Tuesday, 16 May 2017

The Wells Fargo Scandal Continues to Develop: An Advert for Increased Deterrence

Today’s short post acts as an update to the March post in Financial Regulation Matters that discussed the bank’s fraudulent creation of up to 2 million fake bank accounts, for which it was fined $185 million. However, news over the past few days has revealed that, in fact, up to 3.5 million unauthorised customer accounts may have been opened instead. This post will therefore assess these claims and will then go on to look at what this ever-developing scandal is doing to Wells Fargo’s reputation – ultimately, the claim by major investor Warren Buffett, that the scandal is not materially damaging, may have already started to be proved wrong by developing events.

As this issue has already been discussed in Financial Regulation Matters, there is little need to go over the scandal in any great detail again (a quick review of the scandal can be found here also). However, for us, the news that the 2 million figure for unauthorised bank accounts is likely to be increased upon investigation is worthy of the headlines that the development is generating. Lawyers acting for some of the claimant customers have suggested that the higher estimate ‘reflects public information, negotiations, and confirmatory discovery’, to which Wells Fargo responded by saying that the new estimated figures were based on a ‘hypothetical scenario’ and did not reflect ‘actual unauthorised accounts’. The lawyers, who are seeking a settlement worth $142 million for their clients, claim that the settlement figure ‘fairly balances the risks’ for their clients (with regards to further litigation which they may lose), but Wells Fargo have not raised their settlement offer to more than the original $110 million they initially offered – however, the bank is only focusing upon fake accounts opened since 2009, whilst the claimants are focusing upon unauthorised accounts dating back as far as 2002. Yet, there are more revelations which mean Wells Fargo will likely increase its settlement offer.

On top of the alleged increase in fake account numbers, recent claims by former employees, and even cities, are claiming that the practices of the bank were, and arguably are, inherently discriminatory. Recent court filings show how former employees declared that Wells Fargo employees were targeting Native America. College students, and immigrants in order to open unwanted accounts in their names. In addition to this, the City of Philadelphia is alleging that the Bank’s lending criteria is demonstrative of ‘longstanding’ discriminatory practices, with the court filings including analysis that shows that 23% of the Bank’s loans to ‘minority’ customers were high-cost or high-risk, compared to just 7.6% of loans made to white borrowers, which has ultimately led the City to claim that Wells Fargo have violated the Fair Housing Act by ‘taking advantage of minority borrowers to maximise profits’. The lawyers representing Philadelphia are making the obvious connection to the accounts scandal, by intimating that the complete breakdown of internal controls demonstrated by the accounts scandal have also contributed to the breakdown of controls regarding lending practices; it is unlikely to be a difficult case to make, because the Bank settled with the US Department of Justice in 2012 for $175 million for race discrimination, precisely along the same lines – this is, unfortunately, not a problem that just plagues Wells Fargo, with Bank of America in the crosshairs of Miami for exactly the same practices.


Ultimately, the Bank is under siege, and rightly so. Warren Buffett, speaking earlier this month, declared that he would not be surprised if Wells Fargo’s systems were now not better than any of its competitors with regards to flagging bad behaviour, but this is nothing more than hyperbole at best – let us look at actions rather than imagined or desired behaviour. Rather than Buffett’s ludicrous suggestion that ‘they obviously came up with an incentive system that incentivised the wrong thing… most business do that from time to time’ and ‘I knew John Stumpf and I don’t think it had anything to do with making money’, let us consider (if claimant lawyers are successful in proving) that the Bank has illegally been creating fake accounts and attributing accounts to those without the financial acumen to know what they are doing, for fifteen years. Let us also consider that the Bank doesn’t actually know how many fake accounts it set up. Let us consider that the bank established a lending policy that is directly leading to segregation in many communities within America in 2017. Yes, let’s consider all those things, and not what Buffett suggests we should, because ultimately Wells Fargo represents the very worst of big business. It shows, on a daily business, why financial penalties are simply not a deterrent – they pay the fines and settlements and continue unabated. John Stumpf and the leaders of Wells Fargo are prime examples of when corporate crime should be regarded as crime, irrespective of perpetrator; lengthy custodial sentences are the only deterrent, not retiring and taking $133 million at the same time

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