SAN FRANCISCO (Legal Newsline) - Wells Fargo shareholders this week filed a class action lawsuit against the bank, its chairman and CEO, CFO and the former head of its community banking division, alleging the Wells Fargo executives “concealed” the fact that the source of the bank’s record so-called “cross-selling” was based on fraudulent activity.
“While bragging about the Company’s cross-selling prowess, defendants knew but deliberately failed to disclose known material true facts, including that the Company’s cross-selling strategy was not focused on or designed to benefit customers, but was instead designed to fulfill sales quotas or otherwise advance the interests of Wells Fargo or its employees and increase sources of profitability, while simultaneously burdening customers with financial products they did not authorize, need and/or even know about,” named plaintiff Gary Hefler wrote in his complaint, filed in the U.S. District Court for the Northern District of California Monday.
Hefler filed the securities fraud class action on behalf of himself and all persons who purchased Wells Fargo common stock between Feb. 26, 2014 and Sept. 15, 2016.
The named defendants include Wells Fargo & Company; John G. Stumpf, Wells Fargo’s chairman and chief executive officer; John R. Shrewsberry, chief financial officer; and Carrie L. Tolstedt, former senior executive vice president of community banking.
The class action comes less than three weeks after Wells Fargo reached agreements with the Consumer Financial Protection Bureau, the Office of the Comptroller of the Currency and the Office of the Los Angeles City Attorney regarding allegations that some of its retail customers received products and services they did not request.
Specifically, Wells Fargo will pay a $100 million fine to the CFPB’s Civil Penalty Fund; a $35 million penalty to the comptroller’s office; $50 to the city and county of Los Angeles; and $5 million in customer remediation.
According to the CFPB, the $100 million fine is the largest penalty the bureau has ever imposed.
“Today’s action should serve notice to the entire industry that financial incentive programs, if not monitored carefully, carry serious risks that can have serious legal consequences,” CFPB Director Richard Cordray said in a Sept. 8 statement.
Wells Fargo said it wanted to put the matter behind it.
“Wells Fargo is committed to putting our customers’ interests first 100 percent of the time, and we regret and take responsibility for any instances where customers may have received a product that they did not request,” according to a Sept. 8 statement released by the bank.
Some Wells Fargo employees reportedly opened as many as 2 million accounts without customers’ knowledge or permission in order to meet sales quotas.
“In fact, defendants knew the Company’s cross-sell strategy that they oversaw was fueled by a sales culture designed by Wells Fargo management that incentivized and rewarded employees for pushing products on customers in order to show growth without regard for the impact on customers,” Hefler wrote in his proposed class action. “Thus, in order to meet cross-sell targets set by management, Wells Fargo employees illegally opened millions of accounts (deposit, credit, online banking services, etc.) by forging documents or by other fraudulent means without the consent of Wells Fargo’s customers.
“This unlawful activity, driven by a sales culture engineered by defendants, was admittedly known to but not disclosed by the Company and its CEO, defendant Stumpf, before the commencement of the Class Period and was confirmed by internal investigations that resulted in the termination of thousands of employees.”
Last week, a group of former employees, angered over their termination, filed their own class action lawsuit against Wells Fargo in California Superior Court in Los Angeles County.
“Wells Fargo fired or demoted employees who failed to meet unrealistic quotas while at the same time providing promotions to employees who met these quotas by opening fraudulent accounts,” the lawsuit reportedly states.
Hefler’s lawsuit also takes issue with the bank executives’ compensation, arguing Stumpf, Shrewsberry and Tolstedt “profited handsomely” from the fraudulent activity.
“Wells Fargo’s cross-selling efforts to retail and commercial customers were neither designed to meet customers’ financial needs nor drive customer satisfaction, but rather were the product of a carefully designed performance management system that resulted in the opening of millions of deposit and credit card accounts for customers without their knowledge in an effort to generate fee income for Wells Fargo and compensation rewards for Wells Fargo employees, including defendants,” according to his 36-page complaint.
On Tuesday, Wells Fargo, no doubt feeling the pressure from federal lawmakers and others, announced that the independent directors of its Board of Directors have launched an investigation into the bank’s retail sales practices and related matters. Stumpf, a member of the Board, has recused himself from all matters related to the investigation.
Stumpf also has agreed to forfeit all of his outstanding unvested equity awards, valued at nearly $41 million based on Tuesday’s closing share price, and that he will forgo his salary during the pendency of the investigation. In addition, he will not receive a bonus for 2016.
Tolstedt, who was the former head of the retail division at the center of the sales scandal, has left Wells Fargo. She will forfeit all of her outstanding unvested equity awards, valued at about $19 million. Tolstedt will not receive a bonus for 2016, and will not be paid severance or receive any retirement enhancements in connection with her separation from the bank.
“We are deeply concerned by these matters, and we are committed to ensuring that all aspects of the Company’s business are conducted with integrity, transparency, and oversight,” said Stephen Sanger, lead independent director. “We will conduct this investigation with the diligence it deserves -- and will follow the facts wherever they lead. Our thousands of outstanding team members and millions of loyal customers and shareholders deserve no less.”
Stumpf was on Capitol Hill Thursday for a second round of grilling by federal lawmakers. Last week, the Wells Fargo CEO spent three hours in front of the Senate Banking Committee, answering questions about the scandal and why he hasn’t resigned.
This time, he was testifying before the House Financial Services Committee.
“Mr. Stumpf, we don’t yet know what you knew and when you knew it, but we know it happened on your watch and we hold you accountable for the answers to how and why this happened,” Committee Chairman Jeb Hensarling, R-Texas, said in his opening remarks Thursday.
“At last week’s Senate hearing you were uncertain of many matters. In the intervening week we trust you have checked relevant records and refreshed your recollection of events. Therefore, we expect you to provide more complete answers to the questions presented today.
“We need to know today exactly when and how you and other executives at Wells Fargo found out about this endemic fraud. We need to know today what you directed others to do about it when you found out. We need to know today who in management is being held accountable.”
Hensarling said the panel will be questioning other Wells Fargo executives in the coming weeks. He said he “will not hesitate” to issue subpoenas.
From Legal Newsline: Reach Jessica Karmasek by email at jessica@legalnewsline.com.