Today, we celebrate The Eagles most famous song, Hotel California. It all started with a Don Felder cord progression and according to the Financial Times (FT) column The Life of a Song, it had a “fusion of Hispanic melody and soft reggae beat.” With Joe Walsh recently added to the group, it ended up as dueling guitar solos and double axe grinder that came in at six and one-half minutes. The song addressed “the issue of America’s slow implosion into decadence” most particularly through its “gnomic last line echoing from 40 years ago, “You can check out, but you can never leave.” That line may be more relevant today than it was in 1976.

I thought about Hotel California and that final line when I read the “Independent Directors of the Board of Wells Fargo & Company Sales Practices Investigation Report” issued on April 10, 2017. It is truly one of the most damning reports of complete corporate failures around ethics and culture that has recently been seen. The report leaves aside the company’s current policy of fighting tooth and nail whistleblower awards, so that issue aside, the report is unsparing for every group at the company. Yet buried with the 110 pages are numerous lessons for the compliance practitioner which I will be exploring over the next few days. Today, I will present the executive summary of the report and then discuss the failure in the corporate functions which caused or contributed the catastrophic failure.

The internal investigation was headed by the law firm of Shearman & Sterling LLP, who were assisted by FTI Consulting, Inc. (FTI). The principal findings were “the root cause of sales practice failures was the distortion of the Community Bank’s sales culture and performance management system, which, when combined with aggressive sales management, created pressure on employees to sell unwanted or unneeded products to customers and, in some cases, to open unauthorized accounts. Wells Fargo’s decentralized corporate structure gave too much autonomy to the Community Bank’s senior leadership, who were unwilling to change the sales model or even recognize it as the root cause of the problem. Community Bank leadership resisted and impeded outside scrutiny or oversight and, when forced to report, minimized the scale and nature of the problem.”

However, with any catastrophic failure, there were numerous other control and human failures leading to the fraud. John Stumpf, the former Chief Executive Officer (CEO), “was too slow to investigate or critically challenge sales practices in the Community Bank. He also failed to appreciate the seriousness of the problem and the substantial reputational risk to Wells Fargo.” There was also a catastrophic failure of the company’s control functions, specifically Human Resources (HR), internal audit and legal. They all apparently had one response to the knowledge something was very wrong: Not My Job!

The decentralized structure of the organization led to a silo mentality. However, it was not around data and information where this silo effect was so detrimental but the deference given the business units. The report went on to state, “a transactional approach to problem-solving obscured their view of the broader context. As a result, they missed opportunities to analyze, size and escalate sales practice issues.” Moreover, this decentralized nature led to a conflict between the business unit which engaged in fraud, Wells Fargo’s Community Bank group and the company’s self-espoused cultural values of not breaking the law.

One of the most troubling revelations from the report was that the fraud engaged by the bank did not begin in the 2009-time frame but much earlier, as far back as 2002. The culture in the Community Bank group, headed by now disgraced former bank officer Carrie Tolstedt, to tolerate not only any dissent but even anyone raising questions about the number of bank employees who were caught opening fraudulent accounts and were terminated for their troubles to meet the sales goals. The report stated, “Tolstedt and certain of her inner circle were insular and defensive and did not like to be challenged or hear negative information. Even senior leaders within the Community Bank were frequently afraid of or discouraged from airing contrary views. Tolstedt effectively challenged and resisted scrutiny both from within and outside the Community Bank.”

Worse for Wells Fargo was that Tolstedt felt empowered and invulnerable enough to outright lie to the Board of Directors as to the scope of the problem. The report stated, with considerable lawyer-speak understatement, Tolstedt’s “written and oral presentations made to the Risk Committee in May 2015 and to the full Board in October 2015 were inadequate.” She even managed to dissemble to the entire Board, as the report noted, “A subsequent report to the entire Board by Tolstedt in October 2015 was widely viewed by directors as having minimized and understated problems at the Community Bank.”

In an amazing admission, the Board was not aware that over 5,300 employees had been terminated for engaging in fraud. The Board was told as late as mid-2016, the number of Wells Fargo employees terminated was under 3,000 and it was not until September 8, 2016 “through settlements with the Consumer Financial Protection Bureau (the “CFPB”), the Office of the Comptroller of the Currency (“OCC”) and the Los Angeles City Attorney, the Board learned for the first time that approximately 5,300 Wells Fargo employees had been terminated for sales practice violations between January 1, 2011, and March 7, 2016.”

There was a corporate culture in the Community Bank group that run absolutely amok. There was no person in that business unit who could or did stand up and say something is wrong here. Indeed, it now appears the business unit was able to effectively circle the wagons and engage in a massive fraud for over 10 years with no person or group within the company investigating the issue of the creation of fraudulent accounts.

One name not mentioned was that of Wells Fargo’s Chief Compliance Officer (CCO), Yvette Hollingsworth Clark. Although perhaps not too surprising given the widespread nature of the fraud and the apparent lack of ability and will to do anything about it. I did find one fact quite telling about how Wells Fargo viewed compliance. On her LinkedIn profile, Clark says she “Direct(s) the enterprise-wide regulatory compliance framework for diversified financial services company with 42 global locations and $1.9 trillion in assets.” To accomplish such a lofty goal, Ms. Clark has a compliance department of seven direct reports. I wonder how the Department of Justice (DOJ) would view that commitment to a culture of compliance?

Remember, “You can check out, but you can never leave.”

To listen to a YouTube clip of The Eagles playing Hotel California, click here.

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at

© Thomas R. Fox, 2017