Wells Fargo is pushing to move past its damaging sales scandal with the release of a report that largely lays blame at the feet of executives who have already resigned or been fired or demoted.
The 110-page autopsy from the company’s board of directors focuses heavily on the actions of ousted retail banking chief Carrie Tolstedt and several executives who worked inside the division she ran for nearly a decade.
The board said that it is clawing back $47 million from Tolstedt and $28 million from former CEO John Stumpf, who resigned in October. Those sums are on top of the combined $60 million in compensation forfeited by the two executives last fall.
But Chairman Stephen Sanger also made clear that no more high-level executives will be fired for their roles in the scandal, in which Wells Fargo employees opened roughly 2 million unauthorized customer accounts.
“The investigation findings, we believe, fully capture the root causes of the sales practices problem,” Sanger said during a conference call with reporters. “And we do not anticipate any further employment or compensation actions as a result of this investigation.”
For his own part, Wells Fargo CEO Tim Sloan said: “We are not going to let these mistakes happen again. They will not happen on my watch."
Still, the San Francisco bank will have a hard time putting the scandal to rest anytime soon, since the Department of Justice, the Securities and Exchange Commission and other government agencies are still investigating.
Here are six takeaways regarding the heavily anticipated report.
Carrie Tolstedt takes the brunt of the blame
The report casts the most significant blame on Tolstedt, portraying her as a hard-charging, numbers-focused manager who ultimately misled the board about the severity of her unit’s ethics problems.
“Tolstedt and certain of her inner circle were insular and defensive and did not like to be challenged or hear negative information,” the report said, accusing her of intentionally withholding damaging information about the sales practices in Wells branches.
Tolstedt stepped down from her post last July and was replaced by current retail chief Mary Mack. As head of what the firm calls its community bank, a post she took over in 2007, Tolstedt was said to be instrumental in aligning sales goals with performance reviews and incentive pay.
In the months leading up to her departure, however, Tolstedt downplayed to her superiors the potential risks associated with Wells' high-pressure sales environment — and particularly with the growing number of employee terminations for sales-practice violations.
Board members began growing frustrated with Tolstedt throughout 2015, the year before the blockbuster settlement with regulators, according to the report. Risk committee Chairman Enrique Hernandez, in particular, had grown convinced that she was understating the issue in a series of presentations, the report states.
During a presentation in May 2015 — shortly after the city of Los Angeles filed its lawsuit alleging improper sales practices — Tolstedt told the risk committee that 230 employees had been terminated for sales violations. She also emphasized that the root cause of the terminations was employee misconduct, rather than misaligned sales incentives, according to the report.
The terminations, of course, were later revealed to the board to be much broader in scope. In May 2016, the board of directors was told that more than 1,300 employees had been fired for sales-related violations in 2014, and 960 more had been terminated in 2015.
Tolstedt declined to be interviewed for the investigation.
“We asked her to be interviewed,” Stuart Baskin, a partner at Shearman & Sterling, a New York-based law firm that was hired to help conduct the investigation, said during a call with reporters. “On the advice of her attorneys, she declined.”
The board criticizes Wells Fargo’s decentralized corporate structure
For months, the $1.9 trillion-asset bank has acknowledged problems with its aggressive sales culture, which has come under fire since the scandal broke.
The board’s report adds a second systemic culprit: a corporate structure that gave too much autonomy to Tolstedt. It argues that one effect of the decentralized setup was to impede corporate-level insight into what was happening in the community banking division.
“Historically, the risk function at Wells Fargo was highly decentralized. The line of business risk managers were answerable principally to the heads of their businesses and yet took the lead in assessing and addressing risk within their business units,” the report states.
Starting in 2013, Wells Fargo embarked on a multiyear plan to move toward centralization of more risk functions, according to the report. But Chief Risk Officer Michael Loughlin had limited authority with respect to the retail banking division, according to the report.
“As events were unfolding, his visibility into risk issues at the community bank was hampered by his dependence on its group risk officer, and he was essentially confined to attempting to cajole and persuade Tolstedt and the community bank to be more responsive to sales practice-related risks,” the report states.
The board also found that Stumpf was the principal champion of the company’s decentralized business model.
CEO Tim Sloan and the company’s board are largely exonerated
Sloan took over as Wells Fargo’s CEO in October 2016 after stints as chief financial officer, head of the company’s wholesale bank and president and chief operating officer.
The board’s report contends that Sloan had little knowledge of the employee misconduct prior to becoming president and COO in November 2015. And it suggests that in at least one instance prior to that November, he was given bad information.
The report cites a May 17, 2015, email that Stumpf sent to Sloan after the Los Angeles city attorney sued Wells Fargo over its unauthorized product sales.
“Nothing could be further from the truth on forcing products on customers,” Stumpf wrote. “In any case, right will win, and we are right. Did some do things wrong — you bet and that is called life. This is not systemic.”
During Monday’s conference call with reporters, Sanger said that Wells Fargo’s board has full confidence in Sloan.
The report also defends the board itself, arguing that it was shielded from a full understanding of the fraud inside the retail banking division.
In one particularly telling example, the report states that Wells Fargo’s board did not know that 5,300 employees had been fired for misconduct until early September 2016, when the bank signed a consent order with regulators.
“The findings of the investigation showed that the board took the appropriate actions with the information it had, when it had it,” Sanger said.
Sanger acknowledged that the company’s board made certain missteps. For example, the board could have pushed sooner to centralize the company’s risk management function, he said.
“The board could have pushed more forcefully to effect a change in leadership at the community bank,” he added. “And the board could have insisted on more detailed documentation of the action plans that were presented to us.”
No pattern of retaliation against whistleblowers is found
Despite numerous public allegations to the contrary, the board said that it found no pattern of retaliation against employees who raised concerns about unethical sales practices.
Numerous former Wells employees have said in news stories that they were retaliated against after lodging whistleblower complaints. Just last week, the Occupational Safety and Health Administration ordered the bank to pay $5.4 million to a former manager who lost his job after reporting what he suspected was fraud to his superiors and also to a bank ethics hotline.
But the report said that Shearman & Sterling has not found evidence of widespread retaliation, though it noted that the investigation is "based on a limited review" completed to date — and that the investigation into the issue is ongoing.
The law firm has completed a review of 10 whistleblower cases provided by Wells Fargo's outside counsel. “The review of those ten files did not reveal any documentary evidence suggesting purposeful retaliation," the report said.
In addition, Shearman & Sterling has so far found no evidence of retaliation among whistleblowers who have been publicly identified in media reports and other Wells Fargo documents. Out of 11 former employees who were contacted for interviews, however, only three agreed to speak for the investigation.
Wells Fargo’s outside counsel has also reviewed files for 885 employees who called the company’s EthicsLine between Jan. 1, 2011, and Oct. 5, 2016, and who were soon after subject to a corrective action.
Shearman & Sterling is in the process of independently reviewing eight such EthicsLine complaints that have been flagged by the outside counsel for raising "concerns." It is also reviewing cases for 10 employees who were among the more than 5,300 firings referenced in the September 2016 settlement, according to the report.
Sloan said in a conference call with reporters Monday, “We’re continuing to look at any situation in which a team member has raised any issues related to retaliation.”
Misconduct started much earlier than Wells previously acknowledged
Before Monday, Wells Fargo had never acknowledged that its retail banking employees engaged in misconduct before 2009. As part of a review that culminated with last fall’s consent order, the firm had agreed to look back to 2011, and it later agreed to extend that review by two more years.
But the board’s report states that in 2002, Wells Fargo’s retail banking division created a task force to address an increase in sales-practice violations. Two years later, an internal investigation staffer wrote a memo noting that the number of employees fired for the manipulation or misrepresentation of sales had risen to 223 in 2004 from 21 in 2000.
In addition, Tolstedt warned Stumpf in a 2004 email about the danger of sales incentives, according to the report.
“Despite the recognition by 2004 of both the increasing scope of sales practice issues and their association with sales incentives, the problem continued to grow,” the report states. “While some good-faith efforts were made to address the issue, witnesses consistently stated that the community bank’s leadership was unwilling to make fundamental changes.”
Still, the report barely mentions Richard Kovacevich, who was Wells Fargo’s CEO from 1998 to 2007.
Wells board members are in a fight to keep their jobs
One prominent big-bank critic immediately slammed the report, describing it as an attempt to blame already-fired executives for pervasive and continuing problems with Wells Fargo's corporate culture.
“The self-investigation and actions reported today by the board of directors of Wells Fargo are grossly deficient," said Dennis Kelleher, president and CEO of Better Markets. "Consistent with their past too-little, too-late cosmetic actions, blaming and punishing two previously fired executives are little more than standard moves in a PR playbook designed more to conceal than to reveal what really happened here and who was involved."
Kelleher urged shareholders to vote against "all board members" at the company's annual meeting, scheduled for April 25.
The two leading proxy advisory firms have issued similar calls in recent days. Institutional Shareholder Services recommended that investors vote against 12 of the company's 15 board members. Glass Lewis has counseled investors to vote against six members.
Board members "had a grossly deficient see-no-evil, hear-no-evil view of their role as fiduciaries at the third-largest bank in the country," Kelleher said.