Analysis & Opinions - Corporate Counsel

Heineman on Wells Fargo: Where Were the Lawyers?

| October 12, 2016

Wells Fargo & Co.'s admission that it created more than 2 million false customer accounts has sparked significant reaction since it agreed, in early September, to pay $185 million in fines to the Consumer Financial Protection Bureau, the Office of the Comptroller of the Currency and the city of Los Angeles.

The bank was sharply criticized in Congressional hearings; law enforcement authorities, including the Justice Department, have begun further investigations; private suits have been filed; the CEO, John Stumpf, resigned and has agreed to forego $41 million of unvested options; the head of the community banking division has been forced to retire early and give up $19 million in options; and there has been a drumbeat of stories indicating that Wells Fargo failed to take prompt action even though it knew of the fraudulent practice in 2013, then 2011 and now perhaps as early as 2005.

So, yet again, there appears to be a significant failure of corporate culture in constraining bad employee acts—and significant failures of top management to create that culture and to embed appropriate systems and processes to prevent, detect and respond promptly and appropriately to indefensible wrongdoing that went on for a number of years.

And, yet again, we must ask the question, "where were the lawyers," the damning question first formulated by Stanley Sporkin about corporate misdeeds decades ago when he was head of the SEC Enforcement Division in the 1970s and then as federal district judge from the mid-80s onward—and repeated in virtually every major corporate scandal since.

So far, at least as far as I know, the Wells Fargo lawyers have not been the subject of investigation and analysis. But how can they not be? How can they not have been responsible, in some part, for fundamental failings in prevention and in the failures to respond swiftly and comprehensively when wrongdoing was detected years go? Wells Fargo indicated in July 2016, prior to the September settlement, that Jim Strother, Wells Fargo GC since 2003, would leave at the end of this year under the bank's mandatory retirement policy.

The internal job of assessing the failures of the Wells Fargo management, including the legal department, has now fallen to a special committee of the board of directors. One week after CEO Stumpf was unmercifully hectored by the Senate Banking, Housing and Urban Affairs Committee, Wells Fargo's independent directors, which until then appear to have been somnambulant, announced that, in addition to clawing back some Stumpf compensation: "They have launched an independent investigation into the company's retail banking sales practices and related matters. A special committee of independent directors will lead the investigation, working with the board's human resources committee and independent counsel Shearman & Sterling."

This investigation should go back to the beginning, when the fraudulent accounts were first reported inside Wells Fargo, and do a complete assessment of causes and the accountability of top management, including the lawyers, in failing to create the proper culture, systems and processes for addressing blatantly improper actions by thousands of Wells Fargo employees under a compensation system which rewarded "new" accounts and which lacked checks and balances to prevent self-aggrandizing fraud.

The investigation should avoid the failures of the Valukus investigation of General Motors Co.'s ignition-switch defect which blamed the GM bureaucracy but failed to inquire into the most important issue—the role of top management, including the general counsel, in preventing, detecting and responding much more swiftly to a long-standing problem before more than 100 people had died.

 

[This article was updated to reflect the resignation of John Stumpf.]

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For Academic Citation: Heineman, Ben.“Heineman on Wells Fargo: Where Were the Lawyers?.” Corporate Counsel, October 12, 2016.