The Wells Fargo CFPB Case

November 09, 2016

By Kevin O'Brien, associate professor in the Department of Business Ethics and Legal Studies

On September 8th, 2016, I was shocked to read as a Wells Fargo customer for forty years the following announcement of the fine imposed by the CFPB against Wells Fargo:Kevin O'Brien

Today the Consumer Financial Protection Bureau (CFPB) fined Wells Fargo Bank, N.A. $100 million for the widespread illegal practice of secretly opening unauthorized deposit and credit card accounts. Spurred by sales targets and compensation incentives, employees boosted sales figures by covertly opening accounts and funding them by transferring funds from consumers’ authorized accounts without their knowledge or consent, often racking up fees or other charges. According to the bank’s own analysis, employees opened more than two million deposit and credit card accounts that may not have been authorized by consumers. Wells Fargo will pay full restitution to all victims and a $100 million fine to the CFPB’s Civil Penalty Fund. The bank will also pay an additional $35 million penalty to the Office of the Comptroller of the Currency, and another $50 million to the City and County of Los Angeles.

“Wells Fargo employees secretly opened unauthorized accounts to hit sales targets and receive bonuses,” said CFPB Director Richard Cordray. “Because of the severity of these violations, Wells Fargo is paying the largest penalty the CFPB has ever imposed. Today’s action should serve notice to the entire industry that financial incentive programs, if not monitored carefully, carry serious risks that can have serious legal consequences.” 

How was it possible that 5100 employees were involved in creating over 2,000,000 unauthorized bank and credit card accounts?  I believe that as Congress and various federal/state government agencies follow up with their own investigations, important precedents will be set and important lessons will be learned.  What happened at Wells Fargo will be studied extensively as a cautionary tale of how things can go terribly wrong when good corporate governance practices are ignored.

Consequently, I will address the following questions in the coming weeks and months:  (1) what are the salient details of the agreement between the CFPB and Wells Fargo; (2) whether the $100 million penalty is deductible by Wells Fargo; (3) what corporate governance principles were violated by Wells Fargo; (4) why were employees who attempted to whistle blow terminated; (5) why did the board of directors learn of the problems a year after the officers; (6) how the financial incentives to bank employees encouraged them to engage in illegal practices; (7) what will the SEC be investigating civilly; (8) what will the DOJ be investigating criminally; (9) what will be the focus of the SEC with regards to the audit firm KPMG; (10) should Wells Fargo have disclosed the problems long before the settlement with the CFPB, (11) should the financial statements for 2013, 2014, and 2015 be restated by Wells Fargo; (12) should top executives have to disgorge equity compensation to the company; (13) did executives commit insider trading on trades prior to the announcement of the CFPB settlement;  (14) can shareholders sue the officers and directors for their actions and finally, (15) how can Wells Fargo rebuild the trust of its customers.