This week I have been exploring the Wells Fargo Department of Justice (DOJ) and Securities and Exchange Commission (SEC) settlement of $3 billion. The case presents multiple lessons for the compliance professional and one very large lesson for the consuming public. Today, I want to consider the fraud schemes used and approved by Wells Fargo to create the fraudulent accounts. The system was so widespread at the bank that it had its own name – Gaming. The details in this series were laid out in the Department of Justice’s Statement of Facts, Office of Comptroller of the Currency (OCC) Order of Charges,and SEC Cease and Desist Order (SEC Order).

Today I want to start with the question I ended my blog post with yesterday, Why Would You Ever Do Business with Wells Fargo again? Even if you believe the cross-selling program started for legitimate business reasons, i.e. to sell more products and services, it very quickly morphed into something illegal and fraudulent. According to the SEC Order, “the cross-sell strategy called for Wells Fargo to meet all of its customers’ financial needs by focusing on selling to its existing customers additional financial products that those customers wanted, needed, and would use.” The bank even created a metric around cross-selling, the cross-selling metric, to represent “to investors that its ability to execute successfully on its cross-selling strategy provided the Company with a competitive advantage, caused an increase in revenue, and allowed it to better serve its customers.” Noted this is a self-created non-GAAP metric.

In other words, a benign sales strategy was used to create a non-GAAP metric that Wells Fargo could tout to investors, shareholders and the market about the strength of its core business. The problem immediately became that to use the metric successfully, Wells Fargo had to make up numbers to support the made up non-GAAP metric. The business unit involved, the Community Bank, almost immediately “directly and/or indirectly encouraged, caused, and approved sales plans that called for aggressive annual growth in a number of basic banking products, such as checking and savings accounts, debit cards, credit cards, and bill pay accounts.” The business unit response was that the employees created the Wells Fargo Gaming program.

Almost immediately thereafter Gaming program was put into place. Community Bank was aware of the Gaming program, which included illegal and fraudulent conduct because, as early as 2002, “Community Bank senior leadership became aware that employees were engaged in unlawful and unethical sales practices, that gaming conduct was increasing over time, and that these practices were the result of onerous sales goals and management pressure to meet those sales goals.”

The next series of problems involved the corporate headquarters that oversaw Community Bank. Community Bank made at least 50% and sometimes up to 75% of the Bank’s overall profits. It truly was the goose which laid Wells Fargo’s golden egg(s). More than the fact that corporate headquarters did not want to lose this golden goose by instructing Community Bank to do business legally, with ethics or at the very least in compliance with the Bank’s Code of Conduct, policies and procedures; Wells Fargo touted far and wide that it was the only bank to come out of the 2008 financial crisis intact and in good financial shape. This was largely because of its non-reliance on toxic mortgages that befell so many other financial institutions.

According to the OCC Order, Wells Fargo senior management, Carrie Tolstedt and the Community Bank ELT tolerated these illegal and fraudulent sales practices “as an acceptable side effect of the Community Bank’s profitable sales model.” Wells Fargo senior management declined to implement effective internal controls and actively overrode what few controls existed and “turned a blind eye to illegal and improper conduct” in the Gaming Program. How did Wells Fargo become a business that tolerated as a side effect illegal and unethical conduct to hit a self-created metric? Was it perverse incentives? Did Community Bank leadership from Tolstedt and her ELT down have a single focus on making the cross-selling metric to the exclusion of all else? Were they simply evil people who wanted to cheat everyone and everything; including (but not limited to) customers, investors, regulators, the Board of Directors, employees, the banking public and everyone else?

I have more faith in American businesses than to believe that senior leadership at one of the top financial institutions in the country were simply evil fraudsters bent on engaging in illegal activity to make their numbers look better. I do not even think the cross-selling program was malevolent. After all MacDonald’s still asks if you want fries with that Big Mac. But somewhere cross-selling was pushed into something fraudulent and then illegal. That push came from the leaders of Community Bank and was approved and applauded by the highest level at the corporate headquarters, right up to former Chief Executive Officer (CEO) John Stumpf, even after the first fine of $185 million was paid to the Consumer Finance Protection Board (CFPB). Addiction to fraudulent metrics, especially those fraudulently achieved, will get you every time.

Where does Wells Fargo go now? The Bank has now spent billions in investigation and remediation costs. It has now been fined billions as well. Some of the top leadership at Community Bank and the corporate headquarters have been fired, retired or resigned to pursue other opportunities. However, does anyone really think that a culture which for nearly 20 years “tolerated as a side effect illegal and unethical conduct” to meet some self-created (i.e. made up) number has really changed. As of 2019, Wells Fargo had over 258,000 employees. Does anyone really think their attitudes about Gaming, doing business illegally and fraudulently has changed significantly? What about the remaining senior management? Do they long for the days where shady business practices are “tolerated as a side effect illegal and unethical conduct” so long as you met your numbers (8 is Great!).

At this point I am often reminded of the scene near the end of On the Waterfront, where union boss Johnny Friendly (played by Lee J. Cobb) collects all the handguns used by his henchmen, throws them in a safe and announces “From now on we’re a clean Union.”

So I end with the question I posed at the beginning Why Would You Ever Do Business with Wells Fargo again? Since I was not a Wells Fargo customer to begin with, I do not have to wonder if I would do business with them again. But after everything that has come out, I certainly will not start doing business with them now.

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