Corporate MovesFebruary 27, 2020

Wells Fargo to Pay $3 Billion Settlement for ‘Gaming’ Investors

Payment includes $500 million civil penalty distributed to investors by SEC.

Reported by Michael Katz

Wells Fargo has agreed to pay $3 billion to resolve potential criminal and civil liabilities for pressuring employees to meet unrealistic sales targets during a 14-year span, which led them to open fake accounts for unwitting customers and sell unnecessary products that went unused.

The payment includes a $500 million civil penalty to be distributed by the US Securities and Exchange Commission (SEC) to investors for misleading them about the success of Wells Fargo’s core business strategy during the time it was opening the fake accounts.

Wells Fargo admitted to collecting millions of dollars in fees and interest to which it wasn’t entitled, harming the credit ratings of certain customers, and unlawfully misusing their personal information, according to the US Justice Department.

“This settlement holds Wells Fargo accountable for tolerating fraudulent conduct that is remarkable both for its duration and scope, and for its blatant disregard of customer’s private information,” Michael Granston, deputy assistant attorney general for the Justice Department’s Civil Division, said in statement.

The Justice Department said the massive $3 billion payment was appropriate because of the “staggering size, scope, and duration of Wells Fargo’s illicit conduct.”

The criminal investigation into the company is being resolved with a deferred three-year prosecution agreement in which Wells Fargo will not be prosecuted if it follows certain conditions, which includes cooperating with additional government investigations.

Wells Fargo also entered a civil settlement agreement under the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) based on the bank’s creation of false bank records. FIRREA authorizes the federal government to seek civil penalties against financial institutions that violate various predicate criminal offenses, including falsifying bank records.

According to the SEC’s cease-and-desist order, Wells Fargo increased its focus on sales volume and reliance on annual sales growth beginning in 1998. A core part of this sales model was the “cross-sell strategy” to sell existing customers additional financial products.

Wells Fargo repeatedly said its sales strategy was “needs based” and published a “cross-sell metric” in its annual reports and quarterly and annual SEC filings that purported to be the ratio of the number of accounts and products per retail bank household. During investor presentations and analyst conferences, Wells Fargo characterized its cross-selling strategy to investors as a key component of its financial success and often discussed its efforts to achieve cross-sell growth. Wells Fargo referred to the cross-sell metric as proof of its success at executing its core business strategy.

“In contrast to Wells Fargo’s public statements and disclosures about needs-based selling,” the order said, “the community bank implemented a volume-based sales model in which employees were directed, pressured, or caused to sell large volumes of products to existing customers, often with little regard to actual customer need or expected use.”

Internally, Wells Fargo referred to the illegal practices—which included using existing customers’ identities without their consent to open checking, savings, debit card, credit card, bill pay, and global remittance accounts— as “gaming.” The SEC said top Wells Fargo managers were aware of the gaming practices as early as 2002.

According to the SEC’s order, one Wells Fargo internal investigator called the problem a “growing plague,” while another said the problem was “spiraling out of control.” Even after senior managers questioned the implementation of the cross-sell strategy, the Justice Department said senior leadership refused to alter the sales model.

“Wells Fargo repeatedly misled investors, including through a misleading performance metric, about what it claimed to be the cornerstone of its community bank business model and its ability to grow revenue and earnings,” Stephanie Avakian, co-director of the SEC’s Division of Enforcement, said in a statement. “This settlement holds Wells Fargo responsible for its fraud and furthers the SEC’s goal of returning funds to harmed investors.”