Behind Wells Fargo's effort to pin sales misconduct on 1% of employees

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When he testified before Congress in 2016 about Wells Fargo's phony-accounts scandal, John Stumpf, the CEO at the time, repeatedly pinned blame on 1% of the bank’s workforce.

It was hard to know what to make of this defense. One percent of the retail employees at one of the nation’s largest banks sounded like a lot of people. It also seemed like a low estimate of the number of wrongdoers, given that the bank’s retail banking unit employed approximately 100,000 people at any point in time, and roughly 5,300 of them had been fired in a little more than five years.

Civil charges that were brought Thursday against numerous former high-level Wells Fargo executives shed new light on how the 1% claim developed inside the bank and why it might have seemed like a good defense. Those details are among the most explosive in a 100-page notice of charges that alleges a high-level whitewash of widespread misconduct.

The Office of the Comptroller of the Currency charged that the San Francisco company’s community banking unit had a systemic problem with sales misconduct that began no later than 2002, or five years before Stumpf became CEO.

“Over 14 years, hundreds of thousands of Community Bank employees succumbed to the intense pressure to perform and engage in sales practices misconduct,” the OCC alleged.

Several new revelations in the OCC’s notice of charges relate to events that were set in motion in 2013. That summer and fall, an internal unit at Wells Fargo conducted an analysis to detect instances of funds being transferred between customer accounts without their consent — a practice that was known as “simulated funding.” Initially the analysis was limited to the Los Angeles and Orange County, Calif., areas.

The OCC found problems with how the analysis was conducted, concluding that it identified only the most egregious patterns. “The Bank effectively decided it would not investigate this red flag activity if it happened 49 times, but only when it reached 50 instances,” the notice of charges states. Approximately 35 employees were fired as a result of the internal findings.

In late 2013, the Los Angeles Times published two articles that reported those firings and shined a broader light on sales misconduct at the bank. Wells Fargo’s community banking unit responded, according to the OCC, by pausing proactive monitoring in an effort to limit the large number of employee terminations.

Proactive monitoring, which involved the use of data analytics to detect potential misconduct, resumed in July 2014. But the detection threshold was set such that only the top 0.01% of employees whose activity was a red flag for simulated funding were identified. “The Bank literally could not have chosen a lower threshold,” the OCC wrote.

The agency alleged Thursday that 30,000 Wells Fargo employees per month exhibited activity that was a red flag for simulated funding, but the bank only referred an average of three employees per month for investigation.

In April 2015, the monitoring threshold was adjusted to identify approximately 15 to 18 employees per month, according to the OCC. “The Bank never set the threshold detection levels lower than this percentile,” the document states.

Wells Fargo’s head of corporate investigations told the OCC that her department was unable to use data analytics to identify a range of other questionable sales practices. In other words, as the bank’s former chief security officer testified, the number of employees terminated accounted for only a small fraction of the misconduct.

“Even if the Bank was just as effective at identifying other types of sales practices misconduct as it was simulated funding,” the OCC alleged, “it would mean that although the Bank terminated 5,300 employees for sales practices misconduct, hundreds of thousands of employees likely engaged in such misconduct.”

Whether these allegations will result in personal liability for the five former Wells Fargo executives who now face civil charges remains to be seen.

Sources close to some of the defendants said Thursday that the administrative law process kicked off by Thursday’s charges could take years to resolve. The OCC has not typically faced off against individuals who have strong legal representation and have so much money at stake, they said.

The OCC is seeking to recover $25 million from former community banking head Carrie Tolstedt and a total of $12.5 million from four other defendants who are contesting the charges.

As part of the OCC’s investigation, the agency obtained testimony from Stumpf, who assigned at least partial blame on Tolstedt.

But the OCC also found that Stumpf failed to supervise Tolstedt, and declined to hold her accountable for the sales misconduct, even after the issue came to light in news articles, lawsuits and reports from outside consultants, and was flagged by the OCC in 2015.

In addition, Stumpf failed to respond to multiple warning signs, including numerous complaints submitted directly to his office about sales pressure, illegal and unethical sales activity and employees’ concerns that they would be fired if they didn’t meet certain sales goals, the OCC alleged.

Stumpf agreed to pay $17.5 million to resolve the charges against him. Tolstedt declined to answer the OCC’s substantive questions about sales misconduct, citing her Fifth Amendment right against self-incrimination. Her lawyer said Thursday that a full and fair examination of the facts will vindicate Tolstedt.

American Banker reported on Jan. 3 that a Department of Justice probe into sales misconduct at Wells Fargo could result in criminal indictments as soon as this month.

Hannah Lang contributed to this report.

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Penalties and fines Disputes and judgments Consumer banking John Stumpf Carrie Tolstedt Wells Fargo OCC