Wells Fargo's Unauthorized Customer Accounts

At its September 20, 2016, hearing, the Senate Banking Committee relentlessly grilled John

Stumpf, chairman and CEO of Wells Fargo, about charges that the bank had fraudulently

opened unauthorized accounts for millions of customers. Senator Elizabeth Warren (D-Mass.)

began with the question, "Have you returned one single nickel of the millions of dollars you

were paid while the scam was going on?" As Stumpf fumbled in response, she concluded, "So

you haven't resigned. You haven't returned a single nickel of your personal earnings. You

haven't fired a single senior executive. Instead, evidently, your definition of accountable is to

push the blame to your low-level employees who don't have the money for a fancy PR firm to

defend themselves. It's gutless leadership."1 A few days later, on September 29, congressional

members at a hearing of the House Financial Services Committee echoed the views expressed

in the Senate. Congressman Gregory Meeks (D-New York) said to Stumpf, "I can't believe what

I'm hearing here. You're going to tell me there's not a problem with the [bank's] culture?"

Patrick McHenry (R-North Carolina) accused Stumpf of being "tone deaf" for not grasping the

scandal's impact on society's trust in the banking system.

The two congressional hearings followed shortly after the imposition of fines on Wells Fargo by

the Consumer Financial Protection Bureau ($100 million), the Los Angeles City Attorney ($50

million), and the Office of the Comptroller of the Currency ($35 million). The reason for these

fines was that the bank had opened more than 2 million unauthorized checking and credit card

accounts without the consent of its customers between May 2011 and July 2015. Wells Fargo

settled with these regulatory agencies without admitting or denying the alleged misconduct.2

These fines were not the bank's only problems. Other lawsuits against Wells Fargofrom

customers, former employees, and shareholdershad started piling up. Shareholders had filed

a class action lawsuit alleging that the bank had misled investors about its financial

performance and the success of its sales practices. The price of Wells Fargo's stock had fallen

more than 10 percent since September 8, when it reached the page 480settlement with

regulators, wiping out more than $25 billion of market capitalization.3 Stumpf and his

leadership team faced a major crisis.

Wells Fargo and Company

Henry Wells and William Fargo founded Wells Fargo and Company on March 18, 1852. The

company began by offering banking and express services in California, and soon afterwards,

formed an overland mail service, becoming indelibly linked with the image of a stagecoach

drawn by six thundering stallions. The bank survived the Great Depression as well as the

difficult period of World War II. The prosperity of the 1960s saw the bank emerge as a major

regional bank in the western part of the United States. By the 1980s, when it started its online

banking service, Wells Fargo had become one of the top 10 U.S. banks.4

The bank weathered the financial crisis of 2007-2008 relatively unscathed. In fact, Wells Fargo

used it as an opportunity to grow by acquiring Wachovia, a bank weakened by the mortgage

crisis, in 2008. Wachovia's extensive retail network in the eastern United States, which

complemented Wells Fargo's, enabled the bank to double both its number of branches and total deposits. By the end of 2015, Wells Fargo had become a diversified banking and financial

services company with assets of over $1.8 trillion and approximately 265,000 employees,

serving one in three U.S. households.

In 2015, Wells Fargo was organized into three major, relatively autonomous, segments. These

were community banking, wholesale banking, and wealth and investment management. The

community banking division offered a complete suite of diversified financial products and

services to consumers and small businesses. Its loan products included lines of credit,

automobile inventory financing, equity lines, equipment loans, education loans, residential

mortgage loans, and credit cards. Consumer and business deposit products included checking

accounts, savings accounts, money market accounts, Individual Retirement Accounts, and time

deposits. The wholesale banking division provided financial solutions to businesses with annual

sales exceeding $5 million. It provided a complete line of business banking, commercial,

corporate, capital markets, cash management, and real estate banking products and services.

Finally, the wealth and investment management division provided a full range of personalized

wealth management, investment, and retirement products and services to high-net worth and

ultra-high-net worth individuals and families.

Between 2010 and 2015, Wells Fargo's assets grew by 46 percent and net income by more than

85 percent. By early 2015, it had posted 18 consecutive quarters of profit growth. Wells Fargo

performed better than its competitors; during most of these years, the bank's return on assets

and return on equity were higher than those of Bank of America, J. P. Morgan Chase, and

Goldman Sachs. Its efficiency ratio (the cost incurred to generate a dollar of revenue) was low

relative to that of its competitors. Of Wells Fargo's three major segments of business,

community banking contributed the most. In 2015, the community banking division contributed

57 percent of revenues, 59 percent of operating income and net income, and 51 percent of

total assets.5

Wells Fargo's financial performance was reflected in the increase in its stock price. In July 2015,

with market capitalization of about $300 billion, Wells Fargo became the most valuable bank in

the world. Its stock outperformed the broader benchmark, consisting of about page 48124

leading national and regional banks. An investment of $100 in the bank's stock at the end of

2009 would have been worth $230 by the end of 2015, earning investors a compounded annual

return of 12.4 percent over the six-year period. By contrast, for the same period, an investment

in BKX (a bank index) would have produced a compounded annual return of only 9.4 percent.6

Wells Fargo stock had also outperformed the broader stock market index over longer periods of

time. For the decade ending December 2015, its stock yielded a 14.3 percent compounded

annual return to the stockholders, compared with the 7.3 percent for S&P 500 index.

Corporate Governance and Senior Leadership

At the time of the Congressional hearings, Wells Fargo's board consisted of 15 directors. Except

for Stumpf, every board member was an independent director as defined by the rules of the

New York Stock Exchange (NYSE). All standing committees of the board, including the human

resources committee that determined the compensation of senior executives, consisted solely of independent directors. The board had also adopted Wells Fargo's Code of Ethics and

Business Conduct for its members. In 2016, NYSE Governance Services, a subsidiary of New York

Stock Exchange, bestowed the Best Board Diversity Initiative Award on Wells Fargo in

recognition of the wide breadth of experience, industry, age, ethnicity, and gender the board

possessed. In 2015, the annual compensation of board members consisted of cash and stock

awards ranging from $279,027 to $402,027 per director.7

John Stumpf served as both chairman of the board and chief executive officer. Born in 1953,

Stumpft grew up as one of eleven children on a dairy and poultry farm in Minnesota. After

earning an undergraduate degree from St. Cloud University and an MBA from the University of

Minnesota, Stumpf joined Northwestern National Bank (later Norwest), where he worked his

way up through a variety of positions, joining Wells Fargo after the bank acquired Norwest in

1998. In 2002, Stumpf was named group executive vice president of community banking and

was elected to Wells Fargo's board in 2006. Stumpf succeeded Richard Kovacevich as CEO in

June 2007 and become chairman in January 2010.8 As CEO, Stumpf instituted a policy of open

debate on issues concerning the bank. "Around here if you have something to say, you say it

nobody is going to be offended," he said. "We've learned how to disagree without being

disagreeable."9

Carrie Tolstedt headed Wells Fargo's community banking divisionwhere the unauthorized

accounts had been openedfrom June 2007 until July 2016. Tolstedt was a veteran in the

financial services industry, with 27 years at Wells Fargo. A graduate of the University of

Nebraska, she joined Norwest Bank in 1986, rising through the ranks to become a key associate

of Stumpf first at Norwest and later at Wells Fargo. In ranking Tolstedt near the top of its list of

the 25 Most Powerful Women in Banking in 2015, American Banker magazine noted the

challenges she faced during integration of Wachovia with Wells Fargo. "One risk of such a large

integration would be that the company's internal service culture would begin to drift," the

magazine opined, "but Tolstedt thinks up ways to communicate values to the front line."10

Wells Fargo's impressive financial and stock performance was reflected in the compensation

packages given to its senior managers. In setting executive compensation, the human page

482resources committee of the board considered the bank's financial performance (including

comparison with peers), progress on strategic priorities, strong and effective leadership,

business line performance (for business line leaders), proactive assessment and management of

risks, and an independent compensation consultant's advice.11 In 2015, Stumpf and Tolstedt

received total compensation of $19.3 million and $9.1 million, respectively.

Wells Fargo's Values and Code of Ethics

Wells Fargo described its primary values as follows:

First, we value and support our people as a competitive advantage and strive to attract,

develop, retain and motivate the most talented people we can find. Second, we strive for the

highest ethical standards with our team members, our customers, our communities and our

shareholders. Third, with respect to our customers, we strive to base our decisions and actions on what is right for them in everything we do. Fourth, for team members we strive to build and

sustain a diverse and inclusive cultureone where they feel valued and respected for who they

are as well as for the skills and experiences they bring to our company. Fifth, we also look to

each of our team members to be leaders in establishing, sharing and communicating our

vision.12

Wells Fargo's Code of Ethics and Business Conduct both described the importance of ethical

behavior and emphasized employees' responsibility to protect the reputation and integrity of

Wells Fargo. The bank also recommended a process for employees to follow when faced with

an ethical dilemma: they were instructed to contact their manager, HR advisor, or Office of

Global Ethics and Integrity for help. Employees could also report any concern regarding

accounting, internal accounting controls, and auditing matters directly to the audit and

examinations committee of the board or could call the bank's ethics hotline (called

"EthicsLine") if they saw or suspected illegal or unethical behavior.13

The "King of Cross-Selling"

Many analysts attributed Wells Fargo's financial success in large part to its prowess in cross

selling. Cross-selling referred to the practice of marketing related or complementary products

to an organization's existing customers (as contrasted with attracting new customers). Cross

selling had several benefits. It increased a customer's reliance on the firm and decreased the

likelihood he or she would switch to a competitor. It allowed a firm to extract the maximum

revenue potential from each customer. Servicing one account rather than several was also

more efficient. In 2006, Richard Kovacevich, Stumpf's predecessor as CEO, explained Wells

Fargo's rationale for cross-selling this way:

Cross-sellingor what we call "needs-based" sellingis our most important strategy. Why?

Because it is an "increasing returns" business model. It's like the "network effect" of e

commerce. It multiplies opportunities geometrically. The more you sell customers, the more

you know about them. The more you know about them, the easier it is to sell them more

products. The more products customers have with you, the better value they receive and the

more loyal they are. The longer they stay with you, page 483the more opportunities you have

to meet even more of their financial needs. The more you sell them, the higher the profit

because the added cost of selling another product to an existing customer is often only about

10 percent of the cost of selling that same product to a new customer.14

Under Stumpft and Tolstedt's leadership, Wells Fargo continued to emphasize the importance

of cross-selling. In addition to signing up existing customers for additional services, the bank

offered customers a set of interrelated products with discounts integrated into the package. For

example, its premier relationship package (called PMA) offered customers a free current

account and free bill payments, together with options to add a savings account, credit card,

mortgage loan, and a discount brokerage account. About 63 percent of new customers opted

for such packages, with an average of four products per package.15Exhibit A depicts the cross-sell ratio (number of accounts or products per customer) of Wells

Fargo from 1998 to 2016. As shown, by 2009 Wells Fargo had recorded an increased cross-sell

ratio for 11 consecutive years. At the time of the Wachovia acquisition in 2008, Wells Fargo's

cross-sell ratio (5.95 per customer) was higher than Wachovia's (4.65). Wachovia's customers

therefore provided an opportunity for Wells Fargo to offer additional products and services,

further increasing the cross-sell ratio. In the 2010 annual report, Stumpf proposed a goal of

eight accounts per customer, declaring the number "rhymed with 'great.'" He added, "Perhaps

our new cheer should be: 'Let's go again, for ten!'" In the same report, he also mentioned the

challenges of cross-selling. "If anyone tells you it's easy to earn more business from current

customers in financial services, don't believe them. page 484We should know. We've been at it

almost a quarter century. We've been called, true or not, the 'king of cross-sell.'"16

Exhibit A Wells Fargo Cross-Sell Ratios, 1998-2016

Source: Wells Fargo annual reports.

Wells Fargo was not alone in using cross-selling as a marketing tool. Several other large and

regional banks, including Bank of America, Citizens Bank, PNC Bank, SunTrust Bank, and Fifth

Third Bank, also used this strategy. However, Wells Fargo's success in cross-selling was

unparalleled. In the second quarter of 2016, the cross-sell ratio (number of products or

accounts per customer) for U.S. banks in 2016 averaged 2.71; Wells Fargo's was 6.27.17

To improve its cross-sell ratio, Wells Fargo developed a system of incentives for its employees.

Employees who cross-sold successfully were rewarded with extra compensation. Branch

employees who hit sales targets could earn bonuses of $500 to $2,000 per quarter, on top of

base salaries of about $25,000 to $30,000 a year.18 District managers could earn bonuses of

$10,000 to $20,000 a year. In addition to providing bonuses, the bank mandated quotas for the

number and types of products to be sold by employees. One employee remarked, "If we did not

make the sales quotas, we had to stay for what felt like after-school detention, or report to a

call session on Saturdays."19 Employees reported that branch managers routinely monitored

their progress toward meeting their sales goals, sometimes hourly, and sales numbers at the

branch level were reported to higher-ranking managers as many as seven times a day. If an

employee did not meet their quota, he or she was reportedly chastised by the community

banking president in front of other staff.20

Unauthorized Accounts

While most Wells Fargo employees tried to sell the right products to the right customers, some

responded to the intense pressure to meet sales targets by opening accounts that customers

had not authorized. An internal investigation later revealed that bank employees had opened as

many as 1,534,280 unauthorized deposit accounts and another 565,443 unauthorized credit

card accounts between 2011 and 2015.21 How had they done this without the customers'

knowledge? In some cases, employees had created phony PIN numbers and fake e-mail

addresses to enroll existing customers for "Net Banking" services and had forged client

signatures on paperwork.22 Some of the questionable accounts had been created by moving a small amount of money from an existing account to open a new one for a customer. Shortly

thereafter, the employees would close the new account and move the money back to the

original account, thereby earning credit toward their quotas. Sometimes, customers were told

by phone that Wells Fargo planned to send them a new credit card as a "thank you" for their

business. If a customer didn't want the card, he or she was told to cut up the card when it

arrived in the mail. However, most customers were unaware that issuing a new card required a

credit check, which could potentially lower their credit scores.

page 485

In many cases, customers did not know that a new account had been opened in their name

until they received a congratulatory letter. Sometimes, when the customers complained about

unwanted credit cards, the branch manager would blame a computer glitch or say the card had

been requested by someone with a similar name. On several occasions, upon receiving the

customer complaint, Wells Fargo refunded the amount charged to the customer. However,

such refund would not restore any deterioration in the creditworthiness of the customer, who

might face higher interest rates or be denied access to credit in the future.23

Opening unauthorized accounts clearly violated the bank's rules. A 2007 internal document

titled Sales Quality Manual stated that customer consent for each specific solution or service

was required every time (including for each product in a package). The document also stated

that "splitting a customer deposit and opening multiple accounts for the purpose of increasing

potential Incentive Compensation (IC) is considered a sales integrity violation."24 When the

Senate Banking Committee questioned Stumpf about the unauthorized accounts, he repeatedly

stated that the vast majority of employees did the right thing, and whenever an internal

investigation had found that an employee had created an account and funded it on behalf of

the customer without that customer's permission, the employee was terminated. He said

employees who had opened unauthorized accounts had "violated the company's code of

ethics, were dishonest, and did not honor our culture."

Wells Fargo's external auditors, KPMG, did not raise any red flags in their audit reports or in

their reports on the effectiveness of internal controls at the bank during the period covered by

the settlements.25 However, top managers knew about the problem as early as 2011, when the

bank fired 1,000 employees for opening unauthorized accounts. (The board was informed of

these terminations.)26 In December 2013, the Los Angeles Times published an investigative

article under the title, "Wells Fargo's Pressure-Cooker Sales Culture Comes at a Cost," based on

interviews with employees and a review of bank documents and court records, putting the

issue in the public eye.27 At both the 2014 and 2015 annual meetings, employees had delivered

petitions with over 10,000 signatures, urging the board to recognize the link between high

pressure sales quotas and the fraudulent opening of accounts without customer permission.28

In August 2015, Wells Fargo hired PricewaterhouseCoopers LLP (PwC) to carry out a detailed

analysis of the sales practices pertaining to all of the 82 million deposit accounts and nearly 11

million credit card accounts that had been opened between 2011 and 2015, to quantify the remediation needed to compensate customers who had suffered because of accounts

fraudulently opened in their names. About a dozen PwC employees worked on the assignment

for about a year and confirmed the prevalence of fraudulent sales practices at the bank.29

Employees Speak Out

In the wake of the congressional hearings and fines levied against Wells Fargo, dozens of

employees spoke to the media about their experiences.

page 486

The Wall Street Journal reported the story of one employee (Scott Trainor) who said that

managers suggested that employees hunt for sales prospects at bus stops and retirement

homes. The employees who refused to do so were harassed, penalized, and even terminated.30

The New York Times reported that another employee (Dennis Russell) said that as a telephone

banker, he handled incoming customer service calls and was expected to refer 23 percent of his

callers to a sales representative for additional product sales. But the customers Russell spoke

with were usually in dire financial shape. Looking at their accounts, he could see mortgages in

foreclosure, credit cards in collection, and cars being repossessed for overdue loan payments.

"The people calling didn't have assets to speak of," Russell said. "What products could you

possibly offer them in a legitimate way? It's a crock, they established the culture that made this

happenit comes down from the top." Russell was fired in 2010.31

CBS News reported that a former banker (Yesenia Guitron) sued Wells Fargo in 2010 claiming

that intense sales pressure and unrealistic quotas drove employees to falsify documents and

game the system to meet their sales goals. She did everything Wells Fargo had asked

employees to do to report such misconduct. She told her manager about her concerns. She

called Wells Fargo's ethics hotline. When those steps yielded no results, she went up the chain,

contacting an HR representative and the bank's regional manager. After months of retaliatory

harassment, Guitron was fired for insubordination.32

CNN Money reported that a Wells Fargo employee (Bill Bado) had called the ethics hotline and

sent an e-mail to human resources in September 2013, flagging sales he was instructed to

execute that he believed to be unethical. Eight days after that e-mail, he was terminated on the

grounds of tardiness.33 Another employee (Christopher Johnson) told The New York Times that

after he started working, his manager began pressuring him to open accounts for his friends

and family, with or without their knowledge. Following the instructions received during

training, he called the company's ethics hotline. Three days later, Johnson was fired for "not

meeting expectations."34 The dismissals of Bado and Johnson occurred despite the bank's

explicit non-retaliation policy outlined in a handbook that was given to every employee.

Wells Fargo's Response

At the congressional hearings, Stumpf apologized several times, stating, "We recognize now

that we should have done more sooner to eliminate unethical conduct or incentives that may

have unintentionally encouraged that conduct." He accepted full responsibility and said that the bank would take steps to address any underlying problems and restore its customers' trust.

But he also insisted that "we never directed nor wanted our employees, whom we refer to as

team members, to provide products and services to customers they did not want or need."35

The bank had already taken several remedial actions. Stumpf testified that since 2011 Wells

Fargo had fired 5,300 employees who had opened unauthorized accounts, but he also

emphasized that this number represented a small percentage of the bank's employees, most

page 487of whom had done nothing wrong. The bank had refunded to customers $2.6 million

of wrongfully charged fees. Stumpf also revealed that he had recommended that Wells Fargo's

board rescind unvested stock awards of $41 million to him and $19 million to Carrie Tolstedt,

who led the bank's community banking division where the wrongful sales practices had

occurred.36 He said that the bank would eliminate sales goals ("quotas") for cross-selling, but

would not back away from cross-selling completely. He also noted that although the

settlements involved conduct that began in 2011, the bank's investigation was going back to

2009 and 2010, when Wachovia was being absorbed, to determine whether misconduct was

taking place then.

But Stumpf's statements did little to appease the members of Congress. Many Senators and

congressional members demanded Stumpf's resignation and the claw-back of his compensation

of about $200 million during the years of misconduct. They also demanded a claw-back from

Tolstedt, who was set to retire at the end of 2016 with a $124 million paycheck (a mix of shares,

options and restricted stock).37 "You have broken long-standing ethical standards inside the

company," said Congressman Patrick McHenry (R-North Carolina). "How can you rebuild

trust?"38

Discussion Questions

Describe the "unauthorized customer accounts" referenced in the title of the case. What did

the bank and its employees do? Which stakeholders were helped and which were harmed by

these actions?

Do you believe Wells Fargo demonstrated an ethical corporate culture? Why or why not? In

your response, please consider both the formal ethics policies of the bank and ethical

leadership as modeled by its senior executives and board of directors.

Describe "cross-selling." What were the benefits of cross-selling to the bank and its

shareholders? In what ways did cross-selling contribute to the problems Wells Fargo later

faced?

If you were an employee of Wells Fargo and felt pressured to cross-sell to customers, even

when you felt this was inappropriate, what would you have done?

Did Wells Fargo respond appropriately to employees who voiced their concerns about

unauthorized accounts? What should it have done differently?Looking at the case as a whole, what steps would you recommend Wells Fargo, its senior

managers, and its board of directors do now to prevent such events from occurring again in the

future?

1. Review Case 5: "Well Fargo
2. Answer all six discussion questions from regarding this case study.