After taking six months to investigate how Wells Fargo became enveloped in an abusive sales scandal, Shearman & Sterling has produced a 113-page report that lays into the legal department for missing the big picture and focusing too much on cost-containment.
Released on Monday,thereport (PDF) was commissioned by the board of directors, which in September retained Shearman to assist an oversight committee in examining the scandal, in which bank employees created an untold number of fraudulent bank accounts in customers’ names in order to meet their sales targets.
As part of the fallout, it fired 5,300 employees, agreed to pay what was a record $100 million fine to the Consumer Financial Protection Bureau, and to pay $35 million to the Office of the Comptroller of the Currency and $50 million to the Los Angeles city attorney in settlements.
On Monday, it also clawed back $75 million in compensation from former CEO John Stumpf and former head of community banking Carrie Tolstedt, two individuals who come up for a large share of the blame in the report.
The team of Shearman lawyers interviewed 100 people, mostly in senior management, and reviewed 35 million documents, collected from 300 custodians with FTI Consulting providing data analytics assistance, according to a note within the 113-page report. It assesses each department in the bank, from human resources to audit, for its contribution to the scandal. Although the law department is far from alone in the blame, the Shearman team repeatedly knocked the department under former general counsel James Strother for failing to see a pattern and recognize the seriousness in a growing number of incidents beginning in 2011 related to improper sales practices.
[caption id="attachment_47516" align="aligncenter” width="426"][Image “John Stumpf, chief executive officer of Wells Fargo & Co., exits after a House Financial Services Committee hearing in Washington, D.C., U.S., on Thursday, Sept. 29, 2016. Photographer: Andrew Harrer/Bloomberg” (src=https://bol.bna.com/wp-content/uploads/2017/04/304697601_1-4-e1491925468614.jpg)]John Stumpf, chief executive officer of Wells Fargo & Co., exits after a House Financial Services Committee hearing in Washington, D.C., U.S., on Thursday, Sept. 29, 2016. Photographer: Andrew Harrer/Bloomberg[/caption]
Right up until September 2016, “there continued to be a lack of recognition within the Law Department (as in other parts of Wells Fargo) about the significance of the number of sales integrity terminations, and the potential reputational consequences associated with that number,” the report notes. “The Law Department’s focus was principally on quantifiable monetary costs — damages, fines, penalties, restitution.”
The Law Department’s focus was principally on quantifiable monetary costs — damages, fines, penalties, restitution.
It adds, “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.”
Former general counsel Strother, who retired last month, also comes up for serious scrutiny in the report including that the board’s risk committee felt badly misled for a presentation he was involved in.
Most notably, according to the report, in May 2015, three weeks after the Los Angeles City Attorney’s Office filed a lawsuit against Wells Fargo, accusing it of setting unrealistic sales goals that created pressure on employees to resort to opening fraudulent accounts, Strother and Tolstedt made a presentation to the board’s Risk Committee about the matter.
The Risk Committee specifically requested the number of employees that had been fired up to that point related to improper sales practices, which numbered around 2,600 at that point, the report states. But this number was deleted from the presentation during a pre-conference call between members of the legal department and Tolstedt’s community banking department — for reasons no one could recall, according to Shearman.
Instead, the Risk Committee heard that only 230 employees had been fired and that “the root cause was intentional employee misconduct, not systemic issues,” according to the report. It was the first time that the committee even heard that there were as many as 230 terminations, and members “felt blindsided by the disclosure,” the report says.
And in fact, the report notes, the actual number of people who had been fired or resigned as a result of investigations was closer to 2,600 at that time.
“Multiple Board members have stated that they felt misled by the presentation; they left with the understanding that sales integrity terminations were in the range of 200-300 and were largely localized in Southern California,” the report states. “The Board was not provided with the correct aggregated termination data until well into 2016.”
[caption id="attachment_44291" align="aligncenter” width="419"][Image “Photographer: Victor J. Blue/Bloomberg” (src=https://bol.bna.com/wp-content/uploads/2017/03/308806202_1-6-e1488838632515.jpg)]Photographer: Victor J. Blue/Bloomberg[/caption]
Last month, the board voted to cancel Strother’s and several other executives’ cash bonuses and to slash their stock bonuses by 50 percent. He is retiring and has been replaced by former Cravath Swaine & Moore presiding partner C. Allen Parker.
Neither Strother nor Parker were available for comment.
While the report does credit some members of the law department with making “commendable attempts to address the sales abuses ... through work on various committees,” it faults its members for not fully considering “whether there might be a pattern of illegal conduct” rather than a series of discrete legal problems.
Already, the report is being held up as a rare inside look at how a law department failed to mitigate a problem before it grew into a full scandal that resulted in major regulatory fines and executive management changes.
“This is the Wells Fargo Investigative Report. It is well worth reading. The next in the chronicles from Enron to GM,” Abercrombie & Fitch’s general counsel Robert Bostrom wrote on LinkedIn on Monday.
Amar Sarwal,vice president and chief legal strategist of the Association of Corporate Counsel, agreed that the report is likely to be studied by lawyers in the future.
“Normally you’re not going to have the confidential workings [of a law department] exposed like this,” Sarwal said.
The fact that it is written by a law firm, and critiques a corporate law department for focusing too much on cost containment and not seeing the big picture marks an “intriguing turnaround” from the normal roles, he added. It is more common to hear corporate law departments critique law firms for being too focused on the billable hour and not spending enough time learning their client’s business.
The Shearman team was lead by New York partner Stuart Baskin , a former federal prosecutor in Manhattan. Baskin previously represented J.P. Morgan’s board of directors as it dealt with the London Whale scandal, which involved a trader who accumulated an outsized position in the credit default swap market and lost $6.2 billion, raising questions about the bank’s risk management system. He was not available for comment.
[caption id="attachment_47511" align="aligncenter” width="388"][Image “Creighton Condon, senior partner and global leader of the sports group for Shearman & Sterling LLP, speaks at the Bloomberg Sports Business Summit in New York, U.S., on Thursday, Sept. 4, 2014. Condon discussed the growth strategies in “mega” sports markets during a panel. Photographer: Peter Foley/Bloomberg *** Local Caption *** Creighton Condon” (src=https://bol.bna.com/wp-content/uploads/2017/04/201448819-e1491925377813.jpg)]Creighton Condon, senior partner for Shearman & Sterling LLP, speaks at the Bloomberg Sports Business Summit in New York, U.S., on Thursday, Sept. 4, 2014. Peter Foley/Bloomberg[/caption]
Shearman has had little relationship with Wells Fargo at least as far as litigation is concerned over the past five years, according to Bloomberg Law Litigation Analytics . It identified only two cases in 2015, in which Shearman acted as its counsel.
Sarwal said the report puts a spotlight on the fact that all corporate lawyers, both in house and at law firms, face a tension between advising their client on a specific matter, and advising them on how to run their business.
“There’s this idea that the lawyers are the conscience of the company, but they’re not,” he added.
Instead, they operate within the hierarchy of the company and have to work with other executives to identify and solve problems. He criticized the report for not contextualizing what else the law department had on its plate as the sales abuse problem unfolded, but nonetheless praised it as useful information.
“For GCs, this report is just another reminder that your job involves trying to change a real culture of human beings,” said Sarwal.
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Read below for the full 113-page report.
[pdf-embedder url="https://bol.bna.com/wp-content/uploads/2017/04/Wells-Fargo-Report.pdf” title="Wells Fargo Report”]
UPDATED:An earlier version misspelled the name of the Shearman partner who lead the investigation. The correct spelling is Stuart Baskin.