Wells Fargo knew as early as March 2016 that a regulator was formally investigating its sales practices, according to emails obtained by the Observer that shed more light on when the San Francisco-based bank became aware of the probe.
Documents show the Consumer Financial Protection Bureau in discussions with Wells’ attorneys, including in Charlotte, about the investigation six months before the CFPB fined it $100 million over unauthorized customer accounts. The emails connected to the investigation, requested under the Freedom of Information Act, have not been previously reported.
The records raise fresh questions about why Wells Fargo did not disclose the investigation to the public or investors before the fine was announced. Under federal securities regulations, companies must disclose “material” information – matters that a “reasonable” investor would deem important in deciding whether to buy a stock.
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The Sept. 8 announcement of $185 million in fines from the CFPB and other authorities amounts to a relatively minor financial hit for a bank that made profits of $16.7 billion in the first nine months of last year. But the scandal’s revelation dealt a big blow to the bank in other ways – initially shaving tens of billions of dollars from its market value, tarnishing its image and sparking a bevy of congressional hearings and federal probes, among other fallout.
“On the basis of what we know, it’s hard to argue this wasn’t material,” said Philip Nichols, professor of legal studies and business ethics at University of Pennsylvania’s Wharton School. “I cannot understand why they didn’t think that was. It just makes me laugh.”
The emails add a new layer to a timeline that’s been hashed out in congressional hearings into the scandal. The story first became public with a 2013 Los Angeles Times investigation, which prompted a 2015 lawsuit by the city attorney for Los Angeles.
The earliest of the emails pertaining to the CFPB investigation dates to March 8, before Wells Fargo reported quarterly financial results for the first three months of 2016.
The bank’s securities filings for that quarter and the second quarter of 2016 do not mention probes by the CFPB or the other two authorities that fined the bank: the Office of the Comptroller of the Currency and the city and county of Los Angeles.
In a statement to the Observer, Wells Fargo echoed comments it has previously made since the scandal, noting that “each quarter we consider all available relevant and appropriate facts and circumstances in determining whether a matter is material and should be disclosed in our public filings.”
The bank also said that, “as a normal course of business, we communicate frequently with our regulators on a variety of topics.”
But lawmakers and some investors have strongly disagreed with the bank’s determination. During a U.S. Senate hearing in September, Republican Pat Toomey of Pennsylvania questioned then-CEO John Stumpf, who resigned over the scandal, why the bank didn’t disclose the problems.
“I get that (the fine) amounts may not qualify as material to a bank the size of Wells Fargo,” Toomey said, “but the reputational damage done to the bank clearly is material.”
The emails show ongoing discussions between the CFPB and Wells Fargo attorneys over the course of last year leading up to the fine’s announcement.
In one email dated March 16, CFPB enforcement attorney Lawrence Brown told Wells attorneys Robert McGahan and David Rice, both based in Charlotte, that he “greatly” appreciated the bank’s “pledge to be transparent and cooperate quickly and fully with the Bureau’s investigation.”
The CFPB declined to comment.
Richard Clayton, research director for CtW Investment Group, a Washington, D.C.-based organization that advocates on behalf of labor union pension funds holding about 12 million Wells Fargo shares, said it’s “distressing” the bank did not inform investors of the investigation sooner.
“It does not really make sense to say that an enforcement action by the CFPB and the OCC wouldn’t count or couldn’t have been anticipated to be potentially a material event,” he said. “I think that’s just implausible.”
Michael Tanglis, senior researcher for Washington, D.C.-based consumer advocacy group Public Citizen, says customers, too, should have heard from Wells Fargo about the fake accounts long ago. Wells has said employees opened about 1.5 million deposit accounts and 565,000 credit card accounts that may not have been authorized by consumers, based on an analysis covering 2011 to 2015.
Unauthorized accounts likely marred credit reports for Wells Fargo customers, causing a cascade of financial harm such as the inability to apply for mortgages and other loans at more-favorable terms, Tanglis said, raising a concern expressed by lawmakers during the congressional hearings last year.
“The damage could be in the tens or hundreds of thousands of dollars depending on the situation,” Tanglis said. “This is something that if it did damage their credit score ... that’s something that would have been good to have on their radar early on.”
For its part, as of late last month the bank noted it had refunded customers $3.26 million on about 130,000 accounts and that remediation work is ongoing as the bank continues to review how customers were affected. As for customers potentially hurt by damaged credit scores, Wells said it plans to complete an analysis in the first quarter of this year and share a remediation plan with regulators.
Nichols, the Wharton School professor, said publicly traded companies are bound by securities regulations that mandate disclosure of material investigations. But there is no requirement for automatic disclosure of a legal investigation, he said.
“So a firm has to make a decision, but it is not up to the firm to choose whether an investigation is material or not,” Nichols said. “If the firm makes the wrong decision, they are exposed to liability.”
The Securities and Exchange Commission defines certain actions by a firm as material, such as acts of bribery, he said. In other cases, determining materiality can be murkier.
In Wells Fargo’s case, Nichols said, it was “pretty clear” the problems with fake accounts at a bank famous for getting multiple products in customers’ hands should have been publicly disclosed.
Failing to disclose can bring a firm penalties.
The Securities and Exchange Commission has fined companies, including banks, for withholding material information from investors. Bank of America, JPMorgan Chase & Co. and Wells Fargo have been among banks charged with disclosure failures by the SEC in recent years.
James Cox, professor at Duke Law School, said the SEC can take a range of actions against firms, from simply chastising a company for not being more forthcoming with investors to harsher steps. Normally, such cases result in a settlement in which a firm pays penalties and perhaps agrees to enhance internal reporting practices, he said.
Jonathan Macey, professor of corporate law at Yale University, said Wells Fargo might have thought the CFPB’s investigation was going nowhere or that it was too early in the process to disclose it.
“It sounds like they weren’t taking the CFPB particularly seriously,” he said. “It was clearly material in retrospect.”
In November, Wells Fargo informed investors in a securities filing that its sales scandal was under investigation by the SEC. An SEC spokeswoman declined to comment on the case or its status.
It is also unclear what impact the incoming administration of President-elect Donald Trump might have on such federal probes into Wells Fargo.
Last week, Trump announced the selection Wall Street lawyer Walter Clayton, whose clients have included Goldman Sachs, to head the SEC. Some Democrats, such as Sens. Elizabeth Warren of Massachusetts and Sherrod Brown of Ohio, have raised concerns that Clayton’s Wall Street ties might mean he won’t be tough enough on big banks.
Bank analyst Paul Miller said Wells Fargo might have faced tougher scrutiny had Democrat Hillary Clinton won the presidential election. But Wells is not out of the clear, having angered both Republican and Democratic lawmakers, he said.
“Wells Fargo did something that a lot of other people couldn’t do,” Miller said. “I do think Wells is going to spend another two or three years to dig themselves out of this hole.”