On September 8, 2016, Wells Fargo announced it was paying $185 million in fines to Los Angeles city and federal regulators to settle allegations that its employees created millions of fake bank accounts for customers. It also agreed to pay $142 million in a national class-action lawsuit to cover fake accounts that went back to 2002 plus another $6.1million to refund customers for unauthorized bank and credit card accounts. The impact of the Wells Fargo scandal continued well into 2020 as legal settlements with the government were drawn out, class-action lawsuits worked its way through the courts, and whistleblower retaliation lawsuits became resolved. In February 2020, the bank agreed to a $3-billion settlement with the SEC and Department of Justice over violations, which involved sales staff opening millions of bogus bank accounts for customers and others in order to meet punitive sales goals.

The problem was top management had set unrealistic sales goals that promoted aggressive sales tactics without regard for the ethics of these policies and what it meant for the public trust. Wells Fargo engaged in fraud when its employees set up fake accounts for customers, charged them for services not requested, and sold products not wanted because of aggressive cross-selling goals set by the bank. Wells Fargo pressured employees to cross-sell, offering customers with one type of product (i.e., savings or checking accounts) and then pressuring them to also buy other types of products, such as credit cards and loans. One former employee described it as a “grind house, with coworkers cracking under pressure.” Another former employee reported, “If you don’t meet your solutions goals you’re not a team player. If you’re bringing down the team then you will be fired and it will be on your permanent record.”⁹⁹

Many employees reported that company sales goals were unrealistic and incentives for compensation encouraged gaming the system. One employee said, “Everybody needs a ridiculous amount of products.” The sales culture was so intense that some workers resorted to deceptive practices to make their sales goals.” That completely contradicted what the former CEO, John Stumpf, said in front of a U.S. Senate Banking committee. He told committee members that “Wrongful sales practice behavior goes against everything regarding our core principles, our ethics and our culture.” Stumpf said the bank never directed nor wanted employees to provide products and services to customers that they did not want.¹⁰⁰

Stumpf’s self-serving statement is ironic given that he presided over the massive fraud at Wells Fargo, turning a blind eye as many of his underlings sent up red flares. While the fraud was going on, he collected what was estimated at about $300 million in cash, bonuses, and stock options. The board of directors found that the compensation was excessive and clawed back about $69 million after Stumpf’s dereliction of duty was revealed. Stumpf was hit with a $2.5 million penalty by the SEC. He also agreed to pay $17.5 million to other banking regulators.

Many questions can be raised as a result of the incident, including why the ethics and compliance machinery at Wells Fargo failed so miserably.

The facts of the case illustrate a company that put “profits-over-people.”¹⁰¹

• 3.5 million of fake bank and credit card accounts opened in customer names.
• Improperly charged mortgage fees known as rate-lock extensions when loan approvals exceeded the 30- to 45-day period. These fees were charged even though the delay in approvals were due to the bank, not the customer.
• Set up about 528,000 unauthorized online bill paying services.
• Forced up to 570,000 borrowers into unneeded auto insurance. The cost of unneeded insurance pushed about 274,000 Wells Fargo customers into delinquency and caused nearly 25,000 wrongful vehicle repossessions.
• Illegal vehicle seizures by repossessing more than 860 vehicles of U.S. service members in violation of the Servicemembers Civil Relief Act.

How did Wells Fargo, a bank that once had a strong reputation for customer service, get to this point? Their motto was: “Our product: SERVICE. Our valued-added: FINANCIAL ADVICE. Our competitive advantage: OUR PEOPLE.

It was a failure at all levels of management, but blame was laid at the doorstep of Stumpf who was forced to resign. Under his watch, Wells violated just about every standard of ethical behavior, most of which were addressed in this chapter. For now, here is a list of the systemic failures.

• A failure of leadership.
• Creating a toxic culture.
• Ignoring employee reports of fraudulent accounts.
• Not living up to the standards in its ethics code.
• Retaliating against whistleblowers, including violations of the Sarbanes-Oxley Act.

The retaliation against Wells Fargo whistleblowers illustrates how a company’s own ethics and compliance procedures are no better than the paper they are written on unless top management ‘walks the talk’ of ethics. Wells had an ethics hotline expressly for the purpose of reporting behavior that employees suspected as suspicious or fraudulent; then they retaliated against those employees who did just that.¹⁰²

Bill Bado, a former Wells Fargo banker, was one of six former Wells employees who spoke to CNN about their experiences. Bado, who refused orders to open phony bank and credit accounts, called the hotline and sent an e-mail to human resources, flagging unethical sales activities as he had been instructed to do. Eight days after reporting it, Bado was terminated. The reason given was “excessive tardiness.”¹⁰³

One unnamed whistleblower, who was a former branch manager in Pomona, California, received $577,500 in back wages and damages after being fired for reporting co-workers who engaged in allegedly fraudulent activities related to the fake-account scandal by opening accounts and enrolling customers in bank products without their knowledge, consent, or disclosures.

A number of Wells Fargo employees reportedly lodged whistleblower complaints with the Occupational Safety and Health Administration (OSHA) of the U.S. Department of Labor after being fired for reporting ethics violations to the company. The Sarbanes-Oxley Act contains a provision that protects whistleblowers who have been unlawfully retaliated against. One such employee, Claudia Ponce de Leon, was reinstated by OSHA, but the bank fought the order, claiming de Leon was fired for inappropriate behavior, not reporting that colleagues were opening fake accounts in order to meet sales goals.¹⁰⁴ Eventually, the bank reached a settlement but the terms were kept confidential.

The culture at Wells Fargo failed at the very top of management all the way down to employees. Stumpf and others failed to set an ethical tone in the organization, didn’t follow its own code of ethics, and virtually ignored employee hot line reports of what was going on. Wells’ Ethics Policy stated:

“Our ethics are the sum of all the decisions each of us makes every day. We have a responsibility to always act with honesty and integrity. When we do so, we earn the trust of our customers. We have to earn that trust every day by behaving ethically, rewarding open, honest communications, and holding ourselves accountable for our decisions and actions.”¹⁰⁵

The saga of Wells Fargo is a company that suffered from ethical blind spots, gave in to situational pressures to meet sales goals at all costs, and functioned in a social and organizational environment that led employees to do things they otherwise would not have done, that is, set up fake accounts and charge customers for unwanted services.

Questions

1. What factors played the most important role in leading so many Wells Fargo employees to cheat the bank’s customers?
2. Many employees admitted that they knew what they were doing was wrong but continued to open fraudulent accounts. Use ethical reasoning to evaluate why their actions were wrong.
3. Analyze the corporate governance failures in the Wells Fargo case.
4. Given the pressure-laden culture at Wells Fargo, if you had been in the position of bank employees what would you have done differently and why?