Chapter 2: "Rainbows and butterflies"

This story is the second chapter in a five-part series: Alarm bells, arrogance and the crisis at Wells Fargo.

Michael Bacon grew up near Dallas, the youngest child in a military family. He helped pay for college by working as a security guard at a bank that later became part of Bank of America. He frequently worked the second shift, carrying a .38-caliber revolver on his hip.

After graduating from the University of Texas at Arlington in 1989 with a degree in criminal justice and criminology, Bacon climbed through the ranks at the bank, hopping from Dallas to Houston to Baltimore. In 1998, he earned an executive master's in general business administration at the University of Maryland.

In 2000, when Bacon was a BofA senior vice president and regional security manager based in Southern California, the bank was looking to cut costs, and he accepted a severance package. He briefly operated a consulting business with a retired FBI agent and a retired Los Angeles Police Department detective before being recruited in 2001 to join Wells Fargo in San Francisco.

During Bacon's first few years at Wells, he had little exposure to the company's growing sales misconduct problem. But in late 2004, Bacon became the head of enterprise services in the newly combined corporate security unit, which included both physical security and internal investigations, giving him visibility into various kinds of employee misconduct, including loan fraud, embezzlement and expense fraud, as well as sales abuses.

Bacon would later become Wells Fargo's chief security officer, which gave him an even better view of the company's growing phony-accounts problem.

In August 2004, an internal memo about "sales gaming" was circulated to executives in Wells Fargo's retail banking unit, which was known internally as the Community Bank, as well as to individuals in the bank's legal and corporate security departments. Bacon was one of the executives who received it.

The memo was written by Marty Weber, manager for special investigations at the bank. He argued that employees who manipulated their sales performance numbers were simply trying to keep their jobs. "Why do they do it?" he wrote. "Terminated tellers have told us time and again, it was not the money and that their incentive to cheat was based on the fear of losing their jobs for not meeting performance expectations."

Weber pointed to several specific instances where Wells Fargo branches were decimated by employee terminations for sales-related misconduct. In a 2002 case, 13 employees were fired in Sioux City, Iowa. The following year, 18 employees at a Denver branch were fired. A 2004 case in Omaha, Nebraska, resulted in 13 more terminations.

"When terminated team members challenge Wells Fargo through the legal system's unemployment hearing process, the court's decisions almost exclusively rule in favor of the former team member," Weber wrote. "For example, in the state of Washington in the past three years Wells Fargo has not won a single decision. This is typical nationwide. Several judges have made disparaging comments about the sales incentive plan."

One particular judge was cited in the memo as having said words to the effect of: You're supposed to be a bank, not a used-car lot.

In a case from 2004, three employees at a Wells Fargo branch in Ellensburg, Washington, were fired, including two people who had been working for the bank since the late 1970s. Details of that incident were shared with a hard-charging executive named Carrie Tolstedt, who at the time was the head of regional banking in Wells Fargo's retail bank. "I just want Carrie to be constantly aware of this growing plague," Weber wrote in an email to a colleague at the time.

Also in 2004, aggregate data on sales-related terminations was shared with another longtime top Wells Fargo executive, Pat Callahan, who was then the human resources director. She pledged to escalate the matter.

In October 2004, Bacon flew to Albuquerque, New Mexico, for a meeting about the sales misconduct problem. During the meeting, Weber laid out several examples of employee wrongdoing. They included: selling debit cards to existing customers without their knowledge; signing up unwitting customers for online banking and bill pay; and misrepresenting products by not disclosing items such as overdraft protection that could generate additional fee income for the bank.

"This was the first time anybody really put it on a piece of paper, but we all knew it," Bacon recalled. "And it was black and white."

Also at the Albuquerque meeting was Loretta Sperle, a manager in the unit that included both the bank's corporate security and internal investigations teams. Roughly 10 years later, Sperle would take over Bacon's duties as head of the internal investigations unit.

In a recent interview, Sperle recalled some of what was said during the 2004 meeting. Marty Weber personalized the sales misconduct problem, describing the experiences of employees who cheated, she said.

"They were interviewing these people, and they were hearing, 'I'm not doing it for the money. I'm doing it to keep my job. I'm doing it because of the pressure,' " Sperle said. "And Marty just wanted to bring it to light." His no-nonsense presentation ruffled some feathers, Sperle recalled. "Marty just says things like they are," she said. "He doesn't care about the politics and play the game."

In 2006, Bacon was named director of corporate investigations. Three years later, he became the bank's acting chief security officer, and two years after that, he got the official title. The bigger roles gave him a clearer view of the bank's unauthorized accounts problem. Before Bacon departed in 2014, he repeatedly called for more attention to be paid to the issue.

A lot of people inside Wells Fargo received investigative data from Bacon's team in connection with sales integrity cases. The list of recipients included the legal department, the audit department, the human resources director and the Bank Secrecy Act officer, according to a document prepared by the corporate investigations unit under Bacon's leadership.

Inside the retail banking unit, data went to the group risk officer, the ethics administrator and the internal fraud committee. Data was also sent to the company's ethics committee, the group risk officers for various lines of business and the code of ethics administrators for the lines of business. It went to Wells Fargo's outside auditor, KPMG.

And in cases of employee misconduct that met certain qualifying standards, Bacon's team also filed suspicious activity reports with the federal government. These reports, known as SARs, can be used by law enforcement agencies to investigate crimes.

In 2021 testimony, former HR Director Hope Hardison, who had been Bacon's boss, contended that the data she got from Bacon was often hard to understand. She said that while the data sometimes indicated the situation was worsening, other times it suggested there had been improvement.

"Because of how it was presented and actually just how the data was collected itself, it was often difficult to understand or get to the real details of what the nature of the problem was," Hardison said.

Other former Wells Fargo executives — including Claudia Russ Anderson, group risk officer in the retail banking unit — have made similar critiques of the data.

"Ms. Russ Anderson felt that Mr. Bacon's presentation of data was often confusing and lacked context, and many people throughout Wells Fargo agreed that his information was difficult to understand," Doug Kelley, a lawyer for Russ Anderson, said in a statement to American Banker. "Mr. Bacon applauded Ms. Russ Anderson's persistence in trying to better understand what the data meant."

Bacon argues that the data was presented at an elementary level, and says that it was not hard to digest. He also notes that Hardison routinely received emails outlining significant investigative cases in detail. "None of this data was complicated at all," Bacon said. "Terminating over a thousand people a year wasn't difficult to understand."

In 2008, Bacon learned of a Wells Fargo employee in Silicon Valley who had opened more than 400 accounts for family and friends using her own home address. When investigators started asking questions, the employee acknowledged that many of the account holders were located outside of the United States and had not visited the branch.

"She also confessed to forging customer signatures, funding accounts with her own money, transferring these funds among accounts, enrolling the same individuals in online banking and falsifying secondary identifications," Bacon wrote in a September 2008 email to colleagues. "Based on her statement that this was a 'learned' activity and that management was aware, the investigation was expanded to two other stores."

The probe ultimately found 1,500 accounts that were opened inappropriately at three Wells Fargo locations in Palo Alto and neighboring Los Altos. Seven employees were fired, including one branch manager.

Around this time, senior leaders at the bank were hyping the company's growth in the Bay Area, Bacon recalled. After the misconduct came to light, a company investigator visited Bacon's office and drew his attention to comments that CEO John Stumpf had made about strong Bay Area customer account growth.

Bacon later recounted in a deposition what the investigator told him: "Would somebody please tell John Stumpf that the numbers he's touting are not accurate?"

After the investigator drew attention to Stumpf's comments, Bacon raised the matter with longtime Wells executive Pat Callahan, according to his deposition testimony. "Pat was somewhat of John's right hand, chief of staff, and I brought it to her attention," Bacon said.

Lawyers for Stumpf and Callahan did not respond to requests for comment.

Callahan later testified under oath about the conversations she'd had with other senior executives regarding the fake-accounts problem. She said that she'd had discussions with Stumpf, Tolstedt and Hardison about two 2013 Los Angeles Times articles that described sales misconduct at Wells Fargo. She also testified that she had shared her view about the root cause of the misconduct — she pinned it on the bank's aggressive sales-incentive plans — with Stumpf, Tolstedt and Hardison.

Alarm bells, arrogance and the crisis at Wells Fargo

Fake accounts. Executives who only wanted to hear good news. Tens of billions of dollars in damage. As the bank's chief security officer, Michael Bacon spent years raising concerns about rampant sales abuses. In exclusive interviews, he details how the bogus-accounts scandal unfolded — and argues that it could have easily been stopped.

When Bacon elevated his concerns, he frequently faced pushback. "Our leaders were not welcoming any bad news at any time," he said. "Rainbows and butterflies" is how he sums up the corporate culture.

Bacon was a more colorful character than some of his buttoned-down corporate colleagues, which shone through even as he made serious points about the bank's vulnerability in connection with sales misconduct. Once, after a meeting with Bacon about sales integrity cases, an internal auditor wrote in an email to colleagues: "He was entertaining as always."

On another occasion, Bacon was trying to make an internal PowerPoint presentation about the corporate investigations unit's work more engaging. So he set the slides to a song called "The Truth" by the rock band Good Charlotte, which contained lyrics that he saw as apt for a discussion of his unit's work.

I want the truth
From you
Give me the truth
Even if it hurts me

Bacon was a squeaky wheel, but he wasn't a bomb thrower. In a 2012 email, Bacon complained that Russ Anderson, the retail banking risk manager, frequently challenged the verbiage that his team used in reporting sales misconduct.

"It is often a classic case of minimizing the negative information being submitted to executive management. Thus, I have gotten good with credible challenge," Bacon wrote.

At the same time, Bacon asked the email's recipients not to take any action in response to it, and he took care not to personalize the conflict. "Claudia is a fantastic business partner and I enjoy a great relationship with her," he wrote.

In sworn testimony, Bacon detailed some of the pressure he faced as he sought to draw attention to negative trends, saying that there were requests to delete words or phrases or sentences from documents. Bacon said that he did change wording — he wanted to be a "good business partner" — but he didn't change any numbers.

"I certainly wouldn't have done anything that I thought misled anyone." he said.

Read the other installments in this series:

• Chapter 1: A turbulent departure
• Chapter 3: Heads in the sand
• Chapter 4: "Post-LA"
• Chapter 5: Star Witness