The $1bn Reason Why Not To Lie About Compliance

The United States’ fourth largest bank, Wells Fargo, has agreed to pay $1bn to investors after it lied about the state of its compliance with government orders.

The payment is part of a securities fraud class action lawsuit, which alleges that Wells Fargo made misleading statements about how its compliance with government consent orders progressed, upon which the bank’s growth depended.

The issue goes back to a scandal, in which bank employees between 2002 and 2016 were pressured to open millions of fake customer accounts and charge hundreds of thousands of borrowers for unnecessary insurance to meet unrealistic sales goals.

In 2018, when the bank settled the case with federal financial regulators, it undertook to fix governance and oversight failures that led to the systemic fraudulent practices.

In an unprecedented move, the Federal Reserve also imposed an asset cap, prohibiting Wells Fargo from expanding its assets until it had fully complied with its consent order.

A subsequent class-action lawsuit alleged that up until 2020, Wells Fargo’s senior executives repeatedly told investors that the regulators were satisfied with the bank’s progress under the consent orders and that the asset cap would be removed in time. In reality, however, the federal regulators rejected Wells Fargo’s plans.

This ultimately came to light in May 2020 when House representatives released two reports stating that Wells Fargo had “clearly demonstrated an unwillingness and inability to stop harming its customers” and that its remediation plans fell “woefully short” of regulators’ expectations.

Following the reports and subsequent congressional hearings, during which Wells Fargo executives admitted they had “not yet done what is necessary” to address their shortcomings, the bank’s shares plunged from $41.40 to $27.20.

Wells Fargo shareholders lost more than $54bn in market capitalisation as the bank’s stock price plummeted.

The settlement is subject to court approval. If it is approved, it will be among the top 20 securities class-action settlements of all time, according to the plaintiff’s attorneys.

Top management’s responsibility

In addition to the bank, former top management members were named as defendants in the suit, including former CEO Timothy Sloan, former CFO John Shrewsberry, former general counsel Allen Parker and former chairwoman Elizabeth Duke, each of whom had distinguished professional careers.

Betsy Duke, for example, was selected by former President George Bush to serve as a Fed governor.

They argue that they did not have fraudulent intent and they would not have put their reputations at risk to temporarily increase the price of Wells Fargo’s stock with no personal benefit to them.

Indeed, there appears to be no evidence that they engaged in suspicious insider trading or received mammoth compensation tied to the bank’s stock price.

According to the court documents, they argue that they “genuinely believed that they were precluded by law” from providing detailed information to investors about the status of Wells Fargo’s compliance with the 2018 consent orders.

Commenting on the news, Wells Fargo’s spokesperson emphasised that these former executives have not been with the company for several years.

“While we disagree with the allegations in this case, we are pleased to have resolved this matter,” the spokesperson told VIXIO.

We use cookies on this site to enhance your user experience.