Wells Fargo had a panel to address misconduct. But stopped meeting.


In July 2011, Wells Fargo agreed to pay an $85 million penalty to the Federal Reserve, a little-noticed enforcement action that served as a precursor to the fake account scandal. Salespeople for a subsidiary called Wells Fargo Financial had allegedly inflated the income of potential borrowers to make them qualify for the loans.

Specifically, the employees created and printed fake W-2 forms, according to testimony by James Strother, who was the general counsel of Wells Fargo at the time of the agreement. The employees also put false information into a model that funneled applicants who should have qualified for prime mortgages toward higher-cost subprime loans.

“So there were two types of conduct there that were dishonest and wrong,” Strother testified. “And we ended up laying off a lot of people.” The Federal Reserve concluded that the deception was motivated by employees’ desire to meet sales performance standards, qualify for incentive pay, and avoid losing their jobs.

Alarm Bells, Hubris, and the Crisis at Wells Fargo - 420 Montgomery - Crop

Inside Wells Fargo’s headquarters at 420 Montgomery Street in San Francisco were the 12th floor offices of CEO John Stumpf, Retail Banking Director Carrie Tolstedt, Wholesale Banking Director Tim Sloan, Managing Director Pat Callahan, Director of human resources Hope Hardison and chief risk officer Mike Loughlin.

After the settlement with the Federal Reserve, Wells Fargo formed a new committee, made up of high-level executives, to address employee misconduct. He Team Member Misconduct Executive Committee It was to meet semi-annually. Its seven members shared responsibility for managing employee misconduct and internal fraud.

They included Strother; Pat Callahan, Administrative Director; Hope Hardison, director of human resources; David Julian, the chief auditor; Mike Loughlin, chief risk officer; and Deputy General Counsel Christine Meuers. The committee’s chairman was Michael Bacon, the bank’s director of security, who finally saw an opportunity to draw high-level attention to the problem of sales integrity.

“We created this committee to comply with the consent order,” Bacon said in an interview. “These are the people who can make a change.”

Bacon used numbers in an effort to persuade committee members to take stronger action. He presented data on the number of sales integrity cases, the types of cases, the regional distribution of cases, the number of employees terminated, the number of confirmed fraud cases, and more.

One problem with the data, and Bacon was aware of this deficiency at the time, was that the corporate investigations unit could only count cases that came to its attention. “I made it clear that it was the tip of the iceberg, because we are very reactive as a company,” Bacon said in an interview.

The cases that were investigated often arose from consumer complaints or employee calls to the bank’s ethics hotline. “I’ve even made the comment in several meetings that it was a sad statement to me to say that we’re sitting down for an employee to tell us that something is wrong,” Bacon said. “Or we’re waiting for a customer to tell us something’s wrong, when we have all the industry-leading information technology.”

Bacon had been advocating screening measures to find unreported sales abuse, but was repeatedly rejected. For example, he wanted the bank’s retail unit to run a report that could help identify employees who had opened accounts in the names of friends, relatives, or fictitious people, using the same address. “It’s not too difficult. To my knowledge, that report was never executed,” Bacon said in a 2018 statement.

Bells of alarm, pride and the crisis at Wells Fargo - organizational chart

In 2013, Bacon believed that the sales integrity problem was worsening and saw the Team Member Misconduct Executive Committee as the ideal place to raise the issue at the highest level of leadership in the bank.

In late August, Bacon met with other committee members in the executive briefing room on the 12th floor of Wells Fargo’s San Francisco headquarters. He presented data, but also spent time educating his colleagues about the motives of employees who cheated. This time, Bacon was not rejected.

“We talked about it. Everybody nodded in agreement. Everybody, I mean, got it. There was no ‘I don’t get it,'” he recalled. “Everyone knew it was a problem. They knew it had gotten worse.”

Loughlin shared an anecdote that showed his understanding. The chief risk officer was an accessible executive who, like many other members of the bank’s operating committee, had an office on the 12th floor of the headquarters building. He joined Wells Fargo in 1986 and was chief risk officer for five years.

During this meeting, Loughlin said his wife would never even go to a local branch again because the employees made such aggressive sales pitches, Bacon recounted in an interview. It wasn’t the first time Loughlin had expressed his concern about his wife’s negative experiences with the bank.

In early 2013, a Wells Fargo colleague recalled Bacon recapping a similar Loughlin story. “He mentioned that on a recent call, Mike Loughlin mentioned that his wife went into a store to do a transaction and came out with 5 items,” the colleague wrote in a post. E-mail.

Bells of alarm, arrogance and the crisis at Wells Fargo - email from Loughlin

In an email dated January 3, 2013, a colleague of Chief Security Officer Michael Bacon summarized a meeting in which Bacon discussed Chief Risk Officer Mike Loughlin by sharing an anecdote related to the sales pressure the company experienced. Loughlin’s wife at a Wells Fargo branch.

Loughlin had also told retail banking head Carrie Tolstedt that his wife received two unauthorized debit cards, according to Court documents filed by the government. Tolstedt’s response was to tell Loughlin to stop telling that story, as it reflected poorly on Wells Fargo’s retail banking unit, according to court documents.

during the same August 26, 2013, meeting of the Executive Committee on Team Member Misconduct, Bacon proposed that Wells Fargo begin monitoring its own executives’ accounts for signs of wrongdoing. Other banks were already doing the same, he later testified. It would have required adding just one full-time equivalent employee, according to Bacon.

But Callahan, the bank’s managing director, rejected the idea, Bacon said. “And he literally said, ‘We’re not going to approve it. We have too many investigations and we’re firing too many team members,'” he testified.

Before the meeting ended, committee members agreed that someone needed to discuss the sales integrity situation with Tolstedt, according to Bacon. Callahan volunteered to do it, he said.

As Bacon left the conference room, he felt a sense of accomplishment. He had escalated the problem to senior executives who were in a position to take meaningful action. “I walked out of there with a V for victory,” he recalled. But over the next year Bacon again became frustrated with the lack of change.

Loughlin, a former chief risk officer, testified that he did not recall attending the August 2013 meeting. His lawyers did not respond to requests for comment. Similarly, attorneys for several other Wells executives who served on the Team Member Misconduct Executive Committee declined to comment or did not respond to requests for comment.

Alarm Bells, Arrogance, and the Wells Fargo Crisis - Mike Loughlin 2

Chief Risk Officer Mike Loughlin was a member of both the Team Member Misconduct Executive Committee and the bank’s operating committee.

Hardison, the former director of human resources, also testified that she did not recall attending the August 2013 meeting. She declined to comment for this article, but a person familiar with her thinking, speaking on condition of anonymity, said the data Bacon presented did not die in the Executive Committee of Team Member Misconduct.

In November 2021, Hardison testified at an administrative law hearing that it wasn’t until 2015 that Wells Fargo executives began to understand that sales abuses were causing financial harm to consumers. “I think the damage to the client significantly increased the urgency and focus of what we had to do,” Hardison testified.

After Bacon left Wells Fargo in 2014, the Team Member Misconduct Executive Committee stopped meeting. The inactivity did not sit well with Loretta Sperle, who was then a manager in the unit that included the company’s corporate security and corporate investigations teams.

Although the Team Member Misconduct Committee was supposed to be replaced by an existing ethics oversight committee, the latter committee did not have as many members from the highest level of bank leadership, and employee misconduct would become in just one component of his jurisdiction, Sperle said in an interview.

There was also the fact that the Team Member Misconduct Executive Committee was formed in response to the 2011 consent order, and was effectively dissolved without informing the Federal Reserve, according to Sperle.

He recalled telling senior bank executives, ‘You have to talk to the Federal Reserve,'” arguing that Wells Fargo could not take this action without first informing its regulator.

When Wells finally told the Fed what had happened, Fed officials asked Wells Fargo to write an explanation, Sperle recalled. “They weren’t happy, because the requirement of that consent order was, whatever changes you need to discuss with them,” he said. A Fed spokesman declined to comment.

Looking back on what happened, Sperle sees the decision to suspend the committee as part of a pattern of disregard for regulatory requirements. She attributes it to arrogance. The prevailing attitude, Sperle said, was: we can do what we want. We’ll figure it out later. We are not going to let regulators run our business.

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