The latest developments in the ongoing Wells Fargo scandal, ahead of Chairman and CEO John Stumpf’s testimony before the House Financial Services Committee on Sept. 29: clawbacks, including a $41 Million hit for Stumpf; a Department of Labor investigation; and a new class action lawsuit.
The bank has faced an onslaught of criticism over recent revelations that employees opened 2 million accounts and credit cards in the names of customers without their knowledge. The offenses, dating back to 2011, resulted in 5,300 terminations and netted $185 million in fines from the Consumer Financial Protection Bureau, Office of the Comptroller of the Currency, and City of Los Angeles.
On the evening of Sept. 27, the independent directors of the board of directors of Wells Fargo & Company announced that they have launched an independent investigation into retail banking sales practices and related matters. A special committee will lead the investigation, working with the board’s human resources committee and independent counsel Shearman & Sterling. Stumpf, a member of the Board, has recused himself from all matters related to the investigation.
More immediately, Stumpf will forfeit all of his outstanding unvested equity awards, valued at approximately $41 million based on that day’s closing share price, and will forgo his salary while the investigation is underway. He will not receive a bonus for 2016.
Carrie Tolstedt, until recently Head of Community Banking, has immediately left the company (she had previously announced plans to retire at the end of the year) and will forfeit all of her outstanding unvested equity awards, valued at approximately $19 million. Tolstedt will not receive a bonus for 2016 and will not be paid severance or receive any retirement enhancements in connection with her separation from the company.
Tolstedt also agreed that she will not exercise her outstanding options during the pendency of the investigation. “These initial actions will not preclude additional steps being taken with respect to Mr. Stumpf, Ms. Tolstedt or other executives as a consequence of the information developed in the investigation,” the board wrote.
“We will conduct this investigation with the diligence it deserves and will follow the facts wherever they lead,” Stephen Sanger, lead independent director, said in a statement. “Based on the results of the investigation, the [board] will take such other actions as they collectively deem appropriate, which may include further compensation actions before any additional equity awards vest or bonus decisions are made early next year, clawbacks of compensation already paid out, and other employment-related actions. We will proceed with a sense of urgency but will take the time we need to conduct a thorough investigation. We will then take all appropriate actions to reinforce the right culture and ensure that lessons are learned, misconduct is addressed, and systems and processes are improved so there can be no repetition of similar conduct.”
Ahead of that news, Senate democrats were applauding a Department of Labor announcement that it will conduct a “top-to-bottom review of cases, complaints, or violations concerning Wells Fargo over the last several years” related to the Fair Labor Standards Act and other labor laws. The decision comes in response to a request for an investigation from Senators Elizabeth Warren (D-Mass.), Sherrod Brown (D-Ohio), Jack Reed (D-R.I.), Robert Menendez (D-N.J.), Bernard Sanders (I-Vt.), Jeff Merkley (D-Ore.), Kirsten Gillibrand (D-N.Y.), and Mazie Hirono (D-Hawaii).
“Every other federal agency with jurisdiction in this matter should follow the Labor Department’s lead and promptly determine whether Wells Fargo and its senior executives should be prosecuted or otherwise sanctioned,” Warren said in a statement.
The senators’ initial request, in a letter to Secretary Tom Perez, noted that the CFPB’s recent investigation into Wells Fargo “uncovered a workplace characterized by stringent sales quotas and aggressive incentives imposed on its employees, and staggering neglect by management of the obvious consequences to consumers of those quotas and incentives,” and cited a series of employee complaints over a period of several years.
“In the wake of the CFPB's announcement, dozens of former and current Wells Fargo employees have come forward to describe the lengths they went to in order to meet the bank's aggressive sales quota,” the senators wrote. “When quotas weren't met, employees faced threats of termination; mandated hours of unpaid overtime; harassment; and other forms of retaliation. For years Wells Fargo employees have described a management culture characterized by ‘mental abuse,’ being forced to work overtime ‘for what felt like after-school detention’ during the week and on weekends, and being "severely chastised and embarrassed in front of 60-plus managers."
The senators also point out that:
Last month, a former Wells Fargo employee filed a class-action lawsuit in a U.S. district court in Pennsylvania alleging that the bank violated the FLSA in failing to pay account executives overtime wages for hours worked in excess of 40 hours per week.
• In 2014, employees filed a case against Wells Fargo claiming wrongful termination and failure to pay overtime.
• In July of 2013, account executives for Wells Fargo Insurance Services filed a complaint alleging that the company had violated the FLSA in denying them overtime pay and improperly misclassifying them as overtime exempt. 14
• In 2013, five Wells Fargo branch managers in California filed lawsuits alleging the bank's failure to pay overtime and wrongful misclassification.
• In 2011, Wells loan officers filed a complaint against the bank for misclassification and failure to pay overtime going back to 2008. 16 In this suit, the plaintiffs argued that they worked so many hours above 40 that their take-home pay per hour frequently fell below the state's minimum wage.
An investigation should include “a comprehensive inquiry into whether Wells Fargo aggressively skirted overtime laws,” the letter adds. “Such allegations are especially worrisome on the eve of the December 1, 2016 implementation of the Department's updated overtime regulations. It is critical that the Department investigate Wells Fargo now to ensure that the bank is not poised to skirt the forthcoming rule.”
The Labor Department’s response letter explains that it has established a working group that includes the Wage and Hour Division (WHD), the Employee Benefits Security Administration, the Occupational Safety and Health Administration (OSHA), the Office of Federal Contract Compliance Programs, and the Office of the Solicitor to review the serious allegations.
“In addition to 0ur top-to-bottom review, the Department has taken other measures to ensure that all current and former Wells Fargo employees are of [worker protection laws],” the letter adds. “This includes creation of a dedicated landing page at www.dol.gov/wellsfargo.”
Whistleblower retaliation claims will also be investigated. “Of note, OSHA enforces 22 separate whistleblower laws, including those under the Consumer Financial Protection Act and the Sarbanes-Oxley Act (SOX),” the letter adds. “The OSHA Whistleblower Protection Program received a number of complaints from Wells Fargo employees over the past five years under both the CFPA and SOX. The majority of the whistleblower cases that OSHA investigated against Wells Fargo in the last five years have been concluded, through settlement or other actions.”
In some cases, OSHA determined that the complaints had no merit under whistleblower laws, but it will continue to “investigate at least a handful of complaints” from former and current employees.
Amid the activity in Washington D.C., the law firm Robbins Geller Rudman & Dowd has filed the first securities class action complaint against Wells Fargo over the fake accounts. The complaint also names Stumpf, Tolstedt, Chief Financial Officer John Shrewsberry. The complaint, filed in the Northern District of California, alleges violations of the Securities Exchange Act of 1934 and SEC Rule 10b-5.
“While the resulting stock price declines have obviously harmed shareholders, the misconduct has exposed the company to criminal probes that could prove even more damaging to the public and shareholders,” says Robbins Geller partner Shawn Williams.
The fraud class action was filed on behalf of shareholder Gary Hefler and all who purchased Wells Fargo common stock between Feb. 26, 2014 and Sept. 15, 2016, a time period they say was marked by “artificially inflated prices.”
“While bragging about the Company’s cross-selling prowess [to investors], defendants knew but deliberately failed to disclose known material true facts, including that the Company’s cross-selling strategy was not focused on or designed to benefit customers, but was instead designed to fulfill sales quotas or otherwise advance the interests of Wells Fargo or its employees and increase sources of profitability, while simultaneously burdening customers with financial products they did not authorize, need and/or even know about,” the lawsuit says.
“Unlawful activity, driven by a sales culture engineered by defendants, was admittedly known to but not disclosed by the Company and its CEO…before the commencement of the Class Period and was confirmed by internal investigations that resulted in the termination of thousands of employees,” the suit adds.
The lawsuit makes the case that “no mention is made of the bank’s internal probe, or authorities’ probes in the ‘legal actions’ section of its latest quarterly or annual securities filings.” The bank also did not say, “until this week, that during the second quarter it had set aside money for the settlement.”