Court case reveals new details of fake-account allegations at Fifth Third

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After submitting a resignation notice in 2010, a Fifth Third Bancorp employee wrote a four-page letter to management laying out concerns about sales tactics at the Cincinnati company.

“We are becoming a ‘predatory’ financial institution,” this person wrote. “Every week I come across at least one or two customers that have been taken advantage of.”

The author, whose name has not been revealed publicly, wrote that one common sales tactic was to persuade customers to open a second or third checking account, putting them at greater risk of incurring overdraft fees and resulting in additional monthly service charges.

Fifth Third argues that the CFPB has shown only limited instances of employee wrongdoing, which occurred long ago, and that it has identified and prohibited such misconduct.
Fifth Third argues that the CFPB has shown only limited instances of employee wrongdoing, which occurred long ago, and that it has identified and prohibited such misconduct.

“The motivation for these practices is simple, if you don’t meet your goal you get fired,” the person continued. “That’s what I’ve been told, and that’s what other employees have been told, they are pushing the ethical envelope in order to save their jobs. I do not open as many accounts as some of my peers and the main reason is I refuse to partake in the practices.”

The decade-old letter surfaced in a lawsuit the Consumer Financial Protection Bureau filed against Fifth Third in March for allegedly opening accounts without customers’ knowledge.

Its disclosure is one of several new developments in a case that is expected to go to trial in 2022 or later, assuming the two sides do not reach a settlement earlier. The CFPB has also suggested in court documents that, years after Fifth Third said it flagged and addressed employee misconduct around unauthorized accounts, the bank’s technology for identifying such abuses is still insufficient.

It’s rare for disputes between the CFPB and banks to wind up in court, and a trial poses certain risks for Fifth Third. The whistleblower’s letter, for example, shows how unflattering information that banks might prefer to keep quiet can be exposed when investigations by bank regulators culminate in lawsuits rather than settlements. At the same time, though, interim rulings by the judge in the case could result in a more favorable settlement for Fifth Third.

The CFPB, which investigated Fifth Third in the aftermath of revelations about widespread problems with unauthorized accounts at Wells Fargo, has alleged in its suit that the $201 billion-asset bank took insufficient steps to detect and stop employee wrongdoing.

Fifth Third argues that the CFPB has shown only limited instances of employee wrongdoing, which occurred long ago, and that the bank has identified and prohibited such misconduct.

“After more than three years of investigating the bank — collecting nearly half a billion data points for more than 10 million customer accounts, taking sworn testimony, demanding voluminous documents, and ultimately filing this lawsuit — the only instances of unauthorized account openings the bureau cites are those that the bank itself detected, investigated, and remediated before the bureau began its investigation,” lawyers for Fifth Third wrote in a June filing.

Fifth Third has said that 96 employees were either fired or resigned between 2010 and 2016 for opening accounts that were flagged as suspicious or didn’t meet the bank’s standards. The bank has also identified more than 1,000 accounts as unauthorized, which amounts to 0.01% of the 10 million accounts that were opened during that seven-year span. But the CFPB contends that the bank’s estimate may be too low.

“There is substantial evidence that Fifth Third’s admission understates its problem, and Fifth Third continued to drive sales without implementing a systematic way to detect unauthorized accounts,” the CFPB wrote in a May court filing, without elaborating on what the evidence is.

Six months into the litigation, some outside observers say that Fifth Third appears to be pursuing a strategy that involves prolonging the litigation in an effort to avoid paying a large penalty.

“That they are taking such a hard line is a bit of a head-scratcher, given the CFPB's recent enforcement track record,” said Graham Steele, director of the Corporations and Society Initiative at Stanford’s business school, referring to a decrease in enforcement actions during the Trump administration. “The CFPB may want to settle this and are just waiting for Fifth Third to come to the table.”

The two sides have recently been jockeying over the site of a potential trial. The CFPB filed the case in federal court in Chicago and wants to keep it there. Fifth Third, which has been headquartered in Cincinnati since its founding in 1858, is seeking a transfer to the Southern District of Ohio, noting that it houses its key operations in the Queen City.

U.S. District Judge Andrea Wood is expected to issue a ruling soon on the bank’s motion to transfer venue.

To support its effort to avoid a transfer, the CFPB argued in May that Chicago was a hotbed of bad behavior by Fifth Third employees. The bureau pointed to a June 2010 email by the bank’s head of retail banking, who wrote to a colleague: “As you probably know, there have been consistent problems around unauthorized credit card sales in Chicago.” (Fifth Third has long had a significant presence in Chicago and bulked up further with its 2019 merger with MB Financial.)

The CFPB also pointed to the 2010 letter by the disenchanted employee, who was based in Illinois. “I come across Hispanic customers that don’t understand or speak English that were sold products they don’t understand by individuals who don’t speak Spanish,” the employee wrote.

“I doubt upper management truly knows the scope of what’s happening in the organization,” the person continued. “It might just be isolated in my region, but I believe it’s a systemic issue in the market. The culture is hostile, negative and breeds unethical behavior.”

A Fifth Third spokesman declined to comment on the letter, but pointed to information the bank disseminated earlier this year in response to the CFPB’s lawsuit. In those written materials, Fifth Third states that it has proactively implemented safeguards to deter and identify unauthorized accounts.

Since 2016, Fifth Third has sent automatic email notifications to customers when new bank accounts are opened in their names, according to the bank. In 2017, Fifth Third started requiring customers to enter a unique PIN sent to their mobile phones before an account could be opened, a system used for approximately 80% of account openings.

The bank also says that in 2018 it eliminated account openings as a factor in employee compensation.

“We are always working to improve,” the bank stated. “In recent years, we have invested approximately $200 million in personnel and technology to enhance this compliance framework.”

Still, the CFPB suggests in court papers that Fifth Third’s technology for uncovering employee misconduct remains inadequate. The agency recently pointed to 2017 deposition testimony by Fifth Third director of corporate investigations Darren Steinmann, who said, “We don’t have a systematic way of detecting gaming.”

A source familiar with the bank’s position, who spoke on condition of anonymity, said that Fifth Third does have advanced technologies to detect the opening of unauthorized openings, but that trained investigators are also used to determine whether instances of potential misconduct have a legitimate explanation.

In a court document filed in June, Kenneth Oglesby, a regional investigations manager at Fifth Third, wrote that while the bank has no technological solution that can automatically detect so-called gaming by employees, the company takes many steps to detect and investigate the problem.

Specifically, Oglesby cited employee training, various avenues for reporting employee misconduct and internal investigations of alleged wrongdoing.

A CFPB spokeswoman declined to comment for this article. But documents filed in the Fifth Third case show that the bureau was seeking documents from the bank by early November 2016 — or less than two months after the fake-accounts scandal at Wells Fargo emerged.

Also in the wake of the Wells Fargo revelations, the Office of the Comptroller of the Currency opened examinations of sales practices at dozens of large and midsized banks, which led to the identification of more than 250 specific items that the agency wanted fixed at individual banks.

But Fifth Third was a state-chartered bank in 2016 and 2017, so it did not fall under the purview of the OCC and was not part of the agency’s sale practices examination. Fifth Third converted to a national charter last year, which resulted in the OCC becoming its primary regulator.

In addition to the CFPB case, Fifth Third is facing a related securities class action suit, which alleges that the bank made materially false and misleading statements about its business, operational and compliance policies. Shares in Fifth Third fell by nearly 3% after the bank disclosed in March that it had learned of the agency’s intent to file an enforcement action in connection with unauthorized accounts, according to that complaint.

CEO Greg Carmichael and Chief Financial Officer Tayfun Tuzun are among the Fifth Third executives who have been named as defendants in a shareholder derivative lawsuit filed in July.
CEO Greg Carmichael and Chief Financial Officer Tayfun Tuzun are among the Fifth Third executives who have been named as defendants in a shareholder derivative lawsuit filed in July.

Separately, top Fifth Third executives including CEO Greg Carmichael and Chief Financial Officer Tayfun Tuzun have been named as defendants in a shareholder derivative lawsuit filed in July, also in connection with unauthorized customer accounts. Such suits seek to recover money not for the shareholders, but rather for the company in which the shareholders are part-owners. Carmichael was Fifth Third’s president from 2012 to 2015, at which point he became CEO. Tuzun was the company’s treasurer from 2011 to 2013, when he was named CFO.

In the CFPB suit, Fifth Third is being represented by lawyers at Williams & Connolly and Gibson Dunn & Crutcher. One of the Williams & Connolly attorneys, Ryan Scarborough, has argued publicly that companies in the consumer bureau’s crosshairs are often too eager to reach settlements, and that litigating cases can yield far better outcomes.

Scarborough previously represented TCF Financial, which litigated a 2017 case in which the CFPB alleged that it marketed and charged consumers for overdraft protection in deceptive and abusive ways. Eighteen months after the CFPB filed suit, TCF agreed to pay a $5 million fine and provide $25 million in restitution as part of a settlement in which the bank neither admitted nor denied wrongdoing.

One of TCF’s arguments was that the CFPB was retroactively pursuing claims that related to conduct that predated the bureau’s establishment in July 2011. Fifth Third is making similar arguments with respect to unauthorized customer accounts that were opened in 2010.

“The court should give little or no weight to claims that predate the Bureau’s enforcement authority because they will in all likelihood be dismissed, as they have in similar cases,” lawyers for Fifth Third wrote in a recent court filing, citing a ruling in the TCF case that preceded the eventual settlement.

During Kathy Kraninger’s tenure as the CFPB’s director, the agency has settled some enforcement cases for relatively small sums of money, said Arthur Wilmarth, a law professor at George Washington University.

In reference to the Fifth Third case, Wilmarth said the bank “may think that a more aggressive defense will persuade her to make a low-ball settlement.”

Other lawyers, including Mayer Brown partner Ori Lev, said that the Fifth Third case shows that the CFPB is not afraid to litigate against banks on charges of abusive acts or practices. The agency’s complaint alleges that certain conduct by Fifth Third was abusive, a legal standard established in the Dodd-Frank Act of 2010 that does not require the CFPB to show that consumers suffered harm.

“They have not been shy about bringing cases against banks,” Lev, a former CFPB deputy enforcement director for litigation, said at a banking conference Tuesday.

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Crime and misconduct Consumer banking CFPB Fifth Third Bancorp Greg Carmichael
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