Wells Fargo Scandal Shines Harsh Spotlight On Bank Practices

Wells Fargo & Co. (NYSE:WFC) is finding its policies under a harsh spotlight after the bank found itself entangled in a scandal over the opening of fraudulent accounts by its employees. A federal regulator and the Los Angeles prosecutor alleged that the company’s employees created roughly 2 million accounts for customers without their knowledge. Chief Executive John Stumpf is now under pressure to explain how this happened on his watch.

U.S. prosecutors have begun an investigation into the bank’s sales practices, but the bank had been looking into the tactics deployed in its branches since 2011. A Los Angeles Times investigation published in 2013 described numerous issues with the sales culture at the bank. Stumpf has apologized and said management takes responsibility for what happened. He will testify before the Senate Banking Committee next week.

The bank agreed to settle the claims for $185 billion without admitting wrongdoing. However, the settlement barely makes a dent in the $23 billion of profit earned last year by the bank. In an interview with the Wall Street Journal, Stumpf, seemed to lay the blame for the scandal specifically on rogue employees. The bank says it has fired 5,300 people over the scandal. Not once did Stumpf insinuate that there was a corporate culture issue at Wells Fargo.

The scandal caused a 7.5 percent drop in Wells’ stock. The bank has lost roughly $19 billion of its market value since the disclosure. Activist investors have begun filing shareholder resolutions with Wells Fargo. Some call on the bank to split the roles of chairman and CEO, both held by Stumpf, while others call on the bank to study breaking up its business.

The bank gave investors no indication of the scale of the account scandal prior to announcing the settlement. According to bank spokesman Mark Folk, the bank did not believe it had to disclose information to investors ahead of the settlement. The bank did not say until this week that it had set aside money for the settlement during the second quarter.

A group of Democratic U.S. senators asked in a letter dated Sept. 15 whether the bank will claw back top managers’ pay following the scandal. There seems to be ample justification for recouping at least some of the compensation paid to Carrie Tolstedt, who led the unit where the alleged misconduct occurred. Wells Fargo’s clawback policy permits the bank to recoup about $17 million in unvested shares from Tolstedt. That doesn’t include previously vested stock options worth $36 million as of Tuesday’s stock-market close.