Wells Fargo. (Photo: John Disney/ ALM)
In May 2015, two weeks after Los Angeles sued Wells Fargo & Co. over alleged fraudulent sales practices in the city, the bank’s risk committee summoned top executives for a presentation on the brewing scandal.
After an opening presentation by James Strother, the bank’s general counsel at the time, Carrie Tolstedt, then the head of community banking, reported that the bank had fired 230 employees following an investigation that began in southern California and expanded across “the retail banking footprint” in 2013 and 2014.
That number—230—blindsided the risk committee, but it was just a fraction of the firings that have stemmed from the bank’s sales practices. Still, it marked the first time board members had heard of large-scale firings, according to a report by law firm Shearman & Sterling, which the Wells Fargo board hired to conduct an independent investigation into the scandal.
The report, released Monday, was commissioned by Wells Fargo last year after the bank agreed to pay $185 million to settle accusations that employees opened as many as 2.2 million unauthorized accounts by transferring funds without customers’ consent from existing accounts. Since that September 2016 settlement, Wells Fargo CEO John Stumpf has resigned, and Tolstedt and Strother—the two presenters at that May 2015 meeting—have both retired. Former Cravath, Swaine & Moore partner C. Allen Parker was named in March as the new general counsel, and Strother is staying on for several months to help with the transition.
Strother declined to comment on the report. In a prepared statement, Wells Fargo president and CEO Tim Sloan said, “We accept the board’s findings as a critical part of our journey to rebuild trust.” Sloan said the board’s “findings provide another important opportunity to learn from our mistakes and take action to improve the way we operate, serve customers, and lead our team members.”
(Photo, left: James Strother. Courtesy photo)
The report’s account of that May 2015 meeting spoke to a larger issue highlighted by Shearman & Sterling: Strother’s legal department failed to appreciate the gravity of situation facing Wells Fargo as alarm bells were sounding.
As late as the September 2016 settlement with the Los Angeles city attorney, along with the Consumer Financial Protection Bureau and the Office of the Comptroller of Currency, “there continued to be a lack of recognition within the law department (as in other parts of Wells Fargo) about the significance of the number of sales integrity terminations, and the potential reputational consequences associated with that number,” the report stated.
“The law department’s focus was principally on quantifiable monetary costs—damages, fines, penalties, restitution,” the report said. “Confident those costs would be relatively modest, the law department did not appreciate that sales integrity issues reflected a systemic breakdown in Wells Fargo’s culture and values and an ongoing failure to correct the widespread breaches of trust in the misuse of customers’ personal data and financial information.”
Strother is only named three times in the 113-page report—but his legal department is faulted throughout. According to the report, sales practices were highlighted to the board in 2014 as a “noteworthy risk.” But the information and advice with that “did not highlight or identify the potential consequences of the misconduct that were distinctly legal in nature,” the report states, listing “a cascade of civil litigation, regulatory action from a host of federal and state agencies and the resulting serious harm to Wells Fargo’s reputation” as examples.
In 2013, Wells Fargo’s internal investigations group and a team created in response to allegations of inappropriate sales practices launched a probe into the Los Angeles regional bank, according to Shearman & Sterling’s report. The investigation sought to follow-up on internal reports that identified unusual funding activity with accounts, along with changes in the phone numbers associated with those accounts.
“Although some line-level employment lawyers provided advice and guidance in the course of the investigation, its significance was not escalated, and senior employment attorneys only learned details of the investigation after the media began to inquire about the terminations,” the report said.
By early October 2013, leaders in the law department grew concerned by the “lack of escalation by the line-level attorneys.” Strother was briefed at end of the month, but his department “did not further escalate the existence or details of the investigation to the board or any board committees at that time,” according to the report.
Federal regulators are still investigating the fake-account scandal at Wells Fargo, generating significant work for many firms. Wells Fargo said in a securities filing in November that it had set aside at least $1.7 billion to confront a litigation wave.
Last week, Wells Fargo said it would pay $110 million to resolve a dozen class actions rooted in the sham accounts scandal.