WELLS FARGO CUSTOMER

ACCOUNT FRAUD: CASE STUDY

Chanjana Ma’am

White Collar Crime teacher

Faculty of CMR University of Legal Studies

Submitted by:

Sohel Alam

BBA.LLB Semester VII (2020)

Roll No: 40

Registration No: 17BBLB050

Date of submission: 16th November 2020

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 ACKNOWLEDGEMENT
I would specially like to thank my guide, mentor, Chanjana ma’am without whose constant
support and guidance this project would have been a distant reality.

This work is an outcome of an unparalleled infrastructural support that I have received from
CMR School of Legal Studies, Bangalore. I owe my deepest gratitude to the library staff of
the college. It would never have been possible to complete this study without an untiring
support from my classmates and seniors.

This study bears testimony to the active encouragement and guidance of a host of friends and
well-wishers.

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 WELLS FARGO CUSTOMER
ACCOUNT FRAUD: CASE STUDY
INTRODUCTION

The case discusses the controversial sales practices at one of the largest financial institutions
in the country that led to unprecedented penalties by the Federal Reserve. The case study
deals with corporate governance policies within an organization and the ethical
responsibilities of those charged with governance. Talking about the history of this banking
company, Wells Fargo (the Bank) was established in March 1852 by Henry Wells, William
Fargo, and different financial specialists. The Bank's first office was opened in July 1852 in
San Francisco, California and not long after more workplaces were opened in different urban
communities and mining camps. The organization's underlying center was to offer banking
and express administrations toward the western piece of the United States. 1 These services
included buying gold, selling paper bank drafts that were equivalent to gold, and delivering
gold and other valuables to customers.

Throughout the 1920s, Wells Fargo played a key role in developing businesses, agriculture,
fledgling auto, aerospace, and film industries in the western U.S. Starting in the 1980s, the
Bank engaged in a series of mergers to create the current institution. 2 Most notable was the
2008 merger with Wachovia which allowed the Bank to expand operations throughout the
country.

In October 2017, Wells Fargo revealed its most reduced quarterly return in 7 years. This
shocks no one, given that the organization has been dealing with the aftermath from its
ongoing strategically pitching disclosures and implementation activities. About a year ago,
Wells Fargo announced a settlement of $185 million with federal regulators after admitting to
having opened millions of unauthorized customer accounts, falsifying bank records, forging
customer signatures and contact information, and even manipulating/transferring funds
between accounts to charge overdraft fees, all without customer knowledge or consent.3
1
Hagen 1, CASE STUDY: Wells Fargo 2016 Fraud Scandal, 9 February 2017.

2
Camden Brian Tayan, The wells fargo cross-selling scandal, Stanford Closer LOOK series, January 8, 2019.
Bharathy Premachandra and Azish Filabi, Under pressure: wells fargo, misconduct, leadership and culture,
3

January 2018

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 SUMMARY OF FACTS

The fraudulent account case for Wells Fargo emerged on September 8, 2016. The Consumer
Financial Protection Bureau, the Currency Comptroller's Office and the Los Angeles City
Attorney accused the business. The organizations claimed that Wells Fargo, between 2011
and mid-2016, created additional fraudulent bank accounts for pre-existing customers.
Signing up over 2 million customers for new credit cards and fees that they were unaware of.
Wells Fargo was fined an initial $185 million and the bank in response fired 5,300 involved
employees.4 The fraud supposedly came about because of the organization's business
program made by CEO John Stumpf. With the mantra "eight is extraordinary" Stumpf's
program set exacting deals objectives for Wells Fargo workers. Sales associates and
managers were urged to “get eight Wells Fargo products into the hands of each customer”.
These requesting quantities brought about representatives being asked to compromise,
opening new store accounts without assent from clients and focusing on minorities who
talked minimal English. The scope of the case grew as more investigations were done on the
company’s actions, uncovering 565,443 unsolicited credit card accounts. These events along
with consistent pressure from the media, The House of Representatives and The Senate lead
to the resignation of their CEO, John Stumpf in mid-October.

OPENING OF CUSTOMER ACCOUNTS: THE ISSUE THAT LEAD TO THE

In approximately 2009, the Bank developed a new sales program to distinguish itself from its
competitors. The main objective was to be the market leader in the cross-selling of banking
products and services to existing customers. The bank established a target for each customer
to have at least eight accounts or relationships with it.

To achieve the sales targets and thus earn additional compensation, employees used
customers’ information to open additional checking and credit card accounts, often without

4
https://www.attorneygeneral.gov/taking-action/press-releases/attorney-general-shapiro-announces-575-
million-50-state-settlement-with-wells-fargo-bank-for-opening-unauthorized-accounts-and-charging-consumers-
for-unnecessary-auto-insurance-mortgage-fees/

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their consent.5 Signatures were often forged on the applications and in some instances, the
Bank sent unsolicited credit cards to customers. The ideal customers were ones that
employees thought might not notice any discrepancy in their banking relationship, such as
elderly clients, and those who were not fluent in English. Employees and management
earned financial rewards under the Bank’s incentive compensation program for satisfying
these sales goals.

Sales volume was the ultimate performance measure and managers encouraged workers to
boost daily sales. Branch personnel were assigned sales targets that kept increasing over the
years. Employee progress was tracked and reported daily to managers and other executives.
Supervisors pressed low performers to achieve their quotas and the CEO communicated with
high performing managers by email or in person, to congratulate them on achieving goals.

Employees were encouraged to use misleading sales pitches, such as telling customers that a
checking account was bundled with a credit card. Other examples of techniques used by
employees to achieve sales targets included:6

• Branch employees invented fake businesses and subsequently used them to open new
bank accounts.

• Bankers in one branch opened new deposit accounts in existing customers’ names and
established the resulting pin numbers on the new accounts debit cards as “0000.” The bankers
would also enter false data into the customer contact information fields to avoid customer
communication responses using email addresses such as 1234@wellfargo.com and
noname@wellsfargo.com

• Bankers at another location moved funds from existing accounts to newly created
accounts to reflect artificial growth.

Opening unsolicited accounts created unexpected consequences for customers. For instance,
multiple credit card inquiries could negatively impact their credit scores. Also, frequently
applying for and opening credit cards could impact the average age of accounts, an item that
factors into the individual’s overall credit score. Checking accounts opened and not funded
incurred annual maintenance fees, plus accrued interest if such fees were not paid on time.

5
Rules amendments effective in December; Wells Fargo under fire for sales practices. (2016). American
Bankruptcy Institute Journal, 35(10), 8-9.
6
Raymond J Elson, Valdosta State University Patrice Ingram, Valdosta State University, Wells fargo and the
unauthorized customer accounts: a case study.

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 RESPONSE OF THE BANK’S MANAGEMENT

Some employees grew uncomfortable with the Bank’s sales practices and reported their
concerns to local and national management, to the Bank’s ethics hotline and, in some cases,
to the chief executive officer. Employee notifications were not positively received and some
were either demoted, forced to resign, or terminated for reporting the controversial sales
practices. This was despite the Bank policies prohibiting retaliation against employees who
report suspicious conduct.7 There were various Consequences faced by the employees who
reported the higher authorities of the bank. A branch employee filed a report with the branch
manager, the manager’s boss, and the Bank’s ethics hotline. The report alleged that a
colleague was opening and closing accounts without customers’ permission. The reports were
ignored, and the employee was fired a year later for insubordination while the managers
involved were rewarded with promotions. Again when an employee filed approximately 50
ethics complaints while working at the Bank. However, no action was ever taken by
management and the employee was denied bathroom breaks as part of intimidation efforts.
The worker’s employment was finally terminated for not reporting to work on time. 8

CONSEQUENCES FACED BY WELLS FARGO DUE TO INDULGING IN SUCH

In approximately 2015, the Bank finally acknowledged that it had a problem with
unauthorized accounts and began an internal investigation. Unfortunately, it was too late.
The issue had captured the attention of the local prosecutor’s office and two federal
regulators (“the parties”) which collectively fined the Bank $185 million and issued a consent
decree.9

The parties alleged that the Bank opened or applied for more than two million bank accounts
or credit cards without customers’ knowledge or permission. The allegation covered the
period from May 2011 to July 2015. The alleged misconduct also caught the attention of
7
Levine, Matt (9 September 2016). "Wells Fargo Opened a Couple Million Fake Accounts". Bloomberg.
Retrieved 6 May 2017.
8
Raymond J Elson, Valdosta State University Patrice Ingram, Valdosta State University, Wells fargo and the
unauthorized customer accounts: a case study.
9
Bharathy Premachandra and Azish Filabi, Under pressure: wells fargo, misconduct, leadership and culture,
January 2018.

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other oversight bodies including the FBI, federal prosecutors in multiple states, and the U.S.
Congress; each opened its own investigation.

Bank management could no longer ignore the problem and its initial action was to terminate
approximately 5,300 low-level employees (1% of its workforce) who were suspected of being
involved in the fraudulent activities. However, no senior level employee was terminated at
this point. Meanwhile, management hired an outside accounting firm and the board of
directors hired a law firm, to help each governing body better understand the root cause of the
improper sales practices within the CBD. 10

The Bank announced in September 2016 that it would end its sales program effective January
1, 2017, and introduce a new performance plan based on customer service, growth, and risk
management. Meanwhile, the accounting firm found that between the period 2011 to 2015,
approximately 565,000 credit card accounts were opened without customers’ approval. An
additional 1.5 million deposit accounts were opened and probably not authorized by
customers.11

Employees whose careers were impacted for failing to meet sales targets and/or for reporting
managers to the Bank’s ethics hotline initiated their own lawsuits against the Bank. Some
500 employees joined a class action lawsuit claiming wrongful termination and retaliation. In
one settled lawsuit, the court ruled in favor of an employee who was unlawfully terminated
by the Bank and it was ordered to pay the employee $5.4 million to cover back pay,
compensatory damages, and legal fees. The Bank was also required to rehire the employee.

In September 2016, the CEO testified before two congressional panels that were
investigating the Bank’s handling of the developing scandal. During the same period, the
State of California, one of the Bank’s most important customers, suspended it for at least one
year from underwriting some of its municipal bond offerings. The state attributed the move
to the Bank’s on-going account scandal.12

By October 2016, the CEO opted for early retirement from the Bank ending a 34-year career
due to public outcry resulting from the accounting scandal.

10
Keller, Laura (12 May 2017). "Wells Fargo's Fake Accounts Grow to 3.5 Million in Suit". Bloomberg.
Retrieved 13 May 2017
11
Smith, Randall (28 February 2011). "Copying Wells Fargo, Banks Try Hard Sell". The Wall Street Journal.
Retrieved 6 May 2017.
12
Raymond J Elson, Valdosta State University Patrice Ingram, Valdosta State University, Wells Fargo and the
unauthorized customer accounts: a case study.

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 CONCLUSION

The Federal Reserve’s action now puts into place a comprehensive remediation programme
that Wells Fargo must satisfy before being permitted to regain its status in the marketplace.
The new Consent Order between Wells Fargo and the Federal Reserve sets forth a
comprehensive plan for the bank to improve its board governance and its risk management
and compliance function. Wells Fargo remains as another demonstration of the outcomes of
overlooking morals and consistence. The damage to its reputation is staggering and the ability
of the bank to recover will depend on a sustained commitment to ethics and compliance and
careful management of its business practices. In this situation, Wells Fargo would be wise to
ensure that ethics and compliance considerations are given appropriate deference and
consideration in the future.

While we look through the rubble of past corporate scandals, it is easy to see how instilling
business ethics would inform corporate governance and protect a company from deviating
from corporate governance norms. I am reliably stunned at in what way numerous enormous
organizations with fruitful business records disregard the worth and need for business morals
and consistence. A culture of ethics and compliance is an invaluable asset and very few
companies have demonstrated a commitment to ethics and compliance as a long-term strategy
for financial sustainability.

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