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Wells Fargo fake accounts

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Executive summary

This report contains information about Wells Fargo & Company which is an international

banking and financial services holding company headquartered in San Francisco, California. It

has offices all around the globe. The company deals in financial services such as mortgage

insurance, banking, investing, credit cards and various other commercial and consumer financial

services. In September last year the company stated that it was paying about $200 million in

fines to LA city as well as the federal regulators in order to settle the allegations that its staff has

created millions of fake accounts for the consumers and this issue developed into a huge

firestorm within the industry. The senior management also fires over 5000 of its employees for

creating over 2 million fake bank accounts. In this report, we begin with the history and

background of the company as well as its current operations. Then we have discussed the scandal

itself and its various effects on the revenue, reputation and the stakeholders of the company. For

the purpose of research, we have enlisted some questions that will allow us to understand various

issues that the company faced due to the scandal and what measures did they take to overcome

them. We will also study that what were the intentions of the employees and the management of

the company when they were creating these fake accounts? We have also analyzed that whether

the bonus system for the employees or the profit mechanism for the company itself has anything

to do with it or not. The study will also allow us to understand what are the issues within the

current regulatory system are and how they can be addressed. The study also provides

information about various issues that the company was facing before and during the time of the

scandal and in the end, we have provided with recommendations and conclusion regarding the

fraudulent practices.
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Wells Fargo fake accounts

Introduction to Wells Fargo & Company

Wells Fargo & Company is an international financial and banking services holding

company which is situated in San Francisco, California and has many offices spread in different

countries as well. Wells Fargo is the second largest bank in the world in terms of market

capitalization and is the third largest within the United States in terms of assets. In the year 2015

Wells Fargo edge passed ICBC as the largest bank in the world in terms of market capitalization

but in 2016 it slipped back and JP Morgan Chase became the largest entity in the industry. In the

year 2015, Wells Fargo became the 3rd largest in the US by surpassing Citigroup Inc. The

company is now the 2nd biggest in mortgage, debit cards and deport services. Wells Fargo’s

primary subsidiary operating in the US is Wells Fargo Bank with the main office located in Sioux

Falls, South Dakota (Wells Fargo, 2016).

History and background of company

Wells Fargo has a long history that dates back to 1852 when Henry Wells and William

Fargo who founded the company to provide banking services to the residents of the state of

California. Henry Wells and William Fargo also co-founded the American Express. After 8 years

from the foundation, the company gained the control of Butterfield Overland Mail Co and led the

western segment of the Pony Express. In the year 1866, Wells Fargo, Overland Mail, and

Holladay joined forces under the name Wells Fargo resulting into the Grand consolidation. In the

year 1905, Wells Fargo’s bank and Nevada National Bank merged together to form Wells Fargo

Nevada National Bank. Then in 1918 due to the 2nd World War the US government nationalized
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the company’s express franchise and turned it into a federal agency which was called the US

Railway Express Agency or REA but after the war REA was privatized again. Since then Wells

Fargo has been part of many mergers with the likes of Union Trust Company, American Trust

Company, Dial Finance and Northwest Corporation. The company has also acquired many other

entities like Crocker National Corp, the personal trust business of Bank of America, Barclays

Bank of California, First Interstate Bancorp, National Bank of Alaska, First Security Corp, HD

Vest Financial Services, CIT’s constitution unit, Placer Sierra Bank, Greater Bay Bancorp,

United Bancorporation of Wyoming, Century Bancshares of Texas, Wachovia Corp, North Coast

surety Insurance Services, Merlin Securities and The Rock Creek Group LP (Wells Fargo, 2017).

Current operations

Wells Fargo currently operates in 3 separate business segments when it reports its

financial performance and results. These include Wholesale banking, Community banking and

Brokerage, retirement & wealth. In wholesale banking, various products and services are sold to

the commercial consumers on the wholesale basis. These include treasury management, lending,

commercial real estate, mutual funds, trust services, investment in capital markets through the

securities. In community banking, the services include diversified products, regional banking as

well as consumer deposit groups. In brokerage, retirement & wealth, the company offers

investments through its subsidiaries including LLC and Wells Fargo Advisors, Wells Fargo

Investments and through broker firms as well (Wells Fargo, 2017).

Wells Fargo fake accounts

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On September 8th, 2016, news came out that Wells Fargo has fired over 5000 of its

employees for opening over 2 million fake accounts and this news took the world by storm. This

was very frightening for the investors as they knew that this sort of news can have a negative

impact on their earnings. The bank overruled the ethical considerations and the employees, to

gain more sales bonuses, opened numerous fake accounts. Subsequently, the company faced a lot

of heat from the Senate, the House of Representatives, the Office of Comptroller of Currency and

the Consumer Financial Protection Bureau. The company was also under siege from various state

authorities, municipalities as well as local authorities. The main question was raised towards the

person who was sitting on top of those employees, Wells Fargo CEO, John Stumpf and the

question was whether he and the other senior executives knew about the case of fake accounts.

However, many of the financial experts mentioned that this scandal will not affect the quarterly

financial reports of the company but it will have a negative impact on the share value of the

company (Decambre, 2016).

In this situation, the ethical dilemma is clearly present as the bank's employees opened

back accounts in millions of numbers and they did not get the permission of their customers. It is

illegal and unethical activity. This illegal activity has been conducted due to the target which is

given to the bank employee by the high management. The management wants the employee to

meet the accounts targets in the month, which compel them to conduct this ethical activity. This

is good to set the target. However, the extra burden and fear of termination or demotion are a bug

cause of this act by the employees. They tried to get incentives to show that they achieved the

sales target. However, they adopted the non-professional attitude and in the result the bank lost

its moral ground to pursue and preserve the rights of its clients. In this recent event, however,
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the situation has been addressed in a clear manner, and it is obviously noted that the employees

of the bank made illegal and unethical practice which must not have been done (Swanson, 2016).

In addition, the motivation was to be enhanced by the training the detail of fines is that

the bank should pay $100 million to Consumer Financial Protection Bureau which is a federal

institution to curb unethical practices by corporations. Office of Controller of the Currency

imposed the fine of $35 million, and the bank should pay $50 million in fine to City and County

of Los Angeles. The employees of the bank got pressurized by high sales goals of the bank, and

this is the situation which might seem bit acceptable. However, the customers must not be given

the product which they have not applied for (Reuters, 2016).

The work culture of the bank was not effective and pertinent to the modern needs and

trends. Flexibility was necessary for the work environment to enable the employees to use

creative techniques to open more accounts. In a good organization culture, the management often

set the flexible targets for the employees along with the different success measures and solutions.

Relative to the Mailgram experiments, this was necessary for the bank management to set the

diplomatic organization culture to let the employees obey the authorities. If the authorities or

management aware the employees regarding the ethics, and contain the tasks per the abilities and

skills, the employees start to follow (SWEET, 2014).

Many knew that the events that took place at Wells Fargo were based on greed and a very

flawed structure of compensation. The fraud was on the radar but the management never

responded to the issue and the question that comes to mind is that what made them thought that

the issues are under control and under sound check. However, as human beings, we often ignore

what we don’t want to see and this is a pervasive cognitive error. One of such errors is associated

with the confirmation bias. Confirmation bias is also known as myside bias and is the tendency
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to favor or interpret the information in a manner that confirms the preexisting ideologies and

providing less base to the alternative realities or possibilities. If you lack the competitive

perspective associated with behaviors or attitudes then the quality of the analysis is at heavy risk.

Debates are also feared in most cases because most of the time we take it too personally and due

to this the value linked with the conversation can be immensely diminished. The management

knew that something was wrong with the system but they never took any action and for this

purpose they had to identify the flaws, however, they continued with their sales hungry strategies

and all this resulted in a major failure (Decambre, 2016).

The situation depicts that employees of the Wells Fargo Bank lacked moral imagination

which intends to guide people what is right and what is wrong. They do not to be told by anyone

that this practice is right or wrong. They should also know this thing. Employees could use their

skills to get desired targets set by the company, but they did not use proper ways to do so. They

should have used moral imagination to keep themselves away from this negative and improper

practice. There is a need to consider the impact on the different stakeholder regarding this

unethical or illegal activity. Different employees may adopt this activity in future to achieve their

targets. On the other hand, there may be a frustration between management and the customers.

The impact on the stakeholders is necessary to consider eliminating the unethical or illegal

activates. Moreover, the issue also depicts that there lacks moral imagination. It is recommended

studying ethical dilemmas to help reduce the incidents of unethical practices which have hurt the

trust of clients and credibility of corporations (Coenen, 2008).

Scandal impact on revenues of Wells Fargo

Mark Decambre mentions in his article that Wells Fargo is estimated to report the EPS at

$1.01 which is down from $1.14 in the same period for a previous year and the quarterly revenue
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will drop from $23.132 billion to 22.237 billion within a year for the 3 rd quarter. Before the

scandal, the bank reported its revenue rise by 4% in the 2 nd quarter of the previous year

(Decambre, 2016)

Scandal impact on reputation of Wells Fargo

Wells Fargo has bragged about its name and the superior reputation that is enriched with

a long history and the great performance even under the Great Recession has been tarnished by

the scandal. More and more investors think twice when they consider Wells Fargo as their

investment option. The ethical negligence of the senior management of Wells Fargo has cost

them a lot. To add to this the senior management also responded in a vague manner in front of

the Congress. The issue of mistreatment of workers also added fuel to the whole issue. The

negative perceptions about the Wells Fargo brand have soared to 52% score, which was standing

at 15% before the news about the scandal broke (Egan, 2016)

Scandal impact on shareholders of Wells Fargo

The shareholders also faced a huge set back from the fake operations of the management

of the bank as they breached the trust that the shareholders and the customers have had on them.

The biggest shareholder of Wells Fargo is Warren Buffet and he alone can influence the brand

image of any company in which he chooses to invest. However, many investors to think about

Wells Fargo and the image now it has in the market because they are in the shades of doubt and

the company has to perform really well from here onwards (Reuters, 2016)

Scandal impact on employees of Wells Fargo

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The employees that were involved in the scandal all lost their jobs for creating fake

accounts and boosting their sales bonuses. The number of employees that were fired after the

news broke out was 5300 as they were involved in creating over 2 million fake accounts.

However, the question here that needs to be addressed is what the reasons were that all these

employees had to go for such an unethical act. They knew what they were doing yet they

continued with their activity, was the there no system of scrutiny of the employees and were the

employees so attracted towards gaining their sales bonuses? The management that was

overseeing the whole activity must also be brought to justice as they were the culprits on the first

place (SWEET, 2014).

Research objectives

The objective of this study is to understand the circumstances under which the 5300

employees of Wells Fargo had to create the fake accounts. There is multiple reasons that can

justify this issue. The employees created the fake accounts in order to get their sales bonuses

regardless of any ethical considerations. Another issue that can be highlighted here is that why

the overseeing management was so negligent about the system that their subordinates created

over 2 million accounts from 2011 to 2015, a period of 4 years.

Problem statement key questions

 How Wells Fargo fake accounts scandal goes so bad?

 What considerations have been taken by the management of Wells Fargo to overcome the

issue of fake accounts?

 What was the thinking behind the scandal, whether it was an incentive to cheat?
 Is the bonus system big part for the employees’ pay, under the circumstances of the

scandal?
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 Is the scandal of Wells Fargo fake accounts part of the profit system of the company?
 How Wells Fargo made 5,000 Criminals?

Significance of research study

This research study discusses the scandal of fake accounts that the employees of Wells

Fargo created under the light of the issues that were responsible for the whole matter. The study

explains the bonus system of the employees of the company and it also provides details on the

intentions of the senior management of the company while they were reporting their financial

results for four years straight. The study also focuses on the challenges that were faced by the

company and how the management used the fraudulent practices while ignoring the ethical code

of conduct to make more profits.

The US treasury investment during financial crisis of Wells Fargo

In the year 2008 during the financial crisis of 2007-08, Wells Fargo became the recipient

of $25 billion under the Emergency Economic Stabilization Act. This money was issued as

preferred stock by the US Treasury (United States Department of the Treasury Office of

Financial Stability, 2008). The study conducted by the federal government officials indicated that

the company is in need of $13.7 billion for remaining capitalized. Next year the company

received $8.6 billion in the capital and the remainder was planned to be raised with help of

earnings. Next year the company redeemed $25 billion to the treasury and it also paid $131.9

million as accrued dividend for the preferred stock. The total dividends paid out were $1.441

billion since the stock was issued.

Impact on other bank accounts

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A report from S&P Global indicates that all banking consumers even those who don’t

have any link with Wells Fargo will feel the impact to a certain degree where they will need to

look out for the add-on accounts that their banks have to offer. This report had numerous

complaints from the consumers that have been filed with CFPB (Consumer Financial Protection

Bureau) regarding cross-selling offers made by many major banks. However, these complaints

are only claims and any other banks using the same tactics is just a matter of speculation.

Nevertheless, it’s not too early to consider such circumstances (Sullivan, 2016)

Holy crap: firing of employees

Challenges faced by Wells Fargo

Wealth and investment management

Wells Fargo securities

Controversies faced by Wells Fargo

 Huge cost charged to African American and Latino borrowers

 Overdraft fees
 Allegation of racial discrimination during foreclosures
 Avoidance of tax and lobbying
 Fines of consumer financial protection bureau
 Violation of new york credit card laws

Crisis of the week

Facts and figures behind the Wells Fargo fake accounts

Fake accounts affected financial services industry

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Fraudulent practice

Manipulation in accounts for profitability

Learning behind the Wells Fargo fake accounts

Researcher Arguments

State opinion

Further research opportunities

Recommendations

Conclusion
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References

Coenen, T. L. (2008). Essentials of Corporate Fraud. John Wiley & Sons.

Decambre, M. (2016, October 14). Wells Fargo earnings: Here’s what to expect as embattled
lender’s CEO steps down. Retrieved from MarketWatch:
http://www.marketwatch.com/story/wells-fargo-earnings-heres-what-to-expect-from-the-
embattled-lender-2016-10-12?

Egan, M. (2016, October 24). Wells Fargo's reputation is tanking, survey finds. Retrieved from
CNN Money: http://money.cnn.com/2016/10/24/investing/wells-fargo-fake-accounts-
angry-customers/

Reuters. (2016, October 28). Warren Buffett’s Wells Fargo Scandal Silence Could Soon Be
Broken. Retrieved from Fortune - Finance: http://fortune.com/2016/10/28/wells-fargo-
warren-buffett/

Sullivan, B. (2016, October 6). The Wells Fargo Fallout: How Does the Scandal Affect You?
Retrieved from Grow: https://grow.acorns.com/2016/09/how-does-the-wells-fargo-
scandal-affect-you/

Swanson, B. (2016, October 12). How will Wells Fargo's accounts scandal impact its earnings?
Retrieved from HousingWire: http://www.housingwire.com/articles/38263-how-will-
wells-fargos-accounts-scandal-impact-its-earnings

SWEET, K. (2014). Wells Fargo fined $185 million for improper account openings. Retrieved
December 1, 2016, from http://www.seattletimes.com/business/wells-fargo-fined-185-
million-for-improper-account-openings/

United States. Department of the Treasury. Office of Financial Stability. (2008, November 17).
Transaction Report Updated on November 17, 2008. Retrieved from Fraser:
https://fraser.stlouisfed.org/scribd/?
item_id=519794&filepath=/files/docs/historical/fct/treasury/treasury_tarp_transreport_20
081117.pdf&start_page=1

Wells Fargo. (2017, January 9). About Wells Fargo. Retrieved from Wells Fargo:
https://www.wellsfargo.com/about/

Wells Fargo. (2017, January 9). Wells Fargo History. Retrieved from Wells Fargo History:
https://www.wellsfargohistory.com/

Wells, J. T. (2011). Corporate Fraud Handbook: Prevention and Detection. John Wiley & Sons.
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