Wells Fargo Has Agreed to Pay $500 million to Settle Charges; Money Will Be Returned to Investors. $500 Million Is Part of a Combined $3 Billion Settlement With the SEC and the Department of Justice.
Kehoe Law Firm, P.C. is making investors aware that on February 21, 2020, the SEC announced that Wells Fargo & Co. has been charged for misleading investors about the success of its core business strategy at a time when it was opening fake accounts for unknowing customers and selling unnecessary products that went unused. The SEC announced that Wells Fargo has agreed to pay $500 million to settle the charges, which will be returned to harmed investors. The $500 million payment is part of a combined $3 billion settlement with the SEC and the Department of Justice.
According to the SEC’s order, between 2012 and 2016, Wells Fargo publicly touted to investors the success of its Community Bank’s “cross-sell” strategy – selling additional financial products to its existing customers – which it characterized as a key component of its financial success. The order finds that Wells Fargo sought to induce investors’ continued reliance on the cross-sell metric even though it was inflated by accounts and services that were unused, unneeded, or unauthorized. According to the order, from 2002 to 2016, Wells Fargo opened millions of accounts of financial products that were unauthorized or fraudulent. Wells Fargo’s Community Bank also pressured customers to buy products they did not need and would not use. The order finds that these accounts were opened through sales practices inconsistent with Wells Fargo’s investor disclosures regarding its purported needs-based selling model.
The SEC’s order finds that Wells Fargo violated the antifraud provisions of the Securities Exchange Act of 1934. Wells Fargo has agreed to cease and desist from committing or causing any future violations of these provisions and to pay a civil penalty of $500 million. The SEC will distribute this money to harmed investors.
According to the Summary of the SEC’s “Order Instituting Cease-And Desist Proceedings Pursuant To Section 21c Of The Securities Exchange Act Of 1934, Making Findings, And Imposing A Cease-And-Desist Order”:
1. These proceedings arise out of a fraud committed by Wells Fargo from 2012 through 2016, when the Company misled investors regarding the success of the core business strategy of the Community Bank operating segment, its largest business unit. Wells Fargo publicly stated on numerous occasions that its sales strategy was “needs-based.” In other words, Wells Fargo claimed that its strategy was to sell customers the accounts that they needed. Well Fargo published a Community Bank “cross-sell metric” in its Annual Reports, and quarterly and annual filings with the Commission that purported to be the ratio of the number of accounts and products per retail bank household. During investor presentations and analyst conferences, Wells Fargo characterized its cross-selling strategy to investors as a key component of its financial success and routinely discussed its efforts to achieve cross-sell growth. Wells Fargo referred to the Community Bank’s cross-sell metric as proof of its success at executing on this core business strategy.
2. In contrast to the Company’s public statements and disclosures about needs-based selling, the Community Bank implemented a volume-based sales model in which employees were directed, pressured, or caused to sell large volumes of products to existing customers, often with little regard to actual customer need or expected use. The Community Bank’s onerous sales goals and accompanying management pressure led thousands of its employees to engage in: (1) unlawful conduct to attain sales through fraud, identity theft, and the falsification of bank records, and (2) unethical practices to sell products of no or low value to the customer, with the belief of the employee that the customer did not actually need the account and was not going to use the account. Collectively, many of these practices were referred to within Wells Fargo as “gaming.”
3. From 2002 to 2016, Wells Fargo opened millions of accounts or financial products that were unauthorized or fraudulent. During that same time period, Wells Fargo also opened significant numbers of unneeded, unwanted, or otherwise low-value products by employees that were not consistent with Wells Fargo’s purported needs-based selling model. Accounts and financial products opened without customer consent or pursuant to gaming practices were included by the Company in the Community Bank cross-sell metric until such accounts were eventually closed for lack of use.
4. Beginning as early as 2002, when a group of employees was fired from a branch in Fort Collins, Colorado, for sales gaming, the 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.
5. From 2012 to 2016, Wells Fargo failed to disclose to investors that the Community Bank’s sales model had caused widespread unlawful and unethical sales practices misconduct that was at odds with its investor disclosures regarding needs-based selling and that the publicly reported cross-sell metric included significant numbers of unused or unauthorized accounts. Certain Community Bank senior executives who reviewed or approved the disclosures knew, or were reckless in not knowing, that these disclosures were misleading or incomplete.
6. Moreover in a January 12, 2015, response to a SEC Comment Letter that asked how the cross-sell metric was calculated and in its 2014 and 2015 Annual Reports, Wells Fargo characterized the cross-sell metric as a ratio of “products used by customers in retail banking households.” Prior to and after that time, the metric was described as “products per household,” “products per retail bank household,” or “the average number of products sold to existing customers.” Community Bank executives knew that the metric included many products that were not used by customers. Wells Fargo’s inclusion of the word “used” to describe the accounts was therefore misleading.
7. Notwithstanding the substantial effect the unused and unauthorized products had on inflating the cross-sell metric, Wells Fargo continued to tout the cross-sell metric as one of the Company’s competitive advantages in its public statements to investors. By failing to disclose the extent to which the cross-sell metric was inflated by low-quality accounts, Wells Fargo sought not only to induce investors’ continued reliance on the metric but also to avoid confronting the risk of reputational damage that might arise—and eventually did arise—from public disclosure of the severity and extent of sales quality problems.