Anil Vazirani Scottsdale Investment Advisor shares SEC charges ex-Wells Fargo execs with misleading investors
The Securities and Exchange Commission on Friday accused two former top Wells Fargo executives of misleading investors about a sales metric that was exposed as unreliable after bank employees were found to have opened fake accounts for customers in order to meet sales goals.
Former CEO John Stumpf agreed to pay a $2.5 million penalty in order to settle the civil charges. Onetime community banking head Carrie Tolstedt did not agree to a settlement, and she now faces an SEC civil lawsuit that alleges she committed fraud.
The cases involve statements that the former executives made about Wells Fargo’s cross-sell ratio, which the San Francisco bank regularly cited as evidence of its sales prowess, and was long the envy of the banking industry. Wells stopped reporting the cross-sell ratio in early 2017 after the fake-accounts scandal exploded into view.
The SEC alleges that Tolstedt publicly endorsed the cross-sell ratio as a means of measuring the bank’s financial success, even though she knew about numerous flaws. Not only was the cross-sell ratio inflated by unauthorized accounts, it also included accounts that customers neither wanted nor used, according to the SEC.
“Rather than reveal to investors the extent to which the inclusion of unused, unneeded and unauthorized accounts in the cross-sell metric had inflated the reported number, Tolstedt continued to falsely claim that Wells Fargo’s cross-sell strategy was to sell products that customers valued and used,” the complaint states.
The SEC also contends that Tolstedt profited from stock sales made around the time of her alleged misconduct, pointing to sales of Wells Fargo shares for more than $11.8 million in November 2014.
Tolstedt’s attorney, Enu Mainigi of Williams & Connolly, said in an email Friday that her client acted appropriately, transparently and in good faith at all times.
“Ms. Tolstedt was an honest and conscientious executive. It is unfair and unfounded for the SEC to point the finger at Ms. Tolstedt when her statements were not only true but also thoroughly vetted by others as part of Wells Fargo’s policies, procedures and systems of controls,” Mainigi said. “We look forward to setting the record straight and clearing her name.”
Documents released by the SEC on Friday shed new light on how top Wells executives reacted after reports of sales misconduct at the bank surfaced in 2013, which led to scrutiny from local prosecutors in Los Angeles as well as the bank’s regulators.
In January 2016, Tolstedt made a presentation to Stumpf and then-Chief Operating Officer Tim Sloan that recommended the bank start reporting a new metric that it would call “active cross-sell,” according to the SEC. The recommendation was allegedly prompted by questions that Stumpf had raised about the fact that unused accounts were counted in the cross-sell ratio. The revised ratio would only count products that customers actively used.
The presentation showed that while the cross-sell ratio using the traditional methodology was 6.13 during the third quarter of 2015, the active cross-sell ratio was 5.17, the SEC stated. While Wells executives discussed the possibility of using the active cross-sell ratio at the bank’s Investor Day in 2016, that idea was eventually scrapped, according to the SEC.
Stumpf, who resigned as CEO later in 2016, was required to certify the accuracy of Wells Fargo’s filings with the SEC. The agency alleges that he learned of facts that put him, or should have put him, on notice about material inaccuracies in the cross-sell ratio in 2015 and 2016.
Stumpf, 66, neither admitted nor denied wrongdoing as part of the settlement. His attorney did not immediately respond to a request for comment.
The SEC accused Tolstedt of misleading investors about the cross-sell ratio both in sub-certifications testifying to the accuracy of the company’s securities filings and in public comments.
In one example, the securities watchdog pointed to comments that Tolstedt made at Wells Fargo’s 2014 Investor Day. In her response to a question about why growth in the cross-sell ratio was slowing, Tolstedt did not mention the impact from efforts to address sales misconduct and related changes in the behavior of employees, some of whom had previously opened accounts without customers’ permission in an effort to meet sales goals.
“Providing a truthful answer to investors would have linked the effects of the sales practices misconduct to the cross-sell metric,” the SEC stated in its complaint.
Tolstedt, 60, also left Wells Fargo in 2016. The SEC is seeking disgorgement of what it alleges were her ill-gotten gains, a civil money penalty and a ban on her serving as an officer or director of any public company.
“If executives speak about a key performance metric to promote their business, they must do so fully and accurately,” Stephanie Avakian, director of the SEC’s enforcement division, said in a press release.
Wells Fargo agreed in February to pay $3 billion to resolve a criminal investigation by the SEC and the Department of Justice that grew out of the phony-accounts scandal. One problem that the SEC identified at that time involved some of the specific language that Wells provided about the cross-sell metric in its 2014 and 2015 annual reports.
The SEC concluded that the bank’s description of the cross-sell ratio as a way of counting “products used by customers in retail banking households” was misleading because executives knew that the metric counted many products that were not actually used by customers.
The SEC’s actions are only the latest fallout from the scandal for Stumpf and Tolstedt.
In January 2020, Stumpf agreed to pay a $17.5 million penalty, and also consented to a ban from the banking industry, to settle civil charges brought by the Office of the Comptroller of the Currency.
Tolstedt is still facing civil charges from the OCC, which the agency hopes will result in a $25 million civil money penalty and a ban from the banking industry.
Wells Fargo has previously announced clawbacks totaling $69 million from Stumpf and $67 million from Tolstedt.
Read More: https://www.americanbanker.com/news/sec-charges-ex-wells-fargo-execs-with-misleading-investors
Anil Vazirani is president of Secured Financial Solutions, independent insurance advisor investment advisor rep with a fiduciary obligation and in the financial services industry since 1994. A+ rating with the Better Business Bureau for over a decade and a half, members in good standing with the National Association of Insurance and Financial Advisors.
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