By Julie Shursky

In an effort to meet sales goals, Wells Fargo employees opened approximately two million fictitious bank accounts.[1] Over the course of a five-year period, the San Francisco bank fired 5,300 employees over the fraud.[2] Following the sales tactics scandal, the retail-banking unit head responsible for creating the fictitious accounts, Carrie Tolstedt, stepped down from her position.[3] Ms. Tolstedt is set to retire later this year with nearly $96 million in stock and options.[4] The Wells Fargo board, however, decided that Ms. Tolstedt would forfeit unvested equity awards of about $19 million for her involvement and leadership in the scandal.[5]

After the scheme, Wells Fargo terminated employees who did not meet the sales quotas. These former Wells Fargo employees filed a lawsuit in a California court seeking $2.6 billion in damages.[6] To remedy the situation, Wells Fargo refunded $2.6 million to customers who were charged as a result of the sales scheme, and the bank settled to pay $185 million in fines and penalties for its actions.[7] Moreover, CEO John Stumpf took the fault for all of Wells Fargo’s unethical sales practices.[8] Ultimately, he is “forfeiting at least $41 million in pay” and “vows that his bank will drop its sales incentive program.”[9]

On Wednesday, September 27, 2016, House lawmakers questioned Janet L. Yellen, the Federal Reserve chairwoman, on how to handle the Wells Fargo sales scandal.[10] Representative Michael E. Capuano, Democrat of Massachusetts, inquired about the length of time it takes for senior management to realize the illegality of the company’s conduct and take action.[11] He emphasized that the $185 million fine is a small footprint in their overall profit because the company has about $1.9 trillion in assets, hinting that Mr. Stumpf’s $185 million settlement is not nearly as gratuitous as it seemed.[12] Democrats also pushed Ms. Yellen on whether the board would administer additional punishment on the senior executives, including Mr. Stumpf, involved in the scandal. Ms. Yellen responded that senior management should be held accountable for their actions in the scandal. She added that the banking agencies are working to complete a long-pending rule on executive compensation intended to limit excessive risk-taking at financial institutions.[13]

Nevertheless, the House Panel was skeptical whether anything would be enforced against the senior executives. On Thursday, September 28, 2016, the House of Financial Services Committee denounced Wells Fargo’s actions as “theft” and “a criminal enterprise.”[14] Further, the Office of the Comptroller of the Currency charged Wells Fargo $20 million for defying rules on lending to members of the military, including a rate cap on how much interest can be owed to service members on active duty.[15]

Before the House hearing, the Wells Fargo board of directors decided to (1) deny Mr. Stumpf his annual bonus, (2) claw back $41 million of his unvested stock awards, and (3) take away a portion of his $2.8 million base salary.[16] The power of the board of directors in corporate law is accurately demonstrated in the abovementioned action. Here, the board exercised its duty of loyalty[17] because it acted in good faith to advance the interests of the corporation. Such decisions may be hard for a board of directors, but the company generally outlives any current and future CEO, so it is in the board’s best interest to ensure that the scandal does not happen again and to rightfully punish those who contributed, despite their status in the company.

 

[1] Emily Glazer, Investment Group Calls for Executive Clawback, Two New Board Directors at Wells Fargo, Wall St. J. (Sept. 23, 2016, 10:30 AM), https://www.wsj.com/articles/investment-group-calls-for-executive-clawback-two-new-board-directors-at-wells-fargo-1474641002.

[2] Id.

[3] Camila Domonoske, Ex-Wells Fargo Employees sue, Allege They Were Punished For Not Breaking Law, NPR (Sept. 26, 2016, 10:57 AM), https://www.npr.org/sections/thetwo-way/2016/09/26/495454165/ex-wells-fargo-employees-sue-allege-they-were-punished-for-not-breaking-law.

[4] Emily Glazer, Wells Fargo Claws Back Millions From CEO After Scandal, Wall St. J. (Sept. 27, 2016, 10:01 PM), https://www.wsj.com/articles/wells-fargo-board-actively-considering-executive-clawbacks-1474985652?mod=trending_now_3&mg=id-wsj.

[5] Id.

[6] Camila Domonoske, Ex-Wells Fargo Employees sue, Allege They Were Punished For Not Breaking Law, NPR (Sept. 26, 2016, 10:57 AM), https://www.npr.org/sections/thetwo-way/2016/09/26/495454165/ex-wells-fargo-employees-sue-allege-they-were-punished-for-not-breaking-law.

[7] Id.

[8] Id.

[9] Stacey Cowley, Wells Fargo’s Reaction to Scandal Fails to Satisfy Angry Lawmakers, The New York Times (Sept. 29, 2016), https://www.nytimes.com/2016/09/30/business/dealbook/wells-fargo-ceo-john-stumpf-house-hearing.html.

[10] Victoria Finkle, House Panel Questions Fed Chief on Wells Fargo Scandal, The New York Times (Sept. 28, 2016), https://www.nytimes.com/2016/09/29/business/dealbook/house-panel-questions-fed-chief-on-wells-fargo-scandal.html.

[11] Id.

[12] Id.

[13] Id.

[14] Stacey Cowley, Wells Fargo’s Reaction to Scandal Fails to Satisfy Angry Lawmakers, The New York Times (Sept. 29, 2016), https://www.nytimes.com/2016/09/30/business/dealbook/wells-fargo-ceo-john-stumpf-house-hearing.html.

[15] Id.

[16] Id.

[17] See Del. Code Ann. tit. 8, § 141 (West 2016) (stating that the “duty of loyalty mandates that the best interests of the corporation and its shareholders takes precedence over any interest possessed by a director, officer, or controlling shareholders and not shared by the stockholders generally”).