?By Rajshree Kundalia
A wave of scandals has hit the market in the past few decades and the effects of such scandals are seen on the shareholders’ value, corporate governance and stock market. Among such scandals is the Wells Fargo Scandal, which was bought into picture recently this year.
Wells Fargo & Company is an American international banking and financial services holding company headquartered in San Francisco, California, with “hub quarters” throughout the country. It is the world’s second largest bank by market capitalization and the third largest in the U.S by assets. It was ranked as the 7th largest public sector company on the planet by Forbes in 2016.
Wells Fargo was founded by Henry Wells and William Fargo, who were also among the founders of the American Express in 1852. It was among the few banks to survive the panic of 1857, which saw a collapse of the banking systems. According to the latest report by the Federal Deposit Insurance Corporation, Wells Fargo has $3.2 billion in deposits in Lehigh Valley, i.e. nearly 20% of the market share. Wells Fargo, in its present form is a merger between San Francisco-based Wells Fargo & Company and Minneapolis- based Northwest Corporation in 1998 and the subsequent 2008 acquisition of Charlotte- based Wachovia. As a part of the Wells Fargo’s work culture, it works hard to foster a culture that is cantered on doing what is right for their customers and exhibiting high ethical standards and integrity.
Banks serve as the lifeline of modern financial system of an economy. But, when banks commit fraud in order to fulfil their greed, it can lead to major economic crisis. Wells Fargo & co., one of the big four banks in the USA, is one such bank whose name can be enlisted among the fraudulent companies. Wells Fargo & Co. opened 2 million phony accounts and issued credit cards in order to meet their sales target. It is presumed that opening of fraudulent accounts, by forging signatures, began at Wells Fargo as far back as 2005, if not earlier. Julie Tishkoff, the Secretary of Wells Fargo in the year 2005, reported to this HR Department and continued to complain about this practice until she was fired in 2009. Heading back to 2011, 2 million sham accounts were created by forging signatures, creating phony email addresses and fake PIN- all of these were created by the employees, who were hounded by their supervisors to meet the daily account quotas. As per one of the sources, “accounts were opened with the minimum required funds and left open for the required 3 months. After the required three months, the banker received credit for the account openings, and then immediately funds were transferred out and the accounts closed. After 6 months from the original date of opening, new accounts could be opened for the same person and the banker would receive full credit.” Thus, the banker could continually hit the sales target, without carrying out any real banking activity. Moreover, 100% employee turnover was witnessed every 6-8 months.
Creation of Phony accounts was just one aspect of the entire scandal. Besides opening deposit accounts without customer authorization, the bank applied for credit card accounts in customers’ names, issued and activated debit cards, creating PINs for customers, created phony email addresses without their knowledge or consent. These activities had put a burden on the customers in the form of annual fees, and late fees for some customers, which amounted to $1.5 million for bogus accounts. Bank’s victims were not just nickel- and- dimed with overdraft and maintenance fees, but most of them took ‘significant hits’ to their credit score for not staying current on accounts, of which they were not aware about. Wells Fargo CEO John Stumpf denied that the company’s culture is obsessed with non-stop selling that ran amok. He claimed that neither he himself nor other executives of the Bank were aware of the fraud, until the Los Angeles Times wrote about it in the late 2013.
The Scandal was detected in September 2016, when the Consumer Financial Protection Bureau (CFPB), the Los Angeles City Attorney and the Office of the Comptroller of the Currency (OCC) fined the bank with $185 million for opening 2 million fake accounts and issuing credit cards, without customers’ knowledge, between May 2011 and July 2015. The fine was a pittance as compared to the income of the bank in the 2nd Quarter which amounts to $5.6 billion. The fine included $100 million paid to the CFPB. Wells Fargo hired a Consulting firm, to review records dating back to 2011 to examine consumer and small business bank accounts and credit cards that were opened. This is not the end; the bank even refunded $2.6 million to its customers for any fees charged in respect of credit cards or any other banking products that they did not request. Therefore, it was found out that the average refund per unauthorized account was $25.Moreover, the bank fired 5300 employees, constituting approximately 1% of the entire work force, as a part of its disciplinary action. The CFPB said that the bank imposed the goals on its employees because it “sought to distinguish itself in the marketplace as a leader in cross- selling banking products and services to its existing customers.”
The effect of the scandal can be seen in the way the company would be managed. On September 16th 2016, three Utah residents filed the first class- action lawsuit against the Wells Fargo over the allegations. Stumpf was even called on to resign from his post and face criminal charges. Besides, the bank’s independent directors announced that he would forego $41 million worth of promised compensation as well as his usual salary as the independent investigation launched. Stumpf, who had been a CEO since 2007, did not even receive a bonus. Tim Sloan, an employee of the company for 29 years, replaced Stumpf as the CEO of the Bank and he aimed at restoring the trust in Wells Fargo. The consequence of unveiling of the scandal was also faced by Former Retail banking executive Carrie Tolstedt, who lost $19 million as penalty. Even after the detection of the scandal, Wells Fargo CFO John Shrewsberry told 500 Senior Wells Fargo executives in a conference call that the scandal would not affect the 3rd quarter earnings “much”.
Greed for money and power is what leads to fraud. The aim of a company should be to earn ethical profit and not deceive their customers, without whom the company cannot function. The list of entities engaged in corporate scandals is vast; Wells Fargo is just an example. The fact is that many companies are brought to light while others are still working on techniques to conceal the fraud committed by them. The penalty imposed would not bring back the goodwill, the trust that the customers had invested in these companies. So, it is necessary for an organisation to integrate the welfare of the masses with their own profit motives.