Why Didn't Wells Fargo's Legal Department Prevent the Account Fraud Scandal?

By Casey C. Sullivan, Esq. on April 11, 2017 | Last updated on March 21, 2019

Wells Fargo's board of directors released its report into the bank's fraudulent account scandal yesterday, a scandal that saw millions of fake accounts opened customers' names, as employees bent rules to meet demanding sales goals. The report, which marks the near culmination of the bank's internal investigations, laid blame primarily on two executives: ex-CEO John G. Stumpf and former head of community banking Carrie L. Tolstedt.

But the report also gives some insight into how the problem got so bad, and how the bank's internal legal department failed to prevent the scandal, even when they'd warned of risks years before.

Early, Unsuccessful Attempts to Address Problems

Wells Fargo's lawyers were not unaware of the risks posed by the bank's aggressive sales goals, goals that were known as 50/50 plans since only half the bank's regions would be able to meet them. In 2011, for example, the company's in-house attorneys warned that sales pressure was "a root cause" of the company's frequent terminations for "sale integrity" issues. "Lawyers in the Employment Law Section and the Deputy General Counsel responsible for the Section," the report notes, "also began to recognize the existence of significant reputational risk to Wells Fargo arising out of sales integrity issues, particularly mass gaming cases."

Nonetheless, "the perception persisted in the Law Department that sales integrity issues involved 'gaming' the Community Bank's incentive programs and not conduct affecting customers," leading the bank's lawyers to underestimate the severity of the issue.

Company attorneys made "commendable attempts" to address sales issues, the report states, even warning the board in 2014 that sales practices carried high risks. But they failed to put those warning in the proper context.

The Danger of a Transactional Approach

Ultimately, the bank's internal procedures failed to prevent the problem because of the transactional, case-by-case approach to issues. Wells Fargo simply couldn't see the forest for the trees.

The banks control functions, the report states, "focused on the specific employee complaint or individual lawsuit that was before them, missing opportunities to put them together in a way that might have revealed sales practice problems to be more significant and systemic than was appreciated."

The law department, "particularly at its senior levels," did not discuss and did not fully consider the possibility of a "pattern of illegal behavior." Once again, the practice of "advising on discrete legal problems as they arose and on managing Wells Fargo's exposure to specific litigation risks" left the company blind to the greater problem it faced -- widespread wrongdoing that would subject it to hundreds of millions of dollars in potential liability.

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