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The Key Issues to Watch as the Wells Fargo Scandal Unfolds

Every day the headlines blare the latest revelations about the brazen, years long illegal conduct at Wells Fargo, including most recently the bank firing whistleblowers when they used the internal “ethics” hotline to report the wrongdoing, and at least one emailing the CEO about it.  Developments are happening so fast, it’s hard to keep up, which is one reason it is worth taking a look at what we know so far and some of the key issues raised by these illegal business practices. 

First, it is difficult to see how the CEO, John Stumpf, survives.  Either he knew about the years long illegal practices ripping off two million customers and accounts (which resulted in the termination of 5,300 employees over five years) or he didn’t.  Either way, it’s pretty clear he should go. 

However, while some will claim getting rid of the CEO will be enough and try to move on, that should just be the beginning of the housecleaning at Wells Fargo.  No one should accept anything less than a full public disclosure from an independent investigation of who did what when; who knew what when; and who was responsible for making sure it didn’t happen.  Only then can the appropriate sanctions for the right people and the right remedies for the bank be determined.  This is a bank, after all, and anything less will look like a cover up and further erode the trust and confidence of its customers and the public. 

Second, the scale and scope of the corporate breakdown here is as breathtaking as the illegal conduct.  The bank has two chains of command:  one, operational, focused on selling products and generating revenue, and one legal, risk and compliance, focused on making sure those in operations do their jobs appropriately and legally.  Both chains of command failed completely, for more than five years.  This is not a CEO problem or even a Carrie Tolstedt problem.  (Tolstedt is the executive in charge of the community banking division where all the fraudulent accounts and credit cards were opened.)

This is a systemic breakdown of the entire corporate structure and culture at Wells Fargo from the Board of Directors and CEO all the way down.  It also includes the outside auditors, who are responsible not just for certifying the financial statements, but also for reviewing and judging the internal controls of the bank.  Clearly, there was a massive breakdown of the internal controls and the auditors knew or should have known that and addressed it with the Audit Committee of the Board of Directors.

Third, above all else, individuals, including in particular, executives and supervisors up and down both chains of command must face meaningful punishment.  Corporations paying puny fines with shareholders’ money without admitting or denying facts or guilt is simply not a punishment and will not deter future crimes.  In fact, this disreputable pattern enshrined by the SEC and DOJ ensures much more crime in the future because it rewards past crimes, thereby incentivizing future crimes.  Yes, punishment must start with the CEO and the head of the business unit, but, if scores of other responsible or deficient executives, supervisors and staff are not severely punished, then the Wall Street crime spree will continue and the public disgust with Wall Street and Washington will get worse.

Finally, disgorgement, through claw backs or otherwise, must be the starting point for sanctioning individuals not the end point.  If giving up their ill-gotten gains is the only sanction lawbreakers face, then there is in fact no punishment: disgorgement and claw backs just means wrongdoers don’t get to keep the upside of their wrongdoing, but they suffer no downside.  It’s just status quo ante.  That is why, at a minimum, in addition to claw backs and disgorgement, substantial fines paid by the individuals out of their own pockets and baring individuals from positions with public companies must be imposed and, where appropriate, civil and criminal actions must be brought.  Then – and only then – will the Wall Street crime spree begin to abate.  Then – and only then – with the trust and confidence of the American people in Wall Street and banking as well as in regulators and prosecutors begin to be restored.

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