Question

How did the Wells Fargo account fraud scandal affect the company financially?

Answer 1

The Wells Fargo account fraud scandal is an ongoing controversy brought about by the creation of millions of fraudulent savings and checking accounts on behalf of Wells Fargo clients without their consent. News of the fraud became widely known in late 2016 after various regulatory bodies, including the Consumer Financial Protection Bureau (CFPB), fined the company a combined US$185 million as a result of the illegal activity. The company has faced and faces additional civil and criminal suits reaching an estimated $2.7 billion by the end of 2018

EFFECT ON COMPNAY

The bank fired approximately 5300 employees between 2011 and 2016 as a result of fraudulent sales,and discontinued sales quotas at its individual branches after the announcement of the fine in September 2016.John Shrewsberry, the bank's CFO, said the bank had invested $50 million to improve oversight in individual branches. Stumpf accepted responsibility for the problems, but in September 2016, when the story broke, indicated he had no plans to resign.

Stumpf was subject to a hearing before the Senate Banking Committee on September 21, 2016, in an effort led by Senator Elizabeth Warren.Before the hearing, Stumpf agreed to forgo $41 million in stock options that had not yet vested after being urged to do so by the company's board.Stumpf resigned on October 12, roughly a month after the fines by the CFPB were announced, to be replaced by COO Timothy Sloan. Sloan indicated there had not been internal pressure for Stumpf's resignation, and that he had chosen to do so after "...deciding that the best thing for Wells Fargo to move forward was for him to retire...".In November 2016, the Office of the Comptroller of the Currency levied further penalties against the bank, removing provisions from the September settlement.As a result of the OCC adding new restrictions, the bank received oversight similar to that used for troubled or insolvent financial institutions.

Stumpf received criticism for praising former head of retail banking, Carrie Tolstedt, upon her retirement earlier in 2016, given that the bank had been conducting an investigation into retail banking practices for several years at the time.In April 2017, the bank utilized a clawback provision in Stumpf's contract to take back $28 million of his earnings.Tolstedt was also forced to forfeit earnings, though she denied involvement.Tolstedt was responsible for the pressure placed on middle management to dramatically increase the bank's "cross-sell ratio", a metric for how many accounts each customer had.

The bank experienced decreased profitability in the first quarter after the news of the scandal broke.Payments to law firms and other external advisers resulted in increased expenses. After earnings were reported in January 2017, the bank announced it would close over 400 of its approximately 6000 branches by the end of 2018.In May 2017, the bank announced that they would cut costs through investment in technology while decreasing reliance on its “sales organization”.The bank also revised up its 2017 efficiency-ratio goal from 60 to 61.

Tim Sloan later resigned in March 2019 under pressure related to the scandal.

The Department of Justice and the Securities and Exchange Commission reached a settlement with the bank in February 2020 for a total fine of US$3 billion to address the bank's criminal and civil violations. However, this settlement does not cover any future litigation against any individual employee of the bank.