By Ben Eisen
Wells Fargo & Co. will pay $3 billion to settle
investigations by the Justice Department and the Securities and
Exchange Commission into its long-running fake accounts scandal,
closing the door on a major portion of the legal problems that for
years have beset one of the country's largest banks.
The deal resolves civil and criminal investigations. It includes
a so-called deferred prosecution agreement, in which the Justice
Department reserves the right to pursue criminal charges. The bank
has to satisfy the government's requirements, including its
continued cooperation with further investigations, over the next
three years.
Friday's settlement is a victory for Charles Scharf, an outsider
who took over as chief executive in October and was tasked with
fixing the crisis that has claimed two CEOs.
"The conduct at the core of today's settlements -- and the past
culture that gave rise to it -- are reprehensible and wholly
inconsistent with the values on which Wells Fargo was built," Mr.
Scharf said in a statement. "We are committing all necessary
resources to ensure that nothing like this happens again, while
also driving Wells Fargo forward."
The bank, though, still faces major regulatory problems. Most
notably, it is under sanction by the Federal Reserve, which has
taken the unusual step of capping the bank's growth. Settling with
the Justice Department and SEC could allow the bank to focus on
persuading the Fed to lift the cap.
As part of the settlement, Wells Fargo admitted that it
"unlawfully misused customers' sensitive personal information" and
harmed some customers' credit ratings, collecting millions of
dollars in fees and interest in the process.
The scandal severely damaged the bank's reputation with
customers and regulators alike, providing a case study of sorts on
how success in banking depends on customers trusting a firm enough
to leave their money there. It also has unsettled customers who
have long thought of retail banking as a service that takes
deposits and makes loans, not a sales-driven industry hawking as
many products as possible.
Regulators first fined Wells Fargo over the sales practices in
2016, alleging that executives created a pressure-cooker
environment in branches where low-level employees were so beset by
high sales goals that they opened up fake and unauthorized bank
accounts.
Afterward, regulators and lawmakers were outraged not just by
the allegations but by what they perceived as the bank's slow
response to them. What's more, with the bank under increasing
scrutiny, additional legal and regulatory problems sprang up across
other business units, including wealth management and
foreign-exchange trading. What was once a fast-growing lender whose
profits towered above those of rivals became a firm with declining
revenue that is leaning heavily on cost cuts.
The SEC portion of the settlement accused the bank of misleading
shareholders. According to the charges, Wells Fargo touted to
investors its ability to sell additional products to current
customers, a practice known as cross-selling, even though numbers
were inflated because of the fake accounts.
Aside from Friday's settlement, regulators and prosecutors could
still take action against former executives, according to people
familiar with the situation. Last month, the Office of the
Comptroller of the Currency charged eight former Wells Fargo
executives over the fake-account scandal, including a former
CEO.
Wells Fargo for years enjoyed a reputation as a folksy industry
darling that catered to Main Street customers. But that reputation
was left in tatters after the sales scandal became public.
"Wells Fargo traded its hard-earned reputation for short-term
profits, and harmed untold numbers of customers along the way,"
Nick Hanna, U.S. Attorney in Los Angeles, said Friday.
Prosecutors said the practices date to 1998, when Wells Fargo
began to rely more heavily on sales growth. It pressured employees
to cross-sell additional products to current customers.
The heightened pressure pushed many employees to open checking
and savings accounts without customer knowledge and make up
identification numbers to activate unauthorized debit cards.
Employees, afraid they would be fired otherwise, sometimes
forged customer signatures to open accounts or altered customers'
contact information to prevent them from learning about
unauthorized accounts, the government said. Sometimes they
persuaded friends and family members to open accounts they didn't
want or need.
Regulators and prosecutors said top managers knew of these
issues years ago. In 2004, an internal investigator called it a
"growing plague." In 2005, a corporate investigations manager
described the problem as "spiraling out of control." Employees
continued to raise concerns internally, the government said.
It also said certain executives "impeded" the OCC from
scrutinizing the sales practices.
After the scandal erupted in 2016, the bank's top executives
faced heavy criticism for holding lower-level employees
responsible. Wells Fargo fired thousands of branch employees, but
regulators, lawmakers and even the bank's own board questioned
whether the junior staffers were the ones to blame.
A board investigation found that the bank's decentralized
structure allowed top executives to avoid addressing these issues
as they got bigger.
Without referring to her by name, the Justice Department heavily
criticized Carrie Tolstedt, the former head of the consumer bank.
By 2012, regional executives "were regularly raising objections" to
Ms. Tolstedt about "unlawful and unethical sales practices."
Ms. Tolstedt is one of the former executives the OCC charged
last month. Her lawyer said Friday she "acted appropriately and in
good faith at all times, and the effort to scapegoat her is both
unfair and unfounded."
The House Financial Services Committee said Friday it is holding
three hearings about Wells Fargo in March. Mr. Scharf will testify
at one of them, his first appearance before the committee since he
took over as CEO. Members of the board will testify at another, a
spokeswoman for the bank said.
--Rachel Louise Ensign, Aruna Viswanatha and Dave Michaels
contributed to this article.
Write to Ben Eisen at ben.eisen@wsj.com
(END) Dow Jones Newswires
February 21, 2020 19:35 ET (00:35 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.
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