For six years, federal prosecutors investigated the Wells Fargo phony-accounts scandal amid a drumbeat of criticism. No big-bank executives went to prison following the 2008 financial crisis, and it didn't appear that pattern would change anytime soon.
But last week, the U.S. Attorney's Office in Los Angeles made an unexpected announcement. Carrie Tolstedt, Wells Fargo's longtime former head of retail banking,
The plea agreement was a victory for Attorney General Merrick Garland and
"This is a stern, stern warning to every senior bank person who could be producing material that the examiners eventually rely on," said a former Wells Fargo executive who spoke on condition of anonymity.
The criminal case against Tolstedt is part of a coordinated set of actions by multiple federal agencies in response to the fake-accounts scandal.
The Office of the Comptroller of the Currency announced last week that Tolstedt agreed to pay a $17 million fine and accepted a ban from the banking industry in order to resolve civil charges. And the Securities and Exchange Commission said that it has reached a tentative settlement with Tolstedt on separate civil charges.
"The case filed by the Justice Department — as well as the related administrative action by the OCC and the pending civil lawsuit by the SEC — should put bank executives on notice that obstruction and fraudulent conduct very well may result in a criminal prosecution," Thom Mrozek, a spokesperson for the U.S. Attorney's Office in Los Angeles, said in an email.
When asked why the case has taken six years to investigate, Mrozek said: "This was an extremely complex investigation, and the plea agreement is the result of extensive negotiations between the parties."
Tolstedt, who left Wells Fargo in 2016, is scheduled to make her initial appearance in federal court in Los Angeles on April 7. Her lawyer, Enu Mainigi, did not respond to a request for comment.
The plea agreement has yet to be approved by U.S. District Judge Josephine Staton. She could impose a sentence that is either shorter or longer than the agreed-upon 16 months, though in the latter scenario Tolstedt could withdraw from the plea agreement, according to Mrozek. The federal sentencing guidelines call for a range of 10-16 months behind bars.
The obstruction charge that Tolstedt faces stems from a memo that she and other Wells Fargo executives prepared for the risk committee of the bank's board of directors in May 2015. Even though the memo was written for a board committee, Tolstedt knew that it would also be provided to the OCC, according to the plea agreement.
Just two weeks earlier, the Los Angeles City Attorney's Office had sued the San Francisco bank, alleging that Wells employees engaged in fraudulent conduct in order to meet unrealistic sales quotas.
The May 2015 memo failed to disclose that an average of at least 1,000 employees per year were either fired or resigned pending investigation in connection with sales abuses, according to the plea agreement. It also omitted the fact that only a very small percentage of the employees whose activity constituted potential sales misconduct were investigated under the bank's monitoring standard, the plea agreement states.
Previously filed documents in civil litigation brought by the OCC provide more detail about the contents of the May 2015 memo. For example, the memo failed to state that 1% of employees were terminated annually, even though that figure was contained in prior drafts, according to a report by an OCC examiner in 2020.
And the May 2015 memo misleadingly stated that there had been a "dramatic reduction in inappropriate practices in the past year" — without noting that assertion stemmed from a time when Wells Fargo paused monitoring for at least seven months — according to the same OCC report.
Former Wells Fargo CEO John Stumpf has testified that the memo was misleading. In 2020, Stumpf agreed to pay a $17.5 million fine and a ban from the banking industry in connection with his own role in the fake-accounts scandal.
Samuel Buell, a Duke University law professor who focuses on corporate crime, said that prosecutors often bring obstruction charges when they are unable to establish that the underlying conduct was criminal.
But he also said that the type of obstruction to which Tolstedt has agreed to plead guilty — involving efforts to obscure misconduct before a criminal investigation gets opened — is considered more serious than obstruction at a later stage.
"It sounds like someone who had an awareness that there was a serious underlying problem before there was law enforcement scrutiny and tried to cover it up," Buell said.
Obstructing a bank examination is a rarely filed charge, which carries a statutory maximum of five years in prison.
When the charge has been brought in the past, the defendant has typically been a senior executive at a community bank, according to David Weber, a former enforcement official at the OCC, the SEC and the Federal Deposit Insurance Corp.
Weber speculated that there may be a specific document or witness that made Tolstedt's lawyer feel that accepting 16 months in prison was preferable to the risk of taking the case to trial.
If the case had gone to trial, prosecutors would have had to prove beyond a reasonable doubt that Tolstedt acted "corruptly" in obstructing the examination, which is a high bar for the prosecution to meet.
Weber said that prosecutors might have been able to charge Tolstedt with making a false entry in the books of a bank, which carries a statutory maximum of 30 years in prison, for the same underlying conduct. That possibility could have motivated Tolstedt to plead guilty to a charge that carries a lesser maximum sentence, he said.
"My
Weber said that while Tolstedt would not have been sentenced to 30 years in prison if convicted for making a false entry in the books of a book, the sentence likely would have been more than 16 months.
