Wells Fargo Co., one of the largest banks in the United States, has been punished by multiple government actors for its allegedly deceptive banking practices dating back to 2011.1 From 2011 to 2015, the bank’s employees opened roughly 1.5 million new bank accounts and applied for 565,000 credit card accounts that may not have been authorized by their customers.2 The scope of the fraudulent behavior has led regulators and Congressmen to question Wells Fargo’s corporate governance.3
In the fall of 2016, the Consumer Financial Protection Bureau (“CFPB”), the Los Angeles City Attorney, and the Office of the Comptroller of the Currency fined Wells Fargo $185 million for opening more than 2 million bank and credit card accounts without customers’ knowledge and permission between May 2011 and July 2015.4 Specifically, Wells Fargo paid $100 million to the CFPB, $35 million to the Office of the Comptroller fo the Currency and $50 million to the City and County of Los Angeles.5 While these orders contained provisions designed to improve Wells Fargo’s compliance program, it did not directly punish the Wells Fargo board members who had seemingly been asleep behind the wheel.
Arguably, the most severe punishment came from the Federal Reserve (the “Fed”) on February 2, 2018. On Janet Yellen’s last day as the central bank’s chairwoman, the Fed board and Wells Fargo signed a consent order prohibiting Wells Fargo from increasing its current assets, allowing assets to be calculated using a rolling average, and requiring the bank to submit a cleanup plan.6 Additionally, the Fed announced that Wells Fargo would replace four of its board members who had been on the board during the fraudulent activity.7 By announcing this at the same time as the consent order, the Fed created the impression that replacing board members was being done at its instruction.8
The Fed’s consent order with Wells Fargo is important for two reasons. First, it is a unique punishment and by announcing the board member change at the same time as the consent order, the Fed created the impression that its punishment was directly affecting the board members who were supposed to ensure that Wells Fargo complied with the law.9 Second, the consent agreement does not allow Wells Fargo to continue growing, and without growth the value of the company will be negatively affected. Hopefully, this punishment will make shareholders throughout the banking industry elect board members who will attentively monitor their company.
The New York Times has reported that Wells Fargo was angry that the Fed created the perception that changing their board members was part of their agreement.10 It’s easy to understand why the Fed wanted to create this perception. Punishing board members appeases the public by reinforcing the idea that no one, not even board members on big corporate boards, are immune to regulatory action.
Overall, the Fed action creates a strong message to other banks. Banks engaging in widespread fraud will be subject to rules restricting their growth. The perception that the consent order included the change in board members, even though the turnover was already planned by Wells Fargo, also opens the door to future consent agreements including similar provisions. It’s reasonable to assume that the Fed will pursue this type of provision in future consent orders. While the Fed was slightly misleading about the consent order’s terms, it still sends a strong message that banks cannot engage in widespread fraud without suffering severe consequences.
Paul Blake, Timeline of the Wells Fargo Accounts Scandal, ABC News (Nov. 3, 2016), http://abcnews.go.com/Business/timeline-wells-fargo-accounts-scandal/story?id=42231128. ↩
Michael Corkery, Wells Fargo Fined $185 Million for Fraudulently Opening Accounts, N.Y. Times (Sept. 8, 2016), https://www.nytimes.com/2016/09/09/business/dealbook/wells-fargo-fined-for-years-of-harm-to-customers.html. ↩
See Blake, supra note 1. ↩
Emily Flitter et al., How Wells Fargo and Federal Reserve Struck Deal to Hold Bank’s Board Accountable, N.Y. Times, (Feb. 4, 2018), https://www.nytimes.com/2018/02/04/business/wells-fargo-fed-board-directors-penalties.html. ↩
See id. ↩
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