This week I am exploring the Wells Fargo Department of Justice (DOJ) and Securities and Exchange Commission (SEC) settlement of $3 billion. The case presents multiple lessons for the compliance professional and one very large lesson for the consuming public. Today I want to consider the start of Wells Fargo’s veritable miasma of fraud, deceit, toxic culture, unethical sales practices and illegal activity and the cross-selling model. The details in this blog post were laid out in the Statement of Facts referenced in the DOJ Press Release announcing the settlement.

As with any corporate business initiative, unless it has an illegal component built into it, it is usually benign. While sales initiatives can be stupid, inane, over-reaching or contentious; trying to sell more products is not usually viewed as illegal. Such was the Wells Fargo cross-selling model. The premise was “for Wells Fargo to meet all of its customers’ financial needs by focusing on selling to its existing customers additional financial products that those customers wanted, needed, and would use.” Moreover, as with any sales model it was designed to make the company money, as “Wells Fargo represented to investors that its ability to execute successfully on its cross-selling strategy provided the Company with a competitive advantage, caused an increase in revenue, and allowed it to better serve its customers.”

Wells Fargo later expanded on the mandate that its cross-selling strategy was a key component to its business model, saying “its “primary strategy” to achieve its “vision . . . to increase the number of our products our customers utilize and to offer them all of the financial products that fulfill their needs.” The bank characterized cross-selling as “the cornerstone” the bank’s business model and later saying it was even “the foundation of our business model.”

To the outside world, (i.e., investors and regulators) the bank presented the cross-selling strategy as having a rational business basis, that it was “needs-based”. This meant Wells Fargo would only sell to customers the services, products and financial tools that they actually needed. Carrie Tolstedt, then head of Wells Fargo’s Consumer Bank business unit, said at the 2010 Investor Day Conference, “Our cross-sell focus starts with customers needs.” Indeed, “In its 2012 Vision and Values statement Wells Fargo stated: “We do not view any product in isolation, but as part of a full and long-lasting relationship with a customer and with that customer’s total financial needs. We start with what the customer needs—not with what we want to sell them.”  Tolstedt repeated her words at the 2016 Investor Day conference saying, “[A]s we think about products per household or cross-sell, the first thing we anchor ourselves on is our vision of satisfying our customers’ needs.” This sentiment was carried forward right up until the time the bank entered into it original $185 million settlement with Consumer Finance Protection Board (CFPB), the Office of the Comptroller of the Currency and the City and County of Los Angeles (collectively ‘the 2016 Settlement’).

Obviously all of these statements, from Tolstedt’s through to the bank’s multiple Vision and Values, were total and utter fraudulent declarations to themselves, their customers, the greater banking public and investors. The reason they were fraudulent was that Wells Fargo employees were instructed to sell eight products, services and financial tools to every customer. Where did this number 8 come from? It was from former bank Chief Executive Officer (CEO) John Stumpf who like the rhyming phrase “8 is Great!” as a sales motivation tool.

One of the primary reasons Wells Fargo went down the rabbit hole of fraud in its sales practices is that it used reports of cross-selling success as a key metric to report to regulators and investors. Beginning as early as 2000 right up until the time it entered into the 2016 Settlement it reported what it called “the cross-sell metric” to investors and analysts “as proof of its success at executing on this core business strategy. Wells Fargo touted to investors the consistent growth of the cross-sell metric over time as demonstrative of its success at executing on its cross-selling strategy.” The was done in the bank’s annual reports, and 10K, 10Q and 8K filings with the SEC.

This is the invidiousness of the Wells Fargo fraud. The company reportedly made only about $400,000 in actual revenue in all the years of its cross-selling. However that pales beside the growth in stock price the bank garnered for hitting or exceeding growth in literally every quarter from the implementation of the cross-sell strategy back in 1998 up until 2014, when the metric (as reported by Wells Fargo) flattened out.

The sales incentives under which Wells Fargo came to such grief is a simple, and even benign, cross-selling of products. After all, large banks cross-sell their clients all the time, and nobody seems to blink an eye at the cross-selling McDonalds engages in every time you buy a Big Mac when the representative asks if you would like fries with it. Yet there are other reasons for engaging in this type of business practice. Each and every time a company has a touchpoint, particularly a commercial touchpoint, with a business, it strengthens the relationship.

Yet Wells Fargo was using this cross-selling metric to defraud investors by illegally opening up fraudulent accounts on unsuspecting bank customers. Further, what may have started off as a legitimate, legal and beneficial business strategy became not only high-risk, but illegal because of the manner in which Wells Fargo administered its approach to cross-selling. As with any sales initiative, if a company wants to push it, it will set up incentives for the sales team to engage in such behavior. This can be done by increasing commissions around the service or product being emphasized, such as the banks products. Companies can also increase sales by making clear that you will be evaluated on how much you sell a product or service. In other words, whether you receive a bonus, pay raise or even keep your job will be evaluated, in some part, on how much you cross-sell.

Tomorrow I will consider the illegal sales strategies developed by Wells Fargo and memorialized in the bank’s sales practices called “Gaming”.