In September 2016, Wells Fargo fell from grace when the financial institution was rocked by an internal scandal. The reputation of the country’s third-largest bank was severely tarnished when it was fined by the Consumer Financial Protection Bureau for opening more than two million unauthorized deposit and credit card accounts.
It’s been more than six months since news of the scandal broke, but Wells Fargo has yet to get past it. On April 10, the company’s board announced plans to take back another $75 million in compensation from two executives who’ve received the brunt of the blame — former CEO John Stumpf and former Head of Community Banking Carrie Tolstedt. The forced return of pay and stock grants are one of the most significant in the history of corporate America, according to a statement released by the company.
The shamed executives aren’t the only ones who’ve paid dearly for the scandal. Find out more details about the blunder, and how much cash Wells Fargo has shelled out to make things right.
Wells Fargo Scandal: An Overview
On Sept. 8, the CFPB rocked the financial industry when it announced that, since 2011, Wells Fargo employees have opened more than 2 million deposit and credit card accounts without customer knowledge. The illegal practice resulted in extra fees and charges to customers and was carried out by Wells Fargo employees trying to hit aggressive sales targets and compensation incentives set by the company.
The CFPB charged Wells Fargo with violations of the Dodd-Frank Wall Street Reform and Consumer Protection act, including:
- Opening unauthorized deposit accounts and transferring funds without permission
- Issuing and activating debit cards without permission
- Applying for credit cards without permission
- Enrolling customers in online banking services using fake email addresses
Wells Fargo Pays Fines, Fires Over 5,300 Workers
Beyond forcing the bank to issue full refunds to all impacted customers, the CFPB ordered Wells Fargo to hire an independent contractor to conduct a comprehensive review of its procedures and fined the financial institution $100 million. On top of this penalty, Wells Fargo is required to pay $35 million to the Office of the Comptroller of the Currency and $50 million to the city and county of Los Angeles.
While this fine is large enough to take out many businesses, it’s just a slap on the wrist for Wells Fargo — a bank that brought in $23 billion in net income for 2015.
After the Wells Fargo scandal was made public, the bank admitted to firing 5,300 workers over the past five years over the opening of fraudulent customer accounts. All of these employees worked in the community banking division overseen by Carrie Tolstedt — an executive who had been with the company for 27 years and was set to receive a compensation package worth approximately $125 million when she announced her retirement, reported Fortune.
John Stumpf and Carrie Tolstedt Step Down
After the scandal erupted, Stumpf and Tolstedt’s days at Wells Fargo were numbered. Rather than retiring at the end of 2016 as planned, Tolstedt stepped down in late September, followed by Stumpf in October.
Stumpf certainly isn’t hurting for cash, but the disgraced CEO lost plenty of money in the scandal. He earned $19.3 million in 2015, but agreed to walk away from much of his 2016 pay, including his bonus and $41 million in stock.
Although stepping down from his role as CEO didn’t earn him severance pay, he walked away from Wells Fargo with more than $100 million in vested stock and more than $24 million in pension and 401k benefits, reported the Los Angeles Times. But he wasn’t done paying up. Including the most recent claw backs, executive compensation actions against Stumpf and Tolstedt currently exceeds a combined total of $180 million.
Prior to his departure from Wells Fargo, Stumpf spent the last few weeks on the job doing damage control. On Sept. 20, he met with Congress where he faced intense scrutiny — especially from Sen. Elizabeth Warren, who encouraged him to resign amid the scandal. In addition to calling for a criminal investigation, the Massachusetts senator accused the former Wells Fargo CEO of “gutless leadership.”
After Stumpf’s retirement was made public, Warren reaffirmed her belief over Twitter that he should face investigation. She added that he should return all the money he earned during the scandal.
Wells Fargo Suffers Backlash
As expected, the controversy has proven to be a public relations nightmare for the bank, as consumers question the security of Wells Fargo accounts. On Sept. 28, California State Treasurer John Chiang announced plans to sever some business ties to the bank for the next year. In a letter addressed to Stumpf and Wells Fargo’s board of directors, Chiang said he would not invest in Wells Fargo securities, use the bank to buy stocks or bonds, or select the financial institution to underwrite select bond offerings.
Chicago, Seattle and Ohio have also stopped depositing money with Wells Fargo and hiring it to sell bonds.
Major Wells Fargo investor Warren Buffett has remained largely silent amid the revelations, but the inherent dishonesty of the situation has rattled others. A group of religious investors — including nuns — has filed a shareholder resolution urging the bank to share the underlying cause of the scandal.
The negative impact has also trickled down to the Wells Fargo branch business. In September, customer meetings with branch bankers dropped 10 percent, consumer checking account openings tumbled 25 percent and credit card applications fell 20 percent from the level reached during the same time period in 2015.
In addition to the public outcry, Wells Fargo is also facing criticism from former employees who have felt compelled to speak about the toxic work environment. Some have offered insights into a highly competitive sales culture that drove staffers to engage in deceptive practices just to meet sales goals.
Former Wells Fargo banker Bill Bado told CNNMoney he rebuffed orders to open fraudulent bank and credit accounts in September 2013, and reported the request to the company’s ethics hotline and human resources. Eight days later he was fired for tardiness. Other former and current employees have reported similar instances of retaliation for reporting unethical behavior.
Financial Impact and Recovery Efforts
The impact of the breach rippled through Wells Fargo, causing the company’s stock to take a nosedive. On Sept. 26, Wells Fargo stock plummeted to below $45 per share — its lowest level since February 2014. Since then, it’s gradually recovered, closing at upwards of $54 per share on April 10. That same day, bank analyst Scott Siefers told CNBC the bank’s worst days from the scandal are now behind it.
Wells Fargo ended 2016 with $21.9 billion in profit — a glaring decline from the $22.9 billion earned by the bank in 2015. The company is still facing more than a dozen investigations, inquiries and lawsuits related to the unauthorized accounts.
Consumers aren’t being too quick to forgive and forget the scandal, either. The bank reported a 43 percent decline in new consumer checking accounts and a 55 percent decrease in new consumer credit card applications in February, compared with the same time period in 2016.
Since news of the scandal broke, the bank has been busy doing damage control. A print and digital “commitment campaign” was launched in the weeks following the revelation of fraudulent accounts.
Tim Sloan, the new Wells Fargo CEO, swiftly announced plans to ramp up marketing efforts, which included running its commitment ads in major newspapers across the country. Saying, “Moving forward to make things right,” the ads served as a public apology of sorts, where the bank admitted it failed to serve customers, promised to make it right and vowed to do better moving forward.
Wells Fargo is currently preparing to unveil its first national advertising campaign since the scandal. Called “Building Better Every Day,” it’s slated for a mid-April launch.