Beginning in the early 2000s, corporate managers at Wells Fargo bank began pressuring branch employees to engage in aggressive “cross-selling” – marketing multiple financial products such as bank accounts, credit cards, or overdraft protection services to customers. Employees faced sales quotas, many of which were nearly impossible to meet, and they were regularly hounded over their progress. The failure to meet these quotas carried dire consequences: official reprimands and even dismissal.[i]
The predictable result of this relentless pressure was that many of the bank’s employees resorted to unethical practices to meet their impossible quotas. They sold their clients products they did not need or could not afford. When even that was not sufficient to satisfy management’s expectations, they set up accounts, credit cards, monitoring programs, or loans for clients without their knowledge or permission. In many cases, the bank’s retail salespeople carried out these fraudulent activities with the approval, and even the encouragement, of supervisors.[ii] Notably, this behavior began years before the Consumer Financial Protection Bureau (CFPB) was up and running.
While details of the Wells Fargo fake account scandal began to emerge around 2011, the practice continued unabated until at least 2016. By then, the full extent of the scandal had become public. In September of that year, federal regulators had documented more than 2 million fake bank and credit card accounts that had been opened between 2011 and 2016.[iii] Additional investigations uncovered still more cases, and by August 2017 Wells Fargo had acknowledged the existence of 3.5 million fraudulent accounts dating back to 2009.[iv]
These fake accounts caused massive harm to affected Wells Fargo customers, especially lower-income account holders. The bank admitted to cheating customers out of nearly $11 million in improper charges and fees related to the fake accounts, though the total damages are likely far higher.[v] Just as important, but harder to measure in dollar figures, is the potential damage the fake accounts did to many people’s credit scores.[vi] Bad credit reports could mean that many of those affected will have a harder time securing a job, renting an apartment, buying a home or a car, or obtaining a loan.
In response to the fake account scandal, federal regulators and the city of Los Angeles joined together to take aggressive enforcement action against Wells Fargo. In 2016, the bank agreed to pay $100 million in fines to the CFPB for various violations of the Consumer Financial Protection Act and to set aside an additional $5 million for compensating defrauded customers. As part of the settlement, Wells Fargo also agreed to pay $35 million to the federal Office of the Comptroller of the Currency and $50 million to the city of Los Angeles.[vii]
While important, this enforcement action did not cover the full extent of Wells Fargo’s wrongdoing. Fortunately, many affected account holders have been able to avail themselves of the courts to achieve some measure of justice. In July 2017, Wells Fargo settled several class action lawsuits, covering potentially millions of customers, for $142 million. The settlement covers claims going as far back as 2002. In addition to reimbursing account holders for fraudulent fees and charges, the settlement funds will also seek to compensate those whose credit scores were damaged.[viii]
It appears, however, that Wells Fargo’s abuse of the forced arbitration clauses it includes in its consumer contracts may have short-circuited this settlement, resulting in inadequate compensation for the plaintiffs and perhaps shielding the bank from further accountability. Soon after the class action litigation had been initiated, Wells Fargo sought to block it by invoking the forced arbitration clauses.[ix] Without the prospect of being relegated to arbitration, the plaintiffs may have pushed for an even larger settlement that would have more fully compensated them. They might have even bypassed settlement altogether and proceeded with their claims in court – a process that would have subjected Wells Fargo to discovery, which could have uncovered even more evidence about the nature and extent of the bank’s fraudulent activities.
Wells Fargo has continued to seek to enforce the forced arbitration clauses in other pending litigation arising from its fake accounts scandal, including a class action lawsuit brought in a federal district court in Utah. The judge in that case ultimately denied Wells Fargo’s motion to compel the plaintiffs to pursue their claims through arbitration.[x]
Just as important, but harder to measure in dollar figures, is the potential damage the fake accounts did to many people’s credit scores.
It is also possible that the existence of these forced arbitration clauses helped to prevent details of the full extent of Well Fargo’s cross-selling practices and the fake accounts they helped spur from coming to light well before 2011. These clauses might have prevented the earliest customers affected by the fake accounts scandal from having their valid claims heard in court, which could have served to alert other potentially affected Wells Fargo customers.
The litigation in response to the Wells Fargo fake account scandal illustrates many of the important themes related to the role of civil justice in promoting a fair economy. First, the lawsuits arose from a broad pattern of fraud perpetrated by one of the largest banks in the world that resulted in the theft of millions of dollars and other economic harms – harms that are particularly devastating for the victims who are already impoverished or disadvantaged in other ways.
Second, the seeds of the fake account scandal were planted in the early 2000s, well before there were federal regulatory programs dedicated to protecting consumers of financial products and services. The extent of the fraud started to come to light only once key elements of the CFPB’s enforcement programs had been put into place.
Third, the July 2017 settlement with Wells Fargo, while far from perfect, shows how success in the courts has promoted economic fairness for the account holders affected by the fake account scandal. The financial compensation that the plaintiffs receive through the settlement will be especially valuable to Wells Fargo’s low-income customers, as forcing them to absorb the costs of the bank’s fraudulent activities would further undermine their economic stability. Compensating low-income customers for the damage to their credit scores may be of even greater significance. The realities of our modern economy are such that it is virtually impossible for individuals to improve their economic status without access to affordable credit. For example, lacking such access can serve as a formidable barrier to the kinds of economic activities that enable individuals to build wealth, such as purchasing a house or pursuing higher education.
Fourth, the case shows how corporate interests have succeeded in limiting meaningful citizen access to the courts, with the result of undermining progress toward civil justice and economic fairness. The widespread use of forced arbitration clauses, which had been enabled by favorable court decisions for corporate interests, likely forced the plaintiffs to accept an inadequate amount of compensation as part of their July 2017 settlement with Wells Fargo.
[i] E. Scott Reckard, Wells Fargo’s Pressure-Cooker Sales Culture Comes at a Cost, L.A. Times, Dec. 21, 2013, http://www.latimes.com/business/la-fi-wells-fargo-sale-pressure-20131222-story.html (last visited July 11, 2018); Bethany McLean, How Wells Fargo’s Cutthroat Corporate Culture Allegedly Drove Bankers to Fraud, Vanity Fair, Summer 2017, https://www.vanityfair.com/news/2017/05/wells-fargo-corporate-culture-fraud (last visited July 11, 2018).
[ii] Matt Levine, Opinion, Wells Fargo Opened a Couple Million Fake Accounts, Bloomberg View, Sept. 9, 2016, https://www.bloomberg.com/view/articles/2016-09-09/wells-fargo-opened-a-couple-million-fake-accounts (last visited July 11, 2018).
[iii] Michael Corkery, Wells Fargo Fined $185 Million for Fraudulently Opening Accounts, N.Y. Times, Sept. 9, 2016, at B1, available at https://www.nytimes.com/2016/09/09/business/dealbook/wells-fargo-fined-for-years-of-harm-to-customers.html.
[iv] Uri Berliner, Wells Fargo Admits To Nearly Twice As Many Possible Fake Accounts — 3.5 Million, NPR: The Two-Way, Aug. 31, 2017, https://www.npr.org/sections/thetwo-way/2017/08/31/547550804/wells-fargo-admits-to-nearly-twice-as-many-possible-fake-accounts-3-5-million (last visited July 11, 2018).
[v] Laura J. Keller, Wells Fargo Boosts Fake-Account Estimate 67% to 3.5 Million, Bloomberg, Aug. 31, 2017, https://www.bloomberg.com/news/articles/2017-08-31/wells-fargo-increases-fake-account-estimate-67-to-3-5-million (last visited July 11, 2018).
[vi] Jim Zarroli, Wells Fargo's Unauthorized Accounts Likely Hurt Customers' Credit Scores, NRP: All Things Considered, Sept. 26, 2016, https://www.npr.org/2016/09/26/495501008/wells-fargos-unauthorized-accounts-likely-hurt-customers-credit-scores (last visited July 11, 2018).
[vii] Kevin McCoy, Wells Fargo Fined $185M for Fake Accounts; 5,300 Were Fired, USA Today, Sept. 8, 2016, https://www.usatoday.com/story/money/2016/09/08/wells-fargo-fined-185m-over-unauthorized-accounts/90003212/ (last visited July 11, 2018).
[viii] Roger Yu, Wells Fargo to Pay $142M in Fake-Account Settlement, USA Today, July 10, 2017, https://www.usatoday.com/story/money/2017/07/10/wells-fargo-pay-142-m-fake-account-settlement/464377001/ (last visited July 11, 2018); Matt Egan, Wells Fargo Victims Get Closer to Payback in $142 Million Settlement, CNN Money, July 10, 2017, http://money.cnn.com/2017/07/10/investing/wells-fargo-fake-account-settlement/index.html (last visited July 11, 2018).
[ix] See Plaintiff’s Notice of Motion, Motion, and Memorandum in Support of Motion for Preliminary Approval of Class Action Settlement and for Certification of a Settlement Class at 2, Jabbari v. Wells Fargo, No. 15-cv-02159-VC (N.D. Cal. Apr. 20, 2017).
[x] Rob Tricchinell, Wells Fargo’s Sloan Takes Heat on Use of Forced Arbitration, Bloomberg BNA, Oct. 3, 2017, https://www.bna.com/wells-fargos-sloan-n73014470451/ (last visited July 11, 2018); Christina Davis, Judge Says No Arbitration in Wells Fargo Banking Fraud Class Action, Top Class Actions, Dec. 1, 2017, https://topclassactions.com/lawsuit-settlements/lawsuit-news/827456-judge-says-no-arbitration-wells-fargo-banking-fraud-class-action/ (last visited July 11, 2018).