In July 2011, Wells Fargo agreed to pay an $85 million fine to the Federal Reserve — a little-noticed enforcement action that served as a precursor to the fake-accounts scandal. Salespeople at a subsidiary called Wells Fargo Financial had allegedly inflated prospective borrowers’ incomes so that they would qualify for loans.
Specifically, the employees created and printed false W-2s, according to testimony by James Strother, who was Wells Fargo’s general counsel at the time of the settlement. Employees also put false information into a model that funneled applicants who should have qualified for prime mortgages into higher-cost subprime loans.
“So there were two sets of conduct there that were dishonest and wrong,” Strother testified. “And we ended up terminating a bunch of people.” The Fed concluded that the cheating was motivated by employees’ desire to meet sales performance standards, qualify for incentive pay and avoid losing their jobs.
In the aftermath of the settlement with the Fed, Wells Fargo formed a new committee — composed of high-level executives — to address employee misconduct. The Team Member Misconduct Executive Committee was to meet semiannually. Its seven members shared responsibility for the management of employee misconduct and internal fraud.
They included Strother; Pat Callahan, the chief administrative officer; Hope Hardison, the human resources director; David Julian, the chief auditor; Mike Loughlin, the chief risk officer; and Deputy General Counsel Christine Meuers. The committee’s chair was Michael Bacon, the bank’s chief security officer, who saw an opportunity finally to bring high-level attention to the sales integrity problem.
“We put this committee together to comply with the consent order,” Bacon said in an interview. “These are the individuals that can make a change.”
Bacon used numbers in an effort to persuade the committee members to take more forceful action. He presented data on the number of sales integrity cases, the types of cases, the regional distribution of the cases, the number of employees fired, the number of instances of confirmed fraud, and more.
One problem with the data — and Bacon was aware of this shortcoming at the time — was that the corporate investigations unit could only count the cases that came to its attention. “I made it clear that it was the tip of the iceberg, because we’re so reactive as a company,” Bacon said in an interview.
The cases that did get investigated often grew out of consumer complaints or calls by employees to the bank’s ethics hotline. “I had even made the comment in several meetings that to me it was a sad statement to say that we’re sitting back for an employee to tell us something’s wrong,” Bacon said. “Or we’re waiting for a customer to tell us something’s wrong, when we have all of the industry-leading information technology.”
Bacon had been advocating for detection measures to find sales abuses that didn’t get reported, but he was repeatedly rebuffed. For instance, he wanted the bank’s retail unit to run a report that could help identify employees who had set up accounts in the names of friends, relatives or fictitious individuals, using the same address. “Not too difficult. To my knowledge, that report was never run,” Bacon said in a 2018 deposition.
In 2013, Bacon believed that the sales integrity problem was getting worse, and he saw the Team Member Misconduct Executive Committee as the ideal venue to raise the issue to the top echelon of leadership at the bank.
In late August, Bacon gathered with other committee members in the executive conference room on the 12th floor at Wells Fargo’s San Francisco headquarters. He presented data, but he also spent time educating his colleagues about the motives of employees who cheated. This time, Bacon didn’t get pushback.
“We talked about it. They all nodded their head. They all, I mean, got it. There was no ‘I don’t understand,’ ” he recalled. “They all knew it’s a problem. They knew it’s gotten worse.”
Loughlin shared an anecdote that demonstrated his understanding. The chief risk officer was an approachable executive who, like numerous other members of the bank’s operating committee, had an office on the 12th floor of the headquarters building. He had joined Wells Fargo in 1986 and been the risk chief for five years.
During this meeting, Loughlin said that his wife wouldn’t even go to a local branch anymore because the staffers made such aggressive sales pitches, Bacon recounted in an interview. It was not the first time that Loughlin had raised concerns about his wife’s negative experiences with the bank.
Earlier in 2013, a Wells Fargo colleague recalled Bacon recapping a similar story from Loughlin. “He mentioned that on a recent call, Mike Loughlin mentioned his wife went into a store to do a transaction and came out with 5 products,” the colleague wrote in an email.
Loughlin had also told retail banking chief Carrie Tolstedt that his wife received two unauthorized debit cards, according to court papers filed by the government. Tolstedt’s response was to tell Loughlin to stop telling that story, since it reflected poorly on Wells Fargo’s retail banking unit, according to the court filings.
During the same Aug. 26, 2013, meeting of the Team Member Misconduct Executive Committee, Bacon proposed that Wells Fargo start doing monitoring of its own executives’ accounts for signs of irregularities. Other banks were already doing the same thing, he later testified. It would have required adding just one full-time-equivalent employee, according to Bacon.
But Callahan, the bank’s chief administrative officer, rejected the idea, Bacon said. “And she stated verbatim: ‘We’re not going to approve it. We’ve got too many investigations and we’re terminating too many team members,’ ” he testified.
Before the meeting wrapped up, members of the committee agreed that someone needed to discuss the sales integrity situation with Tolstedt, according to Bacon. Callahan volunteered to do so, he said.
As Bacon left the conference room, he felt a sense of accomplishment. He had escalated the problem to senior executives who were in position to take meaningful action. “I walked out of there with a V for victory,” he recalled. But over the next year, Bacon again became frustrated by the lack of change.
Loughlin, the former chief risk officer, testified that he did not recall attending the August 2013 meeting. His lawyers did not respond to requests for comment. Likewise, attorneys for several other onetime Wells executives who sat on the Team Member Misconduct Executive Committee either declined to comment or did not respond to requests for comment.
Hardison, the former HR director, also testified that she did not recall attending the August 2013 meeting. She declined to comment for this article, but a person familiar with her thinking, who spoke on condition of anonymity, said the data that Bacon presented did not die at the Team Member Misconduct Executive Committee.
In November 2021, Hardison testified at an administrative law hearing that it was not until 2015 that Wells Fargo executives began to understand that sales abuses were causing financial harm to consumers. “Customer harm, I think, significantly increased the urgency and focus of what we needed to do,” Hardison testified.
After Bacon left Wells Fargo in 2014, the Team Member Misconduct Executive Committee stopped meeting. The inactivity didn’t sit well with Loretta Sperle, who was then a manager in the unit that included the company’s corporate security and corporate investigations teams.
Although the Team Member Misconduct Committee was supposed to be replaced with an existing ethics oversight committee, the latter committee did not have as many members from the top echelon of the bank’s leadership, and employee misconduct was to become just one component of its jurisdiction, Sperle said in an interview.
There was also the fact that the Team Member Misconduct Executive Committee had been formed in response to the 2011 consent order, and it was effectively being disbanded without informing the Fed, according to Sperle.
She recalled telling senior bank executives, ‘You’ve got to talk to the Federal Reserve,'” arguing that Wells Fargo was not allowed to take this action without first informing its regulator.
When Wells eventually told the Fed about what had happened, Fed officials required Wells Fargo to write an explanation, Sperle recalled. “They weren’t happy, because the requirement of that consent order was, any changes you need to discuss with them,” she said. A Fed spokesperson declined to comment.
Looking back on what happened, Sperle sees the decision to suspend the committee as part of a pattern of indifference to regulatory requirements. She chalks it up to arrogance. The prevalent attitude, Sperle said, was: We can do what we want. We’ll resolve it later. We’re not going to let the regulators drive our business.
Read the other installments in this series: