy more than one product. It’s the rationale for many of the recent megamergers, like the Citicorp-Travelers deal, but for most banks, it’s been more hope than reality. “Cross-sell is like the Loch Ness monster–always talked about but never seen,” says Kovacevich. Except at Norwest. Today the average Norwest customer buys nearly four products, vs. the industry average of two, which generates $113 per customer in profits for Norwest, about triple the amount a two-product purchase yields. Doubling the average product purchase to eight–Kovacevich’s current obsession–would again triple productivity, but Norwest still has a ways to go. “On a scale from zero to 100, we’re about 30,” Kovacevich admits. For example, under 3% of Norwest’s 3.5 million banking households have a relationship with the company’s brokerage.”

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    1. Harry

      Oh they could be prosecuted. But the odds of success are limited. However that tactic is often used by prosecutors in criminal cases. If you wanted to you could initiate the prosecution and just make the risk reward so unappealing that some of these guys settle.

      If it’s good enough for ……

      1. RepubAnon

        For prosecution, the executives’ actions need to be illegal. Here, they set up metrics without adequate controls, which encouraged (but did not mandate) illegal activity. Bad management, but not illegal.

        The fundamental problem here is deregulation – the solution is re-regulation. As the Republicans view government regulation as more threatening that Ebola, that isn’t likely to happen any time soon.

  1. aab

    Back in the day, one of the problems with cross-selling was that the different divisions’ data was siloed separately and there were tech and culture problems with getting them merged. I’ve been out of that sector for a long time, but if there’s still a siloing problem on the tech side (I didn’t read the details yesterday), it might have played a role in fraud. If you’re pressured to cross-sell and there’s no way to get the necessary info, you’re incentivized to make it up and it’s harder to catch you.

    That Fortune quote was seriously triggering.

  2. Madmamie

    Punishing the bankers at this late date seems impossible if not futile. Haven’t we reached the point where the punishment of a few “winners” only incites others to look for better ways to cheat?
    21st century civilization is based upon fiat money so the conversion of banks into one-stop shopping centers for the middle class {thanks to mergers with communications corporations, credit card companies with broad retail holdings and the tourist industry} is probably just a logical next step towards the final form that our society will adopt. And is it much different than all of the other societies that went before? Now we have reached the planetary scale without achieving something better. It seems to be the nature of the beast that we are. That is: inevitably a small minority seizes power by taking possession of all resources, making it easy to manipulate the needs and desires of the rest of us.
    Many don’t believe that change is possible because for the testosterone half of humanity it’s all a game, when it’s not serious death and destruction.
    Maybe it’s time we gave more space to anthropologists in our political debates.

    1. Stephen Gardner

      What does fiat money have to do with this? Gold bugs seem to confuse the eternal quest for increasing profits with the lack of “real money” implied by ending the gold standard. A recognition that all value, even the value of gold, is context dependent and not intrinsic does not inevitably lead to the unsustainable regime of ever increasing profits.

    2. Yves Smith Post author

      I agree regarding your point re anthropologists but beg to differ re punishments, particularly of senior bankers, which should include being banned from working in or advising in any capacity any regulated institution, either for life or a long enough period of time to hurt economically, on top of fines (and when appropriate, jail time). Sarbanes Oxley was designed to end the “I’m the CEO and I know nothing” defense, and also contemplated turning cases that started out civil into criminal (the statutory language is parallel).

      Real punishments would have a deterrent effect, particularly with credentialed and well-paid professionals, since the fall in terms of income and status would be large. The issue is that they can operate with impunity because they are confident nothing will happen to them. Change their risk exposure and you’ll see a change in conduct, not for everyone since their are always individuals and institutions that are willing to take lots of risk, but for the significant majority of top players, which would make a big difference overall.

      1. OpenThePodBayDoorsHAL

        Geez you don’t have to look very far, the last time banks had their hands down the cookie jar this far (the S&L Crisis in the 1980’s) there were more than 1000 white-collar convictions. Paltry fines are just a (deductible) business cost line item, whether you’re HSBC laundering hundreds of millions for the world’s worst beheading drug cartels, or the garden variety criminal organization like Wells Fargo scamming Grandma out of the crumbs of her Social Security check.

  3. allan

    On the face of it, each discrete act of opening an account using a customer’s ID was a violation of

    18 U.S. Code § 1028 – Fraud and related activity in connection with identification documents, authentication features, and information,

    and each act of transferring customer funds (presumably using WF’s electronic transfer system, was a violation of

    18 U.S. Code § 1343 – Fraud by wire, radio, or television.

    These are serious crimes which carry potentially heavy penalties.
    So how hard would it have been to roll up some little guys and go after the bigger fish?
    IANAL, but this does not sound like legal rocket science.

    1. diptherio

      You fail to account for the fact that the head honchos at DOJ (and likely the CFPB) are on the Wells payroll, one way or another.

      To quote a tribal member: “we know that we have a legal system, we’re just not sure that it’s a justice system.”

      1. Carla

        Great quote, but I must suggest an improvement:

        “We know we have a legal system, we just know it’s not a justice system.”

      2. John Wright

        A few years ago, a Northern California bail bonds company ran a radio commercial suggesting that “Friends don’t let friends do time.”, probably in an attempt to get people to co-sign their bail bonds.

        Of course this was referring to jail time spent pre-trial, probably for a DUI, but the sentiment seems to apply to white collar crime in America.

        I still remember the Nixon pardon, which was done ostensibly to spare America the trauma of a trial of a president and because Nixon had “suffered enough”.

        It doesn’t look any better to me with the passage of time, and it still seems an early use of “friends don’t let friends do time”.

    2. Bottom Gun

      …and in theory, RICO isn’t just a character on Miami Vice. The Racketeer Influenced and Corrupt Organizations Act allows a US Attorney with jurisdiction, evidence, and integrity to file a charge of racketeering if two covered offenses (including 1028 and 1343, I checked) are committed within a ten-year period. I think we have about 280,000 times the necessary threshold.

      Of course, this only matters if the people at DOJ are something more than weak, stupid, and corrupt. I worked with a number of them when I was a federal financial official, so I base my opinions on empirical observations.

      I’ve said it before and I’ll say it again. Let’s take financial prosecutions away from DOJ and give them to the United States Air Force. As any ISIS commander will tell you, the USAF does its job, and the bad guys are still terrified of them.

  4. allan

    From this morning’s LATimes, on possible civil suits by customers and by wrongfully terminated employees:

    … Although that case [for wrongful termination] may eventually go to trial, suits filed by Wells Fargo customers over fake accounts have not made it that far. As at many other banks, Wells Fargo customers sign a contract requiring them to bring any disputes with the bank to a private arbitrator rather than to court.

    Those arbitration clauses have stymied customers’ attempts to sue the bank, even over accounts they never agreed to open. …

    Cool. A mandatory arbitration clause for an account you did open can prevent you from using the courts to go after fraud involving accounts you didn’t open. Is this a great country or what.

  5. David in New York

    It’s hard to overstate Kovacevich’s contempt for business ethics. On CNBC he said corporations should not be legally liable for the actions of its employees.

    There’s also the issue of institutionalized racism at Wells. A sampling:

  6. Arizona Slim

    Don’t get me started on WF. Just. Don’t.

    And here’s why:

    I am spending some time with my mother while tending to the estate of my recently deceased father.

    Just took a walk around the old neighborhood. Went by a house that was owned by the richest guy for miles around. He cofounded and built an oilfield equipment services company. More power to him, he deserved every cent of what he made.

    Well, that was then, this is now.

    In 2014, the subsequent owners let the house go back to the bank after a divorce. You should see the place now. Calling it a dump would be way too kind.

    On the front door, there’s a zoning ordinance violation notice from the township. Four violations and they are major ones — roof tarps improperly secured, back entrance door gone, swimming pool improperly covered, and weeds, weeds, weeds.

    Wells Fargo is named as the property owner. And is doing NOTHING. Which is what they have been doing for the last two years.

  7. Carla

    Looking up statutes of limitations is truly depressing. Surely anyone who could possibly be prosecuted has already left Wells. Sickening.

  8. Grizziz

    Of course, Matt Levine soft peddles the crime calling it an emergent property of huge operations. He’s a lawyer and given to legal fictions, so it comes out like a vast uprising of low-paid and ill-treated Wells Fargo employees against their bosses.
    Sheesh, the employees lose their jobs because they are berated by their supervisors to perform unrealistic goals and thus turn to fraud? Wells Fargo can find 5000 self-starters with enough initiative to risk criminal prosecution in order to save their crummy job while simultaneously coordinating and pursuing a common strategy? Answer me that, Mattman.
    The employees immediate supervisors of course have no clue, they’re too busy using the whip. Nobody in accounting is asking why there are so many dead accounts because those jobs were downsized earlier.
    Nope, only voices from C Suite heaven drifting down to the floor whispering, “cross sell,” then, voila, emergence.

    1. Carla

      After glancing at statutes of limitations (different in each state), I had the thought that Wells may have done those 5,300 employees a big favor in letting them go. As far as I can see, it makes it much harder to prosecute those lowly workers for criminal fraud. And in my view, they should be prosecuted only AFTER their overlords are behind bars, which of course will never happen.

  9. Stephen Haust

    Look to Citigroup for more of this. We have recently had a situation where
    they tried to force a credit card down our throats.

    1. patrick

      I scanned these comments (real quickly) looking for a comment like yours Stephen. Thanks for it! The idea that WF is the only outfit pulling this crap and other schemes is inconceivable.

    2. Rhondda

      Bank of America did it to us. Refused to allow us to open a checking account without our acceptance of Visa cards and debit cards with our photos on them. We just chopped them up when we got home. That account was closed a long while back. No more BofA, ever.

  10. mk

    I used to be a Wells Fargo customer. One day in 2006 or so, I noticed a $12.95 charge on my statement for one of my accounts for a monitoring service to keep my accounts safe. I never ordered the service, called customer service, let them know to stop the service, refund my money and asked them “Are you telling me that my money is not safe in your bank?” They removed the charge and didn’t try it again. Of course there were other incidents which I won’t go into here, I eventually moved my money to a war machine credit union.

  11. Aleric

    I worked deep in the bowels of Wells Fargo’s IT department back in the days of Kovacevich. One of the first things the elder greybeards told me was to never trust a banker and do all my financial business somewhere else.

    1. pdxjoan

      Great advice! After the financial crisis, we moved our money from BofA to a community credit union. As a member, I am earning 2% interest on my checking account (there is a $15,000 limit, but you can open as many accounts as you want), they charge 6.99% interest on my credit card, and they are currently offering 1.25% on a 15-month CD. Why are they offering this great CD rate? To raise additional capital to lend to other members. What a novel idea for a financial institution. (Excuse the sarcasm.) Frankly, I don’t understand why the TBTF banks still have any retail customers.

  12. jfleni

    Nearly every one of these 5300 employees were victimized by their own employer
    pimp-daddies; but naturally the little guys will be blamed! Charges and jail for plutocrats are needed, but the gutters will run with the blood of the inocent.

  13. flora

    Our minds tell us, and history confirms, that the great threat to freedom is the concentration of power. Government is necessary to preserve our freedom, it is an instrument through which we can exercise our freedom; yet by concentrating power in political hands, it is also a threat to freedom. “ –Milton Friedman

    So the US govt has, for 30+ years, neutered its regulatory power, in the name of freedom. (the neoliberal idea of freedom)

    “Many people want the government to protect the consumer. A much more urgent problem is to protect the consumer from the government.” -Milton Friedman

    The govt no longer exercises its regulatory powers because neoliberals won the argument that govt using regulatory power is a danger to freedom. (Neutering regulatory power has also handsomely paid the politicians and their appointees.)

  14. David Carl Grimes

    As Yves said, if WFC employees can create 2M fake accounts under the noses of senior management, then there’s a material weakness in their internal controls. Then maybe people should be advised to take their money out of WFC and put it somewhere safer like their local credit union or another bank. If this gains any momentum, maybe the authorities be forced to prosecute the masterminds behind the fraud.

  15. Richard Creswell

    I had to pay $128 to take my expired CD out of Wells Fargo ( which had consumed the bank that bought out the bank that originally took my deposit) in a process that took 3 months and 6 hours in as many trips to the bank. The had decided to put the cd into a year-long account without asking after I had requested the withdrawal on the first day of grace.

  16. foghorn longhorn

    So each of these 5300 employees opened approximately 40,000 unauthorized accounts but nobody noticed a trend
    This really is the twilight zone
    Back to the hermit cave

  17. Shekar

    I wonder if the bank officials who opened the “fake” accounts could be prosecuted for the crime of stealing someone’s identity. That would be independent of any contract that they may have signed with the bank and the mandatory arbitration requirement.

    1. Bottom Gun

      Have fun looking for someone at DOJ, especially Main Justice, with enough intelligence and integrity to want to do his job. Bring a lamp.

  18. John Wright

    Here is another link to the LA Times that discusses what customers can do (and what Wells-Fargo will be doing as far as notifying customers)

    Article title is “Think Wells Fargo ripped you off? Here’s what to do.”


    From this link:

    “Wells Fargo already has sent refunds averaging $25 to about 100,000 customers nationwide who paid fees on accounts they never wanted, but that might not cover all affected customers.”

    “The bank has 90 days to provide federal regulators with a plan to compensate all its customers, but California clients can follow steps the bank already has worked out with Los Angeles City Atty. Mike Feuer, who was one of three regulators who settled with the bank.”

    ““I am certain there will be customers who have not been identified by the bank and their consultants who believe they have suffered some financial consequence,” said Feuer, whose office sued the bank last year.”

    “Under the terms of its agreement with Feuer’s office, the bank will send notices next month to all California customers asking them to call the bank or visit their local branch and go over all of their accounts.”

    ““We’ll also help you close any accounts or discontinue services you do not recognize or want, and discuss the process that’s been established to address any remaining concerns,” the notice will read.”

    It would be very good if Wells-Fargo put this information on their website, maybe it is there but I didn’t find it when I looked.

    As probably 95% of my Wells-Fargo branch interactions are with the ATM, I am hoping no accounts were opened/quickly closed in my name by humans without my knowledge.

    My ATM transactions take longer than they used to as Wells-Fargo has various financial product “tell me more” sales pitches on the screen one needs to click through.

  19. Don Lowell

    My wife recently got a check form Wells from a class action law suit. Something about keeping an eye out for her security blah, blah and charging her but did nothing to earn the monthly charge. Almost $300 bucks.

  20. james myers

    Like someone noticed the sky is blue. Take a vulnerable person, like a senior with mild dementia, to Wells. Watch them getting played over & over again. In different cities, states. And they do it in front of you, the fees, changes, not quite true “advice’. That’s what they do in front of you, you don’t have to guess what they do later on. The safest ones at Wells are the newbies…they haven’t been trained yet.

  21. Wellstones Ghost

    First of all, please bank with a local credit union. It’s the most logical step in moving forward against transnational banks. Second, why are we so surprised?

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