I did not think that the Wells Fargo fraudulent accounts scandal could get worse for the bank. Boy was I wrong. Last week, in a Press Release, the Department of Justice (DOJ) announced a that Wells Fargo & Company and its subsidiary, Wells Fargo Bank, N.A., (collectively ‘Wells Fargo’) agreed to pay $3 billion to resolve their potential criminal and civil liability stemming from its fraudulent accounts scandal between 2002 and 2016 of “pressuring employees to meet unrealistic sales goals that led thousands of employees to provide millions of accounts or products to customers under false pretenses or without consent, often by creating false records or misusing customers’ identities.”

It was not simply the amount of the fine and penalty or even the scope of the fraudulent conduct which was so damning about Wells Fargo. It was that the entire cross-selling program was a fraud upon the customers of the company, the market, the regulators and the public. Rarely do you see such a large and prominent organization engage in a nearly 18 years-long fraud, all the while not simply denying they are doing anything wrong but touting their fraudulent conduct as the reason for years and years of business success. This was a fraud perpetrated at the highest levels of the company by bank executives with actual knowledge of the fraud who continually lied to anyone who either asked about it or they reported to such as the regulators and even the Wells Fargo Board of Directors. It really does not get much worse than the facts laid out about Wells Fargo senior management in the Statement of Facts referenced in the DOJ Press Release.

In the DOJ Press Release, Deputy Assistant Attorney General Michael D. Granston, DOJ Civil Division, said, “When companies cheat to compete, they harm customers and other competitors. 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. The Civil Division will continue to use all available tools to protect the American public from fraud and abuse, including misconduct by or against their financial institutions.” US Attorney Central District of California, Nick Hanna, said the Well Fargo “case illustrates a complete failure of leadership at multiple levels within the Bank. Simply put, Wells Fargo traded its hard-earned reputation for short-term profits, and harmed untold numbers of customers along the way. We are hopeful that this $3 billion penalty, along with the personnel and structural changes at the Bank, will ensure that such conduct will not reoccur.”

In the Securities and Exchange Commission (SEC) Press Release, Daniel Michael, Chief of the Enforcement Division’s Complex Financial Instruments Unit, said, “It is important that brokers do their homework before they recommend that their retail customers buy or sell complex structured products. The products sold by Wells Fargo came with high fees and commissions, which Wells Fargo should have taken into account before advising retail customers to sell their investments and reinvest the proceeds in similar products.” It also noted that the SEC “Order found that Wells Fargo generated large fees by improperly encouraging retail customers to actively trade the products, which were intended to be held to maturity. As described in the SEC’s order, the trading strategy – which involved selling the MLIs before maturity and investing the proceeds in new MLIs – generated substantial fees for Wells Fargo, which reduced the customers’ investment returns. The order further found that the Wells Fargo representatives involved did not reasonably investigate or understand the significant costs of the recommendations. The SEC found that Wells Fargo supervisors routinely approved these transactions despite internal policies prohibiting short-term trading or “flipping” of the products.”

The DOJ led a criminal investigation into false bank records and identity theft that led to a three-year Deferred Prosecution Agreement (DPA) where the bank will not be prosecuted if it abides by certain conditions, including continuing to cooperate with further government investigations.  Wells Fargo also entered a civil settlement agreement under the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA) based on Wells Fargo’s creation of false bank records. The Bank also agreed to the SEC instituting a cease-and-desist proceeding finding violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. The $3 billion payment resolves all three matters and this total fine and penalty includes a $500 million civil penalty to be distributed by the SEC to investors. Additionally, under the SEC Order, Wells Fargo agreed to profit disgorgement of $930,377 of ill-gotten gains plus $178,064 of interest and to pay a $4 million penalty.

The Statement of Facts laid out the violations engaged in by the bank, which I will detail with greater specificity in subsequent blog posts. The fraud began with the institution of the cross-selling program itself back in 1998, when the bank focused on sales volume and annual sales growth through the sales model of the “cross-sell strategy” to sell existing customers additional financial products.  It was “the foundation of our business model,” according to Wells Fargo. In its 2012 Vision and Values statement, Wells Fargo stated: “We start with what the customer needs – not with what we want to sell them.” Yet the cross-selling strategy had nothing to do with customer needs but only designed to pump up the numbers.

To properly motivate bank employees to engage in this fraud, senior management set completely unrealistic sales goals. To meet these goals, illegal and unethical sales strategies were developed that were so pervasive at the bank they had a name, “Gaming”. Gaming included some of the following illegal and unethical practices: “forging customer signatures to open accounts without authorization, creating PINs to activate unauthorized debit cards, moving money from millions of customer accounts to unauthorized accounts in a practice known internally as “simulated funding,” opening credit cards and bill pay products without authorization, altering customers’ true contact information to prevent customers from learning of unauthorized accounts and prevent Wells Fargo employees from reaching customers to conduct customer satisfaction surveys, and encouraging customers to open accounts they neither wanted or needed.”

Not only were senior executives aware of this Gaming, they actively encouraged employees to use these strategies to meet their sales goals. When questioned about these tactics by regulators and even the Board of Directors, these same senior executives denied any illegal activities or unethical actions were ongoing.

Over the next few blog posts, I will detail these activities engaged in by Wells Fargo senior management. If you had ever thought about opening an account at Wells Fargo, I urge you to read the Statement of Facts. After reading it, I cannot imagine any person would ever do business with Wells Fargo.

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