Wells Fargo Settles Criminal and Civil Sales Practices Cases

February 24, 2020

Wells Fargo & Company and its subsidiary, Wells Fargo Bank, N.A., agreed to pay $3 billion to resolve their potential criminal and civil liability stemming from a practice between 2002 and 2016 of pressuring employees to meet unrealistic sales goals that led thousands of employees to provide millions of accounts or products to customers under false pretenses or without consent, often by creating false records or misusing customers' identities. A Deferred Prosecution Agreement (effective for three years) and Civil Settlement allegedly took into account a number of factors, including Wells Fargo's:
  • purportedly extensive cooperation and substantial assistance with the government's investigations; 
  • admission of wrongdoing; 
  • its continued cooperation in the investigations; 
  • prior settlements in a series of regulatory and civil actions; 
  • remedial actions, including significant changes in Wells Fargo's management and its board of directors, an enhanced compliance program; and 
  • significant work to identify and compensate customers who may have been victims.
READ the full-text:


The criminal investigation into false bank records and identity theft is being resolved with a deferred prosecution agreement in which Wells Fargo will not be prosecuted during the three-year term of the agreement if it abides by certain conditions, including continuing to cooperate with further government investigations. Wells Fargo also entered a civil settlement agreement under the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA) based on Wells Fargo's creation of false bank records. FIRREA authorizes the federal government to seek civil penalties against financial institutions that violate various predicate criminal offenses, including false bank records. Wells Fargo also agreed to the SEC instituting a cease-and-desist proceeding finding violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. The $3 billion payment resolves all three matters, and includes a $500 million civil penalty to be distributed by the SEC to investors.

The 16-page statement of facts accompanying the deferred prosecution agreement and civil settlement agreement outlines a course of conduct over 15 years at Well Fargo's Community Bank, which was then the largest operating segment of Wells Fargo, consistently generating more than half of the company's revenue. The statement of facts outlines top Community Bank leaders' knowledge of the conduct. As part of the statement of facts, Wells Fargo admitted the following:

Beginning in 1998, Wells Fargo increased its focus on sales volume and reliance on annual sales growth. A core part of this sales model was the "cross-sell strategy" to sell existing customers additional financial products. It was "the foundation of our business model," according to Wells Fargo. In its 2012 Vision and Values statement, Wells Fargo stated: "We start with what the customer needs - not with what we want to sell them."

But, in contrast to Wells Fargo's public statements and disclosures about needs-based selling, the Community Bank implemented a volume-based sales model in which employees were directed and pressured to sell large volumes of products to existing customers, often with little regard to actual customer need or expected use. The Community Bank's onerous sales goals and accompanying management pressure led thousands of its employees to engage in unlawful conduct - including fraud, identity theft and the falsification of bank records - and unethical practices to sell product of no or little value to the customer.

Many of these practices were referred to within Wells Fargo as "gaming." Gaming strategies varied widely, but included using existing customers' identities - without their consent - to open checking and savings, debit card, credit card, bill pay and global remittance accounts. From 2002 to 2016, gaming practices included forging customer signatures to open accounts without authorization, creating PINs to activate unauthorized debit cards, moving money from millions of customer accounts to unauthorized accounts in a practice known internally as "simulated funding," opening credit cards and bill pay products without authorization, altering customers' true contact information to prevent customers from learning of unauthorized accounts and prevent Wells Fargo employees from reaching customers to conduct customer satisfaction surveys, and encouraging customers to open accounts they neither wanted or needed.

The top managers of the Community Bank were aware of the unlawful and unethical gaming practices as early as 2002, and they knew that the conduct was increasing due to onerous sales goals and pressure from management to meet these goals. One internal investigator in 2004 called the problem a "growing plague." The following year, another internal investigator said the problem was "spiraling out of control." Even after senior managers in the Community Bank directly called into question the implementation of the cross-sell strategy, Community Bank senior leadership refused to alter the sales model, which contained unrealistic sales goals and a focus on low-quality secondary accounts.

Despite knowledge of the illegal sales practices, Community Bank senior leadership failed to take sufficient action to prevent and reduce the incidence of such practices. Senior leadership of the Community Bank minimized the problems to Wells Fargo management and its board of directors, by casting the problem as driven by individual misconduct instead of the sales model itself. Community Bank senior leadership viewed negative sales quality and integrity as a necessary byproduct of the increased sales and as merely the cost of doing business.

As alleged in part in the SEC Administrative Order
https://www.sec.gov/litigation/admin/2020/34-88257.pdf, Wells Fargo & Co. was found to have violated the antifraud provisions of the Securities Exchange Act; and the firm agreed to cease and desist from committing or causing any future violations of these provisions and to pay a civil penalty of $500 million. The $500 million payment is part of a combined $3 billion settlement with the SEC and the Department of Justice. As alleged in part in the SEC Release:

[B]etween 2012 and 2016, Wells Fargo publicly touted to investors the success of its Community Bank's "cross-sell" strategy - selling additional financial products to its existing customers - which it characterized as a key component of its financial success. The order finds that Wells Fargo sought to induce investors' continued reliance on the cross-sell metric even though it was inflated by accounts and services that were unused, unneeded, or unauthorized. According to the order, from 2002 to 2016, Wells Fargo opened millions of accounts of financial products that were unauthorized or fraudulent. Wells Fargo's Community Bank also pressured customers to buy products they did not need and would not use. The order finds that these accounts were opened through sales practices inconsistent with Wells Fargo's investor disclosures regarding its purported needs-based selling model.

Bill Singer's Comment: Lemme see . . . what time is it? Oh, yeah, it's 2020. 

As in 18 years after the 2002 date on which Wells Fargo first opened unauthorized or fraudulent accounts. As in 10 years after Wells Fargo first publicly touted its bogus cross-selling metrics. 

If we amortize today's $500 million SEC penalty over 18 years, that works out to about $27.78 million a year. In fact, Wells Fargo has a foundation that spent in 2019 about the same amount as the penalty in grants. "Wells Fargo Foundation Increased Access to Housing, Jobs, Financial Coaching in 2019" (Wells Fargo Press Release / February 20, 2020)
https://newsroom.wf.com/press-release/corporate-social-responsibility/wells-fargo-foundation-increased-access-housing-jobs :

In 2019, the Wells Fargo Foundation launched a new philanthropic strategy anchored around unlocking economic opportunity for people and communities by addressing housing affordability, small business growth and financial health. The Foundation invested $455 million in grants in the last year, funding national organizations to deliver programs at scale and nonprofits that specifically address the needs of local markets.

Before the ink on all the settlement agreements dried, Wells Fargo hustled back to the SEC in an effort to secure a Waiver from so-called "Bad Boy" disqualifications. As asserted in part in a letter from Wells Fargo's legal counsel to the SEC. "Letter to Timothy B. Henseler, Esq., Chief, SEC Office of Enforcement Liaison, Division of Corporation Finance, from Sullivan & Cromwell LLP" (February 20, 2020):

This letter is submitted on behalf of our client, Wells Fargo & Company (the "Applicant," "WFC," or the "Company" and, together with its subsidiaries, "Wells Fargo"), in connection with a cease-and-desist order to be entered against the Applicant pursuant to Section 8A of the Securities Act of 1933, as amended (the "Securities Act"), and Sections 15(b) and 21C of the Securities Exchange Act of 1934, as amended (the "Exchange Act" and, such cease-and-desist order, the "Order"). On behalf of Wells Fargo, we hereby respectfully request, pursuant to Rule 506(d)(2)(ii) under the Securities Act, a waiver of any disqualifications that will arise as a result of the Order under Regulation D with respect to Wells Fargo and any of the issuers described below. 

. . .

The Applicant understands that the Order, if entered, would disqualify it and certain other issuers from relying on the exemptions provided by Regulation D absent the waiver requested here. Specifically, the Applicant understands that, as the beneficial owner of 20 percent or more of an issuer's outstanding voting equity securities or a person deemed to act in any other capacity described in Rule 506(d)(1) of Regulation D (a "Covered Person" with respect to an offering), the Applicant and other issuers of which the Applicant is the beneficial owner of 20 percent or more of its outstanding voting equity securities would be prohibited from relying upon these offering exemptions when issuing securities. The Commission has the authority to waive these disqualifications upon a showing of good cause that such disqualifications are not necessary under the circumstances. . . .

Did the SEC afford careful deliberation to the pros and cons of waiving the disqualifications that attach to Wells Fargo's misconduct? 

Given the serious allegations in both the criminal and civil settlements, you would think that in response to Wells Fargo's law firm's February 20, 2020, letter that the SEC would require weeks (perhaps months) to contemplate the public policy issues attendant to waiving the disqualifications.

Yeah sure. 

On February 21, 2010, not even 24 hours after receiving Sullivan & Cromwell's letter requesting a waiver, the SEC folded like a lousy poker hand and granted the waiver. Wells Fargo & Company - Order Under Rule 506(d)(2)(ii) of the Securities Act of 1933 Granting a Waiver of the Rule 506(d)(1)(v)(A) Disqualification Provision (Release No. 33-10758 / February 21, 2020)

Based on the facts and representations in the request for a waiver of disqualification submitted by Wells Fargo, and assuming that Wells Fargo complies with the Cease and Desist Order, the Commission has determined that Wells Fargo has made a showing of good cause under Rule 506(d)(2)(ii) of Regulation D that it is not necessary under the circumstances to deny reliance on the Regulation D exemptions by reason of the entry of the Cease and Desist Order. . . .

Shameful. Disgraceful. Outrageous.  Maybe we should just forget about all the fraud and give Wells Fargo a Presidential Medal of Freedom. Worse, there are WB-APPs filed by numerous whistleblowers seeking an Award of bounties from the SEC that have been languishing for months and years without so much as a word of guidance from the federal regulator. How the hell does the SEC drop everything and expedite Wells Fargo's request for a Waiver but can't manage to find time to process whistleblower claims against fines that have already been paid? Amazin' how the SEC finds the time and resources to expedite Wells Fargo's Waiver through the system but that same federal regulator can't find the time or resources to reward those who blow the whistle on the likes of Wells Fargo. See, e.g.:

"SEC Whistleblower Program Is A Black Hole Of Despair(BrokeAndBroker.com Blog / April 9 2015)
https://www.sec.gov/comments/s7-16-18/s71618-4239056-172917.pdf / April 9, 2015

"SEC Seeks To Reform Its Whistleblower Process" (BrokeAndBroker.com Blog / July 3, 2018) 

"More Whistleblowers Sue SEC for Delays in Receiving Award(DoddFrank.com by Steve Quinlivan  / May 2, 2019)