WASHINGTON _ Federal regulators were aware of wrongdoing at banking giant Wells Fargo & Co. as early as March 2012 and issued a string of supervisory letters ordering changes over the next three years, holding off on penalties while the creation of phony bank accounts and falsely issued credit cards to pad employee bonuses continued.
That timeline emerged Tuesday at a Senate Banking Committee hearing on allegedly illegal sales practices at Wells Fargo. Despite the supervisory letters, a scathing investigative report by the Los Angeles Times and this month's $185 million settlement with California and federal regulators, CEO John Stumpf argued that the scandal did not point to larger risks.
The Wells CEO also told Congress he did not err in signing off on quarterly reports filed with the Securities and Exchange Commission that said the company's internal controls were strong, maintaining that the problems did not reflect a material event warranting a notice to investors.
"It was not a material event," Stumpf told the Senate Banking Committee in sometimes testy testimony.
It's an important statement because there is now pressure on the SEC to investigate why Wells Fargo, the nation's third-largest bank by size of assets, did not disclose to investors the potential risks to share prices associated with the ongoing probe by bank regulators.
"I think there is always difficulty when you try to define a term like 'material,'" Comptroller of the Currency Thomas Curry testified, hesitating at first when asked about the SEC filings, then fueling the fire. "The fact that 5,300 employees were terminated was material, and that there were 2 million accounts involved would be material."
Some senators are demanding an SEC probe, arguing Wells Fargo violated internal controls provisions of a federal law known as the Sarbanes-Oxley Act by failing to recognize and stop widespread fraud.
"Either Wells Fargo willfully turned a blind eye, or they completely failed in their legal responsibilities to oversee their operations and to catch and stamp out fraud," Sen. Jeff Merkley, D-Ore., said in a Tuesday speech. "Either way, the SEC must investigate without delay and demand accountability for these egregious failures."
Stumpf's Capitol Hill appearance did little to douse the firestorm of criticism his bank now faces. He likely inflamed it by describing the problems as isolated events and not a bankwide problem.
"I disagree with the fact that this is a massive fraud," Stump angrily responded to heated questioning from Sen. Elizabeth Warren, D-Mass.
Minutes later, after Stumpf concluded nearly three hours of testimony, a top federal regulator said just the opposite.
"The fraudulent conduct occurred on a massive scale," Richard Cordray, director of the Consumer Financial Protection Bureau, said in his opening remarks explaining why Wells Fargo was hit with an agency-record $100 million fine on Sept. 8.
Much of Tuesday's hearing sought to establish who knew what and when about the activity at Wells Fargo that resulted in the firing of at least 5,300 employees over a five-year span. The timeline is important because it involves Wells Fargo's internal controls just a few years after a breakdown in risk management wrecked the economy and led to the punishing U.S. financial crisis of 2008-09.
"In 2008 Wall Street promised change, but it looks like it is business as usual," Warren said, slamming Stumpf over a failure to withhold any bonuses to senior management as called for under new laws.
The Wells CEO testified that he was unaware of problems until 2013 and informed his board of directors in 2014. The Office of the Comptroller of the Currency, the bank's chief regulator, provided testimony Tuesday that the bank was informed of the problem in March of 2012. Stumpf later confirmed that he'd met weekly with Vice President Carrie Telstedt, who oversaw the division where the problems occurred, and that it never came up for a period of nearly a year or more.
Telstedt, who did not attend the hearing, announced her retirement in July while the bank was in settlement talks. Stumpf confirmed that he did not consider firing her because of her "full body of work," allowing her to keep at least $45 million in potential bonuses and stock options that would have been off limits in a dismissal.
Telstedt can still qualify for a 2016 performance bonus too, he acknowledged, and a golden parachute estimated at between $90 million and $145 million.
"Banks and fish rot from the head down," said William K. Black, an economics and law professor at the University of Missouri, Kansas City and a former bank regulator of note during the savings and loan crisis of the 1980s, labeling the settlement with Wells Fargo "disgustingly weak" given management intransigence.
The unfolding timeline clearly suggests ongoing problems with Wells Fargo.
"In March 2012, the OCC received a small number of complaints from consumers and bank employees alleging improper sales practices at Wells Fargo, which were forwarded to OCC supervision staff," Curry explained in detailed prepared remarks, adding that the agency then met with executive leadership following the Los Angeles Times story in December 2013.
The OCC issued a supervisory letter to the bank in February 2013, well before the newspaper report, requiring it to develop a risk compliance program for its operations. That was followed in early 2014 by a directive ordering Wells Fargo to improve risk management over unfair and deceptive sales practices. It identified aggressive cross-selling, the practice of convincing customers to take out multiple financial products, as a potential problem.
Regulators continued to focus on Wells Fargo's perceived weak internal controls, meeting repeatedly with the bank in 2014 and 2015, and issuing another supervisory letter in April 2015 regarding the Community Bank division and one directly to the CEO in June 2015 regarding the bank's "enterprise-wide risk management and oversight of its sales practices," Curry's remarks noted, adding that a Notice of Deficiency was issued July 28 for failure to comply.
After the hearing, Banking Committee Chairman Sen. Richard Shelby, R-Ala., told McClatchy that regulators "came late to the party."
At the heart of the scandal is hard selling and pressure to meet performance targets at the level of branch banks, which led many Wells employees to create false accounts and temporarily transfer money into them without customer knowledge.
This activity would appear to constitute fraud and identity theft under federal laws. The OCC's consent order cites unsound practices but is silent on crimes, and Curry said Tuesday that his agency is continuing to investigate employees with the potential for a lifetime ban from banking.
U.S. attorneys' offices in New York, California and North Carolina have confirmed they are looking into some aspect of the Wells Fargo scandal.
Asked directly whether he'd referred anyone to the Justice Department for prosecution, Cordray said he cannot discuss referrals but then read the statute that allows him to do so.
"We follow that statute to the letter," Cordray said, implying that he had.
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