The Wells Fargo Scandal

ETHICAL DILEMMAS IN FINANCE: THE WELLS FARGO
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Case Assignment:
Ethical Dilemmas in Finance: The Wells Fargo Scandal
Stacey Troup
Managing Organizational Behavior/ MBA-646
July 15, 2018
Professor Dr. Anastaisia Luca
Touro University Worldwide

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Abstract
The world if financial services has been plagued with negative connotations since the
equity markets crash of 2007/2008. While many financial service firms are solidifying their
commitment to their investors and customers through increased security measures, Wells Fargo
committed a great fraud within their organization when they fraudulently opened accounts
without customer consent or knowledge, thus regenerating the idea that major banks and
institutional investors trust among customers is waning. This is just the latest in a series of
legal issues both criminal and regulatory that the investment giant faced including the recent
charges filed regarding fraud amidst a bond offering, improper sales of complex financial
products, and the 2017 filing by the SEC (Securities and Exchange Commission) in which they
were charged with failing to report on money laundering following a management shift at the
organization. This paper will review the scandal that brought Wells Fargo into light in terms of
their fraudulent activities during the account opening scandal that shook investor confidence
and cost the firm $142 million in fines for same.
Keywords: Institutional Investors, Fraud, Wells Fargo, scandals, SEC, Civil
and Regulatory Charges.

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Ethical Dilemmas in Finance
The Wells Fargo Fraudulent Account Scam
Investment banks, institutional investors, and the financial services industry as a whole
has been the subject of great debate since the equity markets crash of 2007/2008, which
crippled global markets to near collapse and caused record losses to the public. Wells Fargo
was no stranger to guilt in their part in this catastrophe and their fraudulent and unethical
business practices continued during the 2016 scandal whereby they fraudulently opened
accounts for customers without their desire, consent, or knowledge and were fined (yet again)
for their part on a scandal. This paper will discuss the issues surrounding the email scandal
including the main problem of opening these accounts, how these problems developed and who
was responsible for allowing this to happen. Additionally, the organizational behavior
problems that occurred and concepts that could have been applied to the organization (both
ethically and legally) will be discussed as well as the legal issues and regulatory compliance
factors in place to prevent this type of fraud. All of these facts will lead to a simple fact that
Wells Fargo intentionally committed the fraud while continuing to mislead their shareholders,
account holders, customers, and retail investors by continuing unethical business practices even
after being fined.
The SEC V. Wells Fargo: Legal and Compliatory Issues Plague the Finance Giant
Wells Fargo is no stranger to civil and regulatory issues (charges) that exist and that they
violate seemingly without concern. For their part in the 2007/2008 housing market crash
(equity markets crash), Wells Fargo was fined $1.2 Billion for hiding bad loans While the
executive in charge of the group responsible, Kurt Lofrano, admitted to hiding bad loans, he
faced no personal liability for his part in the scandal and was also not sentenced to any jail time
as a result. This fraud was caused when the lending giant hid the bad loans which would have

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rendered their FHA mortgages uninsurable due to bad loan practices or unqualified purchasers
(low FICO scores, unconfirmed identities, subprime interest rates, etc.) that the lender offered
to unqualified purchasers, which defrauded the FHA as well as the investors (Pagliery, 2016)
In March of 2016, shortly before the email scandal was to be revealed, Wells Fargo was
charged by the SEC with defrauding investors relating to a bond offering they had underwritten
on behalf of a Rhode Island Agency for a company called 38 Studios (video game production
company). This particular charge defrauded the RIEDC (Rhode Island Economic
Development Corporation) who issued $50 million in bonds to 38 studio in the hopes of
stimulating the job market locally while helping small businesses. The suit claims that Wells
Fargo hid the fact that the company would need $75 million to produce the games per the bond
prospectus and investors rallied in protest when they found out about the fraud claiming that
they were never notified of the funding shortfall that existed when they invested their money.
(N.A., SEC Charges Rhode Island Agency and Wells Fargo With Fraud in 38 Studios Bond
Offering, 2016). This fraudulent activity violated several laws designed to protect the public
including Section 17(a)(2) and (a)(3) of the Securities Act of 1933, 15B(c)(1) of the Securities
Exchange Act of 1934, and Rules G-17 and G-32 of the Municipal Securities Rulemaking
Board (MSRB) (N.A., SEC Charges Rhode Island Agency and Wells Fargo With Fraud in 38
Studios Bond Offering, 2016).
Bringing us to the most recent scandal to hit the newswire, the Wells Fargo account
scandal broke September 8, 2016. Federal regulators revealed that employees of the banking
giant secretly created bank account and credit accounts without consumers knowledge or
approval and was fined $185 million for the fraud (Egan, Geier, & Wattles, Wells Fargo's 17-
month nightmare, 2018).

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Wells Fargo is clearly no stranger to defrauding their clients, we will now dive into how
this latest issue came to fruition and who is responsible for perpetrating this fraud.
Main Problems and Concerns of Wells Fargo
During the scandal of 2016 whereby the fraudulent charge accounts and banking accounts
were opened for customers without their knowledge, it became apparent that the management
was setting unrealistic sales goals for their employees which required them to open a certain
number of accounts to meet the quota put in place by management. Referred to as “high-
pressure sales tactics” and “pressure cooker environments”, these quotas for investment
professionals are unethical and can lead to what former Wells Fargo CEO John Stumpf refers
to as an “orchestrated effort” to defraud (Egan, Wells Fargo to scrap controversial sales goals
October 1, 2016).
Wells Fargo reportedly terminated employment to more than 5300 employees as a result
of this scandal (Egan, Geier, & Wattles, Wells Fargo's 17-month nightmare, 2018), some of
whom were fired for refusing to take part in the company ordered fraud (Associated Press,
2017) in violation of the Dodd-Frank Act which protects whistleblowers of regulatory
infractions (Dodd-Frank Wall Street Reform and Consumer Protection Act, N.D.).
While admitting no wrongdoing at the time (or since), then CEO John Stumpf agreed to
forfeit most of his 2016 salary and bonus, totaling approximately $41 million (Egan, Wells
Fargo to scrap controversial sales goals October 1, 2016). The company was fined $185
million (Egan, Wells Fargo to scrap controversial sales goals October 1, 2016) and agreed to
comply with the Dodd-Frank Act by rehiring 1,780 employees who lost their jobs as a result of

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whistleblowing efforts to correct compliatory and regulatory infractions within the company
(Dugan, 2017).
The rehiring effort came after several employees filed suit for wrongful termination under
the Dodd-Frank Act (Associated Press, 2017). Stumpf took a firm stance on the company’s
ethical policy of anti-retaliation against employees for reporting infractions within the
company rehiring those who were wrongfully terminated and Wells Fargo also canceled the
bonuses and compensation of over eight top executives including Tim Sloan, who replaced
Stumpf as CEO following his resignation, as well as compensation from Carrie Tolstedt who
was offered early retirement amidst the scandal and who was in charge of the Community
Banking Division of Wells Fargo (Associated Press, 2017). As part of the financial
remuneration, Wells Fargo is said to be recalling $47 million in payments to Tolstedt and $28
million from Stumpf (Associated Press, 2017).
Avoiding These Mistakes and Repairing the Damage
While Barrons suggests that the problem of these fraudulent accounts could have been
avoided through the use of Data Science (How Wells Fargo Could Have Avoided a Scandal,
N.D.) and the implementation of data science including data mining methods and AI (artificial
intelligence) into their business practices, a more practical review of what went wrong is fairly
clear as to who is to blame and how to avoid it in the future.
Wells Fargo invited and practiced in a “Toxic Corporate Culture” (Flow, Kupfer, &
Scott, 2016) in which the bottom line was driven by management greed and workers were
forced to adhere to an internal policy which resulted in defrauding customers. While (then)
CEO John Stumpf professed a corporate policy of “Everything we do is built on trust” as
indicated in both the Vision and Mission Statements of the firm at that time (Flow, Kupfer, &

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Scott, 2016), it is evident that he was a driving force in this scandal as the orders flowed from
the top to managers at all offices, and through the staff where it was ordered to be carried out,
without concern for neither the legal implications that this fraud would cause nor the cultural
toxicity that it would breed, as part of this autocratic structure.
By allowing a “toxic corporate culture”, you remove the employee’s faith in the
organization as well as their belief that they are part of the overall success of the company.
Instead, you spread a negativity whereby unattainable (and often unrealistic) goals are set
along with a hierarchy that is counterproductive to actual competitive edge (and success). This
leadership style is referred to as a “dictatorship” and has been known to lead to
misunderstandings and miscommunication between staff, a “failure to develop worker’s
commitment to objectives of organization”, a reduced morale and long-term performance of
employees as they are revered for their contribution, and, finally, results in counterproductive
teamwork in situations like this whereby the workers knew they were doing something illegal
but were forced to comply or be terminated (5 main Disadvantages of Autocratic or dictatorial
leadership, N.D.).
Had compliance professionals been a more integral part of this company and its policies,
this situation could have been avoided. Compliance professionals are well versed in the Dodd-
Frank Act and would have alerted the proper authorities to the misgivings and misguided
directives of executive staff had their concerns been first reported to the C-Level staff and
fallen on deaf ears. Compliance could have also given the legal implications of the directive
and avoided millions in corporate losses, subsequent litigation, and a shaken public trust.
Compliance is also referred to as risk assessment in terms of the epic failures that plague Wells

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Fargo as industry insiders continue to point to their refusal to adhere to firm corporate sales
policies while continuing to fail in terms of their risk assessment requirements.
Organizational Behavior – What Went Wrong and How to Repair It
Under the autocratic concept of organizational behavior, owners and executives are given
the power to dictate the orders to the employees while forcing adherence, regardless of legal
implications or cultural misappropriations (N.A., Best 5 Organizational Behavior Model,
2016). It has been around since the 1800’s and is a standard in a bulk of firms within the
financial industry as they are driven by profits and return on investment. Because of FINRA
and SEC regulations, these firms are overseen by compliance professionals in order to maintain
compliance to the Securities Act of 1933 and the Securities and Exchange Act of 1934 (The
Laws That Govern The Securities Industry, N.D.).
Wells Fargo is a known supporter of a hierarchy/autocratic system of organizational
behavior and while they continue to practice this model of behavior, it is imperative that
compliance be allowed to do their jobs (to the legal limits of the law) by reviewing all
transactions and policies within the firm, identifying trends in business practices (like the
massive account opening scandal), and the trade practices of the organization while reporting
inconsistencies and assisting with prosecution within the law for those found to violate these
rules.
Compliance is the division (or person within a division) who is FINRA registered and
knowledgeable within compliatory issues, including KYC (Know Your Customer). For any
investor seeking to invest through an institutional investor, a due diligence process is necessary
to deem the creditworthiness and liquidy of a customer before allowing them to invest. Their
finances are gone through with a fine tooth comb to be familiar with where the source of their

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wealth comes from to ensure it is not tied to terroristic or illegal activities. Having stricter
controls of compliance on a departmental basis would have halted this type of action in its
tracks.
Wells Fargo has since created an ethics board in the hopes of resolving consumer
confidence issues while implementing further security measures to prevent this type of action
from happening in the future. They have also linked compensation to consumer satisfaction
rather than a high pressured sales pitch while implementing security measures which require a
customer to confirm account establishment or creation via email, text, or in person (Wells
Fargo: What It Will Take to Clean Up the Mess, 2017)
Artificial Intelligence
In addition to the compliatory controls needed for implementation of a system to reduce a
repeat infraction of this type of fraud, the implementation and integration of artificial intelligence
systems into their framework could assist the compliance and anti-fraud departments in
identifying trends and behavior which results in fraud.
One example is an algorithm that identifies fake accounts such as abc123@gmail.com or
phone numbers like 987-6543 when input into an account profile. The algorithm would match
the data used from the application to the account holder’s information on credit accounts such as
Equifax, Transunion, and internal account information databases, to validate identity and
information before allowing the accounts to be opened (How technology could have prevented
the Wells Fargo account fraud scandal, 2016). The technology would send an alert to the
respective review authority alerting them to the inconsistency while prompting a lock of the
customer's information while the situation is resolved (How technology could have prevented
the Wells Fargo account fraud scandal, 2016).

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In addition to monitoring and preventing this type of fraud to be perpetrated, the AI
software would also identify (and limit) the types of accounts each employee at different levels
have access to while mapping the data entry trends of the employees to help identify where the
fraud is happening (How technology could have prevented the Wells Fargo account fraud
scandal, 2016). While they have implemented some AI since the fraud settlement, it is mostly
limited to “bots” to answer social media answers.
With all of the options that should be present within a firm as large as Wells Fargo, the
technology and compliatory reviews are only as good as the company allows. If Wells would
be more open to AI for fraud detection and focus less on their driving sales goals as we discussed
previously, they would have allowed compliance to stop this fraud in their tracks, saving them
close to $1B in fines as well as a negative public perception of their business practices.
System Model Management (Flat Management)
More and more companies are changing the way they manage things to emulate the most
sought after companies in the world (such as Google). In these environments, the system model
management, or flat management style is used.
The system model management style the “family” environment is thriving. Managers
foster authenticity and transparency as well as social intelligence, proving that their employees
matter to both them and the company. This connection, which begins at the lower management
level, provides an emotional and psychological connection between the employee, manager, and
company as a whole, making them more loyal and productive (N.A., Best 5 Organizational
Behavior Model, 2016).
In addition to making a more welcoming environment for employees, there is an
accountability factor to delegated tasks and the high-pressure sales tactic previously enforced by

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Wells Fargo would not be allowed to flourish under this management style. The managers would
give a greater autonomy to the staff, allowing them to be part of the company success rather than
just minions there to take orders. This would also foster a greater transparency of employees
and would allow compliance the leverage to squash such actions by any specific group or person
before they brought the organization to any legal issues with regulators.
Conclusion
While no formal charges have ever been brought against Wells Fargo executives, and the
company has never openly admit to any formal instructions requiring a perpetration of fraud
within their walls, they have been forced to a record payout to their customers as a result of the
fraud they allowed to happen.
John Stumpf avoided jail time and created a boiler room of pressure among all employees
requiring them to open accounts that led to fraud or termination if they refused to take part in
their delegated task. Although he professed transparency and honesty in business practices, his
autocratic management style and forced attrition of defrauding customers came to a head when
civil regulatory agencies caught up with him. Attempts to back peddle the situation came with
a record-breaking restitution to defrauded customers and, to date, they have still not fully
resolved their compliatory issues nor have they instituted a solid values plan which prevents
this type of issue from happening again.
Only recently have they restructured the pay for employees to reflect the customer
satisfaction rather than the close rate or “hunger” of their employees in the driven marketplace.
Although they have implemented internal review boards to help combat such fraud, they have
provided no proof that they have removed the high-pressure environment that caused this issue.

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While Stumpf and others gave up their salaries and bonuses as part of this fraud, they
faced no jail time, leaving one to wonder if regulatory agencies truly do find large investment
firms “too big to fail” and therefore just give them fines and slaps on the wrist rather than
forced attrition, jail time, or outright closure such as Lehman Brothers back during the housing
crisis.
When the culture is bad within an organization and the employees dissatisfied, the
created competitive nature is a negative rather than positive one and often leads to large
turnover. Here is to hoping that Wells truly changes their business practices and turns their
company and their culture around to a positive tune.

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References
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story.html
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https://www.investopedia.com/terms/d/dodd-frank-financial-regulatory-reform-bill.asp
Dugan,K. (2017, 10 02). Wells Fargo rehiressomestaffersfired over accountscandal.Retrievedfrom
NewYork Post:https://nypost.com/2017/10/02/wells-fargo-rehires-some-staffers-fired-over-
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