Inside OCC's effort to extract $37.5M from former Wells Fargo execs

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Over the weekend before Christmas 2013, the Los Angeles Times published a blockbuster story about a pattern of sales misconduct at Wells Fargo. But when the markets opened the following Monday, the company’s stock performance did not suffer. In fact, after closing at $44.96 on Friday, the share price rose slightly in early-day trading.

On Monday morning, Wells Fargo’s then-chief financial officer, Tim Sloan, sent a brief email to CEO John Stumpf. The subject line read: “WFC Share Price,” a reference to the bank’s ticker symbol on the New York Stock Exchange. “$45.45 after the LA Times Story!” said the body of the message.

The email, which suggests internal concern about how the article’s revelations could impact the bank’s valuation, is part of a stash of recently released documents that shed new light on Wells Fargo’s phony-accounts scandal and the government’s effort to collect $37.5 million in penalties from five former high-ranking bank executives.

The documents highlight the challenges that the bankers are likely to face in defending themselves against the civil charges. They include previously unreported testimony from Stumpf in which he acknowledged that the bank’s sales misconduct dated to the early 2000s and that the problems were systemic.

The documents also include testimony from a former Wells chief security officer who said that the bank had a history of paying fines for wrongdoing without instituting the necessary reforms.

The onetime Wells Fargo executives who are facing civil charges include former retail banking head Carrie Tolstedt, who is represented by Williams & Connolly; longtime general counsel James Strother, who has lawyers at Orrick, Herrington & Sutcliffe; and chief auditor David Julian, who is represented by WilmerHale.

The firms are mounting vigorous defenses of the ex-bankers, even though their cases are being heard in a forum that some observers believe offers a home-field advantage to the government. The cases represent one of the largest efforts ever by U.S. bank regulators to punish individual bankers.

The charges were the product of a multiyear investigation by the Office of the Comptroller of the Currency into Wells Fargo’s sales practices. The OCC received more than 1.5 million pages from the bank and took the deposition testimony of more than 90 witnesses, according to documents filed in the case.

In 2016 the bank agreed to pay $185 million in penalties to federal regulators and local authorities in Los Angeles after bank employees, under pressure to meet sales goals, opened millions of bank and credit card accounts without customers’ knowledge.

The OCC, the bank’s primary regulator, alleges that the five individuals who are facing civil charges failed to perform their duties and responsibilities adequately, which contributed to systemic problems at the bank.

Stumpf agreed in January to pay $17.5 million — and also accepted a ban from the banking industry — to settle civil charges. Sloan, who succeeded Stumpf as Wells Fargo’s CEO in 2016 and resigned two and a half years later, was not charged.

The judge in the cases — Administrative Law Judge Christopher McNeil — has scheduled a trial for July 2021. In the meantime, lawyers for the OCC and the former Wells Fargo executives have been sparring over which documents must be turned over and which legal arguments will be available to the defendants.

McNeil has ruled in the OCC’s favor on several important issues. For instance, he decided that the OCC does not have to hand over internal agency documents from prior to 2010, even though the alleged misconduct dates back to 2002. The defendants are seeking to show that the OCC knew about the alleged misconduct and took little or no action for many years.

Former Wells Fargo CEO John Stumpf, left, said in testimony that problems in the community banking unit led by Carrie Tolstedt, center, were "systemic." Tim Sloan, right, replaced Stumpf as CEO in 2016 and resigned in early 2019.
Former Wells Fargo CEO John Stumpf, left, said in testimony that problems in the community banking unit led by Carrie Tolstedt, center, were "systemic." Tim Sloan, right, replaced Stumpf as CEO in 2016 and resigned in early 2019.

The OCC argued that requiring the agency to turn over internal documents from 2002 to 2009 would be unreasonable and unduly burdensome, while defense lawyers contended that withholding the documents would unfairly impair their clients’ ability to mount a defense.

The administrative law judge has also struck down numerous potential legal defenses.

Administrative law judges are appointed by federal agencies and are typically not bound by the same standards as federal courts, which has fueled a perception in some quarters that they put defendants at a disadvantage, though other observers dispute that premise.

Attorneys for the former Wells Fargo executives who face civil charges either declined to comment for this article or did not respond to requests for comment. They have previously called the charges unfounded.

An OCC spokesman also declined to comment.

Most, if not all, of the underlying evidence that has been made public in the cases has been filed by the OCC. Much of it comes from contemporaneous internal emails at Wells Fargo and deposition testimony by former bank executives.

The recently released documents indicate that Michael Bacon, a onetime chief security officer at Wells Fargo, is likely to be a key witness for the OCC. Bacon said in a May 2018 deposition that he was proud to work for the San Francisco-based bank until a certain point, after which he was not as proud.

“The company had a history of getting in trouble and paying a fine or accepting a consent order and just quickly moving on and not remediating and not changing ways,” he said.

“I hate to use this exact phrase,” Bacon testified, “but it took an act of Congress for the company to change.” Bacon was referring to Stumpf’s 2016 testimony to the Senate Banking Committee, during which he maintained that the vast majority of the bank’s employees were doing the right thing.

“I honestly think he thought that testimony would be over and done,” Bacon said, referring to Stumpf, “and we'd go back to business and all the positive things about Wells Fargo.”

Bacon, who is managing partner of Rezolvrizk LLC, did not respond to a request for comment.

For his own part, Stumpf walked back his 2016 congressional testimony during a July 2019 deposition with OCC lawyers.

Stumpf testified last year that Wells Fargo’s community banking unit, which Tolstedt led for many years, had a systemic problem with sales misconduct, dating all the way back to the early 2000s. He added that as the company’s chief executive, he bore significant responsibility, as did top leaders in the community bank.

“I would agree, it was a systemic problem,” Stumpf said, according to a transcript of the deposition, in a comment that mirrored an admission he later made in his settlement agreement.

Representatives of Stumpf, Sloan and Wells Fargo did not respond to requests for comment. Wells CEO Charlie Scharf, who joined the $1.9 trillion-asset bank last fall, told Congress in March that although the company’s culture was broken, a transformation was underway.

During the OCC’s investigation, Tolstedt and her deputy Claudia Russ Anderson refused to answer substantive questions about sales misconduct, asserting their Fifth Amendment right against self-incrimination, according to the agency’s notice of charges.

But the three other defendants — Strother, Julian and former executive audit director Paul McLinko — all testified to the OCC in 2018. In some instances, the onetime executives pointed a finger at former colleagues who were also later charged.

For example, Strother testified that sales goals set by Tolstedt were at least a significant part of the root cause of the misconduct. The OCC alleges that over 14 years, hundreds of thousands retail banking employees at Wells Fargo succumbed to pressure to engage in bad practices.

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Crime and misconduct Wells Fargo OCC John Stumpf Carrie Toistedt