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Wells Fargo board to lawyers: pay attention

By: Bridgetower Media Newswires//August 28, 2017//

Wells Fargo board to lawyers: pay attention

By: Bridgetower Media Newswires//August 28, 2017//

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By BARBARA L. JONES
BridgeTower Media Newswires

MINNEAPOLIS, MN — Corporate counsel need to keep their eyes open and fixed on the big picture.

That’s the lesson from a report released this spring by a committee of the Wells Fargo’s board of directors.

Wells Fargo has been fined $185 million by regulators and has been the subject of two congressional inquiries over various unscrupulous practices, including the unauthorized opening of millions of customer accounts. The bank has clawed back nearly $183 million from executives. Most of the blame was laid on the former Wells Fargo CEO, John Stumpf, and the former community banking executive, Carrie Tolstedt.

But the fault did not stop there. Some systemic weaknesses in Wells Fargo’s law department also contributed to the bank’s spectacular scandal, the report stated. The report said the lawyers could have taken a more expansive view of the sales machinations going on at the bank and recognized that the bank’s reputation was at risk and that a “cascade of civil litigation” and other consequences loomed.

It also suggested that, in the law department, legal concerns were overshadowed by business concerns.

According to the report, the law department is divided into several divisions, each of which is led by a deputy general counsel who reports to the general counsel. Of these divisions, two were significantly involved in matters concerning sales integrity. They were Wells Fargo’s enterprise services division – primarily its employment law section – and its litigation and workout division.

Beginning around 2011, a recurrence of sales-integrity events led employment lawyers to recognize sales pressure as as an explanation for why figures were being manipulated and unasked-for accounts set up. Lawyers also began to recognize that the questions over sales integrity were putting Wells Fargo’s reputation at severe risk, the report said.

But this recognition was not enough.

“Notwithstanding the growing awareness of the reputational risk associated with mass terminations, and the fact that many of these incidents involved unauthorized products or accounts, the perception persisted in the Law Department that sales integrity issues involved ‘gaming’ the [bank’s] incentive programs and not conduct affecting customers,” the report said.

That led them to underestimate the need to more directly manage sales integrity, the board concluded.

Later, attorneys provided legal advice stemming from two sales-integrity projects that had revealed negligence, ineptitude or an effort to fit a corporate culture.

“While sales practices were conveyed to the Risk Committee and the Board in 2014 as a ‘noteworthy risk,’ the information, discussion and advice that accompanied that risk did not highlight or identify the potential consequences of the misconduct that were distinctly legal in nature — e.g., a cascade of civil litigation, regulatory action from a host of federal and state agencies and the resulting serious harm to Wells Fargo’s reputation,” the report stated.

The next steps involving the lawyers occurred in 2015. On May 4, 2015, the Los Angeles city attorney filed a lawsuit against Wells Fargo alleging that the bank had set unrealistic sales goals, which pressured employees to resort to abusive and fraudulent practices to meet their targets, and that Wells Fargo had profited through fees charged to customers.

“Regulatory inquiries followed; the Law Department moved directly into litigation-management mode. [General Counsel James] Strother chose the head of the Law Department’s General Litigation Section, who had joined Wells Fargo three months earlier, to manage the litigation (in conjunction with outside counsel).”

It took more time for the law department to recognize what it meant that Wells Fargo was seeing so many sales-integrity terminations and that there would be attendant “reputational consequences,” the board continued.

“The Law Department’s focus was principally on quantifiable monetary costs — damages, fines, penalties, restitution,” the report continued. “Confident those costs would be relatively modest, the Law Department did not appreciate that sales integrity issues reflected a systemic breakdown in Wells Fargo’s culture and values and an ongoing failure to correct the widespread breaches of trust in the misuse of customers’ personal data and financial information.”

James Strother, general counsel, spoke to the board’s risk committee in May 2015. The board hasn’t specified what he said, but some directors later said the meeting left them with the impression that only 230 people had been terminated for sales abuses over the previous two years. In reality, it was closer 2,500.

The risk committee was told by Strother and Tolstedt that the investigation had revealed that the root cause of the bank’s troubles was employee misconduct, not systemic flaws resulting from unrealistic sales goals or compensation schemes. The committee was also told that Wells Fargo’s controls had been effective in detecting improper behavior.

The risk committee was “highly critical” of the presentation, the report continued.  The board was not fully up to speed until well into 2016.

The board recognized a culture of substantial deference to the business lines and also said that some departments (not just the law department) had often adopted a narrow “transactional” approach to questions as they arose.

“They focused on the specific employee complaint or individual lawsuit that was before them, missing opportunities to put them together in a way that might have revealed sales practice problems to be more significant and systemic than was appreciated,” the report said.

Some attorneys did attempt to deal with the situation, the board noted.

“However, the Law Department, particularly at its senior levels, did not discuss or appreciate the seriousness and scale of sales practice issues within the Community Bank [headed by Tolstedt] or fully consider whether there might be a pattern of illegal conduct involved,” the report stated. “Rather, the Department’s focus was on advising on discrete legal problems as they arose and on managing Wells Fargo’s exposure to specific litigation risks.”

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