Wells Fargo needs real probe
Outsider should investigate bank
Wells Fargo is trying really hard to win back customers after the company admitted that employees created up to 2 million fraudulent accounts.
As evidence of the company’s commitment to transparency and good intentions, CEO Tim Sloan has consistently pointed to what he called an “exhaustive” and “independent” investigation led by the board of directors.
But the San Francisco banking giant will never be able to move beyond the scandal, because the board inquiry was neither exhaustive nor independent. We know this because there have been wave after wave of fresh revelations of misconduct that have spread beyond the original account-opening scandal.
For this reason, former Federal Reserve official Elizabeth Duke, who will become Wells Fargo chairwoman in January, should order another review, this time led by a credible outside figure with experience in law enforcement, financial regulation or — better yet — both. The company should also hire an independent accounting firm to conduct a forensic audit.
“Wells Fargo’s board and management team have taken many actions in response to its retail sales practices issues, including changes in senior leadership, executive accountability actions and numerous steps to ensure we make things right with our customers and other stakeholders,” spokesman Ancel Martinez said in an email. “This work continues and remains a core part of our efforts to build a better Wells Fargo.”
Another investigation will no doubt cost a lot of money and time. But Wells Fargo could have avoided this had the company done it right the first time. The previous investigation, supervised by a fourmember board committee, hired the Shearman & Sterling law firm to “assist” the inquiry. Stuart Baskin, a Shearman partner, is defending those four directors against a shareholder lawsuit filed by prominent Burlingame attorney Joe Cotchett against the Wells Fargo board, which immediately raises the question of how independent the firm can be.
The resulting 113-page report completely exonerated the board, which is highly convenient for the directors who paid for it. Former CEO John Stumpf, who was forced to resign, bore much of the blame.
“Clearly, you have to blame it on someone,” said Wayne Guay, a professor of accounting and an expert of corporate governance at the University of Pennsylvania’s Wharton School.
The inquiry focused on only one division, retail banking, even though the board said the decentralized structure of all of the company’s businesses prevented top executives from detecting wrongdoing. Finally, the report covered a limited time period; we now know allegations of fraudulent accounts surfaced as far back as 2001.
“The board should have examined the entire enterprise,” said Clifford Rossi, a former chief risk officer at Citigroup’s consumer lending unit who now teaches finance at the University of Maryland. “Otherwise, you get this drip, drip” of possible misconduct that was not covered by the report.
For years, Wells Fargo outpaced competitors in revenue growth, he said. That makes you wonder what else employees did to goose sales, Rossi said.
Cotchett filed court documents in April, detailing a scheme in which Spanish-speaking employees would visit places they knew were frequented by undocumented immigrants (including construction sites and a 7-Eleven), drive them to a branch and persuade them to open an account. Some employees allegedly gave the immigrants $10 apiece to start an account. The events described in the declaration go back a decade.
Additional claims of wrongdoing have emerged. Based on company documents obtained in discovery, attorneys who filed a federal class action lawsuit against Wells Fargo estimate that there may have been 3.5 million fraudulent accounts, almost double the bank’s original estimate. (The company said the estimate was “hypothetical.”)
Wells Fargo also recently determined that the bank charged 800,000 car loan customers for auto insurance they did not need. Another lawsuit claims that the bank reordered customers’ transactions to collect more overdraft fees.
“It’s death by thousands of cuts,” Rossi said.
Just by virtue of its size, Wells Fargo faces lots of lawsuits, and not all of the accusations are necessarily true. But given the current environment, any new allegation of fraud undermines the board’s and the company’s credibility, especially when it claims that directors had laid such issues to rest.
“Bank boards primarily exist to protect management,” said Richard Bove, a bank analyst with Vertical Group. “They have done an extraordinarily bad job. I can’t imagine anyone whom I would trust less to safeguard my money than a board.”
That’s why Duke should appoint a prominent outside person to run a more credible review.
Companies have often looked to notable names to lead investigations. Uber went big when it faced allegations of sexism and mismanagement, hiring former U.S. Attorney General Eric Holder’s firm in February. In 2012, Best Buy had a former U.S. attorney and the former director of enforcement at the Securities and Exchange Commission investigate allegations of misconduct against former CEO Brian Dunn.
Wells Fargo’s situation is more serious than that of Uber or Best Buy, because the bank’s scandal involves the way it treated its customers, not just the company’s culture or a wayward CEO.
Until the board commissions a credible outside investigation, Wells Fargo will continue to be dogged by a scandal it could have laid to rest a while ago.
“The board should have examined the entire enterprise. Otherwise, you get this drip, drip” of possible misconduct that was not covered by the report. Clifford Rossi, a former chief risk officer at Citigroup who now teaches finance at the University of Maryland