jack-bennyThief (to Jack Benny): Look bud, I said your money or your life!

Jack Benny: (long pause) I’m thinking it over!

Jack Benny milked the above routine for years. I do not know when he first came up with it but it was just as funny in the 60s as when he became the World’s Stingiest Man. It was the timing of his response and his facial expression that sold the joke that he really was thinking it over. I thought about the Benny routine in the context of Wells Fargo’s toxic sales culture, which was basically sell or lose your job.

I want to end this week’s review of the Wells Fargo scandal by considering what is at issue and what is at stake in this imbroglio. Unlike a Foreign Corrupt Practices Act (FCPA) violation, Wells Fargo paid the relatively paltry amount of only $185 million in this round of fines and penalties. The bank may end up paying much more if other enforcement agencies move to fine the bank for its conduct. Yet here is the kicker, the profits generated by the bank opening some two million fraudulent accounts and products were in the neighborhood of $400,000. It is this final number that I find most stunning.

So let’s run the numbers. Here is a company with a market cap of $234 bn, that engages in fraud that generates it $400,000. Now consider the costs of that fraud to date, we have the initial $185 MM, then we have the reported $60 MM Wells Fargo paid in pre-settlement investigative costs, now add a further $50 MM, per their announcement earlier this month, for post-settlement remediation costs. So far the bank is up to $295 million in costs, fines and penalties. Add to that the $6bn in market cap the company lost since the announcement of the fine. This is where it stands now and it is certainly not going to get much better soon for the bank given its pathetic and even abysmal public response to-date.

Now consider the underlying cause of this stunning amount. It was simply cross-selling of products and services. There is nothing inherently evil, nefarious, bad or illegal in the cross-selling of financial institution products and services. Indeed, when my banker contacts me to tell me about a new product or service, I am always pleased with the touch of such personal service. I meet annually with her to go over my accounts, products and services my bank offers and at that time I also learn about what is newly available. Is she trying to sell me something or offer me a better banking experience? The answer is of course YES to both. But, that is how business is conducted; a seller has something a buyer wants or needs. It does not get more basic than that.

I have never worked in any business where there was not some pressure to perform. As an associate at a law firm, I was expected to bill hours, bill hours, and then bill hours. As a partner at a law firm, I was expected to bill hours and generate business for the firm so the associates could bill hours ad naseum. In every other business I have worked there was always pressure to sell. So it is not pressure to sell that is inherently evil, nefarious, bad or illegal.

It is only when the pressure to perform, whether to keep one’s job, make a salary or earn a bonus becomes so overarching that people engage in illegal conduct. Does anyone think Wells Fargo Chief Executive Officer (CEO) John Stumpf told Wells Fargo employees to create false accounts or saddle customers with products they neither needed or wanted to meet the self-styled motto of cross-selling the companies services and products, “Eight is Great!”? Of course he did not. Did Stumpf even say something along the lines of “Will no one rid me of this meddlesome priest”? Probably not. (At least, not that we know about as yet.)

There was something else going on at Wells Fargo and the most succinct single sentence on it was written by Duke Law School Professor Samuel W. Buell in an article for the online publication Slate, entitled “Prosecuting Wells Fargo Executives Won’t Solve Anything”. Buell said, “As is almost always true with big corporate scandals, the problem at Wells Fargo was not bad apples but a diseased orchard.” Put another way, the culture at the bank was so driven to cross-sell products and services that employees would do anything to meet that culture, specifically engaging in unethical and illegal conduct. Employees were rewarded for meeting that culture and punished for not meeting it. It was the culture of Wells Fargo that was rotten. That culture always starts at the top and that is what CEO Stumpf is guilty on; if not implementing such a sales culture, certainly facilitating it. (AKA eight is great!)

What can or should be done to Wells Fargo? From the regulatory perspective, the company will no doubt pay more fines and penalties. Certainly the bank’s costs in responding to such regulatory efforts will be much greater than its outlay to-date. Yet the current criminal law is not a place that is designed to punish a company that has a rotten culture. As much as Senator Elizabeth Warren may harangue that Stumpf should be criminally prosecuted, it simply is not going to happen. The prosecutions of senior executives in the Enron and Worldcom era involved C-Suite direct involvement in the accounting frauds perpetrated by those organizations. In the financial institution industry, one need only look back further to the savings and loans crisis from the late 1980s to see other types of fraud in the banking industry which did send bank executives to jail but in all those cases the executives engaged directly in the fraud.

Professor Buell believes, “the real reason criminal law has not delivered us from corporate troubles is that it does not have the capacity to do so.” Moreover, the very reasons that the corporate form was invented was to diffuse responsibility and liability. These underlying reasons were, of course, very different in the coffeehouses of 16th century London, where the main concerns were around trade across the globe and a structural entity which would limit losses of English shipping companies. Yet it is that structure which is still with us today.

Does all this mean we should just give up, as some have said, repeal such laws as the FCPA and simply admit that companies will always engage in bribery and corruption? I think the clear answer to repealing the FCPA and not continuing forward with the foremost piece of anti-corruption legislation is that it is not in the interest of the United States to do so. The FCPA was passed, in part, so that foreign purchasers would have confidence that they received the goods and services they contracted for and that US companies would be able to correctly state that bribery and corruption are antithetical to US law. While not foreseen in 1977, it now turns about out that commercial businesses engaging in bribery leads to corruption which has become one of the underlying causes of international terrorism, so for that reason alone aggressive enforcement under the FCPA must continue.

How does a company stop from finding itself in shoes of Wells Fargo going forward? The first thing the Board must do is make a clean sweep, as in sweep out the senior management which allowed the culture to come into being, festering until it affected the entire organization and even after being told about it, allowed it to continue. Is the Wells Fargo Board up to the task? Only time will tell on that score.

This is where compliance comes in, as compliance is that is the answer. The Chief Compliance Officer (CCO) must be given the resources and real authority in the company to ask questions when it is determined that employees broke the law in routine sales transactions. If the CEO will not concern him or herself with the culture of an organization, the Board of Directors must do. The leader should ask, “Are we doing everything alright?”. Even if a company is doing something wrong which is so financially insignificant to not even raise an eyebrow, if it is left to fester and grow the results can become catastrophic. If the $400,000 profit for the two million fraudulent accounts and services is correct that is just over $60,000 profits annualized. What is $60,000 annually to a $234 bn sized company – it is smaller than nothing.

Yet even at a $60 bn company, it turns out that something as simply selling banking products can get an organization into much trouble, cause hundreds of millions of dollars in fines, penalties and related costs and drive multi-billion losses in the capital markets. It was not that the bank was not vigilant as the bank first became aware of the conduct as early as 2009. However, someone at the organization has to care enough to stop illegal conduct before it moves to the scale it did at Wells Fargo. Why no one cared to do so will be something the Board of Directors and the shareholders of Wells Fargo will rue for years to come.

When a corporate culture is so toxic that if you do not meet unreasonable sales quotas, it really becomes your money or your (employment) life.

For a YouTube clip of the famous Jack Benny money or your life routine, click here.

board-of-directorsAt least he fessed up that it was not the (non) rogue 5,300 employees that were responsible for defrauding Wells Fargo customers. At the Senate Banking Committee hearing, held on Tuesday 20th September, Wells Fargo Chief Executive Officer (CEO) John Stumpf admitted that he was responsible for the failure. (He did, of course, claim he was either misquoted or simply misinterpreted.) As much as I was pleased he owned up to being a leader, I was more than a little bemused when Stumpf admitted that he had known about the scandal since 2013 and the company’s Board of Director’s had known about it since 2014. One might reasonably ask what they did in the intervening two years to stop the illegal activity and remediate? Of course, Wells Fargo has not even suspended the sales compensation plan which led to this fiasco, keeping it open until the end of the year so I guess things move more slowly in the banking sector than in non-financial industries.

As I continue to mine the Wells Fargo scandal for lessons to be learned by the compliance professional, today I want to consider the roles of senior management, a Board of Directors and corporate governance. Unfortunately for Stumpf, it appears his cultural leadership of cross-selling; more cross-selling; and then even greater cross-selling of the bank’s products and services to customers, whether wanted or needed, was in large part the reason for the scandal. Of course, with some 255,000 employees, Stumpf can simply claim (and did) that he cannot be responsible for them all.

This typical CEO misdirection was answered by Susan M. Ochs, in a New York Times (NYT) Op-Ed piece, entitled “At Banks, the Buck Stops Short”, when she articulated three reasons why senior management should be held accountable. First, “illicit behavior involving thousands of people and two million fraudulent accounts cannot be dismissed as the work of a few bad apples”. Second, the systemic Wells Fargo’s “problems here stemmed from “cross-selling” — soliciting customers to buy multiple products — which Wells Fargo has promoted as the cornerstone of its retail business model” and what Stumpf was pushing, pushing, pushing. Third, and finally, having been made aware of the problem, it was on senior management to then prevent further illegal activity and remediate the issues.

Yet the overriding function of senior management is to establish the corporate culture. Even if there were three years of culture and ethics training not to break the law; if an employee’s supervisor was on the back of an employee each afternoon at 3 PM asking about the number of cross-selling calls made that day or your job is on the line, the message is clear. Culture means more than having a robust paper Code of Conduct or even saying we do business the right way; it means you must burn those values into your company. Not that you will be fired for missing your monthly sales quotas.

Ochs wrote, “Culture can feel amorphous, and it is always tempting to blame the systems; they are more tangible and easier to deconstruct. But the impact of corporate culture cannot be overstated. For example, sales targets exist in many industries — the key is how they are met. Intimidation, public shaming and micromanagement — as alleged by Wells Fargo employees — will create a culture of fear in which people think they must deliver at any cost.”

What about the Board? They are far from blameless in this fiasco as well. It turns out they were informed about the illegal activity back in 2014. Although you might wonder why it took CEO Stumpf one year to inform the Board? What did the Board do when it was informed of this issue? Where were the Board’s actions to protect its shareholders? Where was the Board’s audit committee?

These questions have not been answered, as yet, but one thing is certain, the once solid reputation of Wells Fargo now lays in shreds. This reputational risk is the province of the Board and as noted in a Financial Times (FT) lead Op-Ed Piece, entitled “The high cost of Wells Fargo’s sales practices, this matter has demonstrated that “trust is the most precious currency in banking. Without it the system is prone to dry up, with dire consequences for institutions and to the detriment of the public.” The FT piece ended with the following, “Confidence in banking requires boards to accept their responsibilities.”

Interestingly, one of the reasons for the seeming Board inertia is that Wells Fargo’s Board of Directors is older and longer-tenured than other US banks. Could this have played into its seeming inertia when it came to this scandal or simply the fact that the monies generated by the fraud were so small and certainly not material to a $50bn plus sized organization? In another FT piece, entitled “Wells scandal stiffens resolve to end board inertia”, reporters Stephen Foley and Alistair Gray noted, “Wells has some of the oldest and long-serving directors among 17 US banks with more than $100bn in assets” with the tenure of director at 9.7 years and an average age of 64.5 years old.

Another concern raised in the FT piece was that there is one person in both the CEO role and the Chairman of the Board role. One shareholder activist, Gerald Armstrong, said he planned to “resubmit a proposal for an independent chairman at the bank’s annual meeting next spring.” Armstrong, as quoted in the article, said “How can they argue against my proposal now? Where is the board? Where is the audit committee of the board? It appears they go to the meetings, pick up their cheques and they go home.” As CEO Stumpf was also the Chairman of the Board, it might reasonably be asked if the relationship was too cozy and it might well be time to consider Armstrong’s proposal.

The most pressing issue will be of clawbacks. In an article in a Wall Street Journal (WSJ), entitled “Wells Fargo Board Comes Under Fire”, Michael Rapoport and Joann S. Lublin reported that Senate Banking Committee members were very critical of the Wells Fargo Board of Directors. But more than the theater of any major Congressional hearing, investors also expressed frustration that the bank has not “moved aggressively” to remediate the problems at issue. The article noted, “In particular, the board’s oversight of the bank’s compensation is under fire because of an incentive-pay structure that fueled the scandal by rewarding employees for selling more products to existing customers. Some think the board should have realized the bank’s pay incentives would lead to misbehavior.” Jill Fisch, a University of Pennsylvania law professor, was quoted for the following, “You might say the board of directors should have been sensitive to how the compensation structure might have induced them to behave that way.”

In his Senate testimony, Stumpf demurred on questions relating to salary and compensation clawbacks for executives saying that was for the Board to decide. However, with the now former head of the consumer banking group due to retire with a package estimated to be worth up to $127MM, it is clearly a very large question. It is also one of optics, with, at this point, seemingly low level hourly workers terminated over the scandal and no executives terminated, sanctioned or in any manner disciplined. In this Senate testimony, Stumpf could not name one executive who had been in any way disciplined or terminated over this scandal.

Whether you consider Senate hearing political theater or simply theater, John Stumpf and Wells Fargo did not come out looking very good.


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 tfox@tfoxlaw.com.

© Thomas R. Fox, 2016


Show Notes for Episode 22, week ending September 16, 2016

  • Harris Corp, China-business unit head settles FCPA matter, for the SEC Cease and Desist Order, click here;
  • Wells Fargo fraudulent accounts scandal,

a. articles in Compliance Week by Tom Fox, click here and here;

b. articles in the NYT, click here; and

c. articles in the WSJ, click here.

  • Telia reports $1.4bn demand to settle corruption claims around its subsidiary Vimpelcom, article in the FCPA Blog, click here.
  • FIFA opens formal investigation into reports that Sepp Blatter, two deputies took $81 million in pay and bonuses, from the FCPA Blog.
  • 5-day Blog post series on passion around compliance, see FCPA Compliance Report. Tom’s request to interview those attendees at the SCCE CEI who feel the same passion about working in compliance.
  • Jay previews his Weekend Report.

For more information see the following blog posts:

  2. On the Global Anti-Corruption Blog- Does an FCPA Violation Require a Quid Pro Quo? Further Developments in the JP Morgan “Sons & Daughters” Case