Cheat sheet: Inside the $3B Wells Fargo settlement

Feeling déjà vu after the news that Wells Fargo will pay the U.S. government $3 billion in connection with the bank’s fake-accounts scandal?

More than three years ago, the San Francisco bank agreed to pay two federal banking agencies a small fraction of that amount — $135 million — in order to resolve related matters. The 2016 regulatory action dealt with sales misconduct dating back more than five years.

The settlement announced Friday is different in several ways. It was the product of a criminal investigation by the Department of Justice and the Securities and Exchange Commission that began after the regulatory probe concluded. It found a pattern of wrongdoing dating back to 2002.

The settlement also included an acknowledgment by Wells Fargo that employees broke the law — namely by committing fraud and identity theft, and by falsifying bank records.

“This case illustrates a complete failure of leadership at multiple levels within the bank,” Nick Hanna, the U.S. attorney in Los Angeles, said in a press release. “Simply put, Wells Fargo traded its hard-earned reputation for short-term profits.”

Under the settlement, Wells Fargo entered into a deferred prosecution agreement, which lasts for three years. The bank will not be charged criminally during that period as long as it complies with certain conditions. Among the conditions is a commitment to cooperate fully with all federal investigations and prosecutions in connection with the scandal.

What follows are answers to several other questions that were raised by Friday’s settlement.

Has Wells finally put the phony-accounts scandal to bed?

No, though the settlement does represent a notable milestone. Wells Fargo CEO Charlie Scharf said as much Friday in a written statement that included a sharply worded condemnation of past wrongdoing at the $1.9 trillion-asset bank.

“The conduct at the core of today’s settlements — and the past culture that gave rise to it — are reprehensible and wholly inconsistent with the values on which Wells Fargo was built,” Scharf said.

“Over the past three years, we’ve made fundamental changes to our business model, compensation programs, leadership and governance. While today’s announcement is a significant step in bringing this chapter to a close, there’s still more work we must do to rebuild the trust we lost.”

One reminder that the scandal remains a live issue in Washington came just minutes before the announcement of the multibillion-dollar settlement.

The House Financial Services Committee announced that it plans to hold three hearings next month under the umbrella of “Holding Wells Fargo Accountable.” The first hearing, on March 10, will feature testimony from Scharf, who joined the bank in October.

The two subsequent hearings will examine the role of Wells Fargo’s board of directors in various scandals and the impact of what the Democratic-led committee described as Wells Fargo’s “toxic culture” on bank employees.

In addition, Wells Fargo is working to resolve a total of 12 public enforcement actions. Among them is the Federal Reserve Board’s two-year-old cap on the bank’s assets.

Will individual bankers be charged criminally in connection with the scandal?

That remains to be seen. The DOJ has been investigating former high-level Wells Fargo executives as part of a criminal probe of sales misconduct, American Banker reported on Jan. 3.

Late last month, former Wells Fargo CEO John Stumpf agreed to pay $17.5 million to the Office of the Comptroller of the Currency, while former retail banking head Carrie Tolstedt and four other ex-executives were hit with civil charges after failing to reach settlements with the agency. The DOJ’s criminal probe of individuals is still under way.

The settlement unveiled Friday was the product of the government’s negotiations with law firms such as Sullivan & Cromwell and Sidley Austin that represent Wells Fargo. Individual former bank executives have separate lawyers, whose job is to represent their personal interests, rather than those of the bank.

Under the deferred prosecution agreement, Wells Fargo agreed to continue to cooperate with federal prosecutors during the course of any prosecution brought against any individuals in connection with the fake-accounts scandal.

Where do matters stand with Tolstedt?

The deferred prosecution agreement includes numerous references to “Executive A,” who is identified as the senior executive vice president in charge of Wells Fargo’s community bank between 2007 and 2016.

That description fits Tolstedt, who left the company just before the phony-accounts scandal exploded. Under Justice Department policy, people who have not been charged do not get named.

Wells Fargo acknowledged in settlement documents Friday that Executive A implemented a volume-based sales model in which employees were pressured to sell large numbers of products to existing customers, often with little regard to customer need or expected use.

The bank also said that certain lower-ranking executives pushed Executive A to shift to a sales model based on customers’ needs, but that Executive A was unwilling to make fundamental changes.

Moreover, the bank said that the compensation paid to Executive A was linked to growth in cross-selling, and that Executive A gave an incomplete and misleading answer to a shareholder's question at an investor day in May 2016 about the factors that had led the bank’s cross-sell ratio to decline.

After the civil charges were brought last month, a lawyer for Tolstedt said that a full and fair examination of the facts would vindicate her client.

What else did investigators uncover about Wells Fargo’s cross-sell ratio?

The SEC found that Wells Fargo misled investors regarding the success of its community bank segment, pointing in particular to the highly touted cross-sell ratio, which purported to count the number of accounts and products per retail bank household.

One problem that the SEC identified involved some of the specific language that Wells provided about the cross-sell metric in its 2014 and 2015 annual reports. In those two reports, the ratio was described as a way of counting “products used by customers in retail banking households.”

The SEC concluded that the bank’s inclusion of the word “used” was misleading because executives knew that the metric counted many products that were not actually used by customers.

Under the agreement announced Friday, the SEC plans to distribute $500 million to harmed investors.

“This settlement holds Wells Fargo responsible for its fraud,” Stephanie Avakian, co-director of the SEC’s enforcement division, said in a press release.

Does this settlement affect the legacy of former Wells Fargo CEO Richard Kovacevich?

Kovacevich’s name does not appear in the settlement documents. Nonetheless, Wells Fargo states clearly that the widespread misconduct began during his nearly decade-long tenure as the company’s CEO, which ended in 2007. Kovacevich was nicknamed “King of the Cross-Sell.”

Wells Fargo acknowledged Friday that as early as 2002, leadership in its community banking unit encouraged and approved sales plans that called for aggressive annual growth in a number of basic banking products, and that the bank opened millions of unauthorized or fraudulent accounts between 2002 and 2016.

Wells Fargo also acknowledged a disconnect between the company’s Vision and Values statement, which Kovacevich brought from Norwest Corp. following the merger of the two companies, and which presented the bank’s cross-sell strategy as being in alignment with the needs of customers, and the reality, in which customer need was often disregarded.

How are outside observers reacting to the settlement?

Investors took the $3 billion agreement in stride, which was not surprising given that the bank had announced $3.1 billion in litigation accruals since October. Shares in the company rose by around 1% in after-hours trading Friday.

Bain Rumohr, an analyst at Fitch Ratings, said in an email that the settlement clears up uncertainty about the financial impact of the fake-accounts scandal on the bank.

Democratic politicians who have been critical of both Wells Fargo and the Trump administration criticized the settlement as weak.

Rep. Maxine Waters, D-Calif., said in a written statement that the penalty represents the cost of doing business for Wells Fargo.

“This fine barely dents Wells Fargo’s $200 billion in profit of the last 10 years,” said Waters, who chairs the committee that is scheduled to hold hearings on the bank’s conduct next month.