Former Wells Fargo CEO will pay $2.5 million for certifying SEC filings while on notice that the public was being misled about a key performance metric.
The SEC has charged the former CEO of Wells Fargo and another executive for misleading investors about a key performance metric. One of Wells Fargo's core strategies was to "cross sell" accounts and products to customers. Wells Fargo and its CEO touted the cross-sell metric of Community Bank, its largest business unit, as proof of its success. This metric, however, was inflated by accounts and services that were unused, unneeded, or unauthorized as a result of Community Bank's unlawful or unethical sales misconduct. The Commission's complaint against the head of Community Bank alleges that she misrepresented the cross-sell metric as a measure of Wells Fargo's financial success. Wells Fargo's CEO agreed to pay $2.5 million to settle charges that he certified statements to the SEC regarding the cross-sell metric while knowing that they were misleading (In the Matter of John G. Stumpf, Release No. 33-10887, November 13, 2020).
The charges stem from Wells Fargo's core business strategy of selling products to existing customers. The success of this strategy was measured through its "cross-sell metric," which was featured in its annual reports and public filings. The metric represented the average number of products sold to households having "the potential for revenue generation and long-term viability," Wells Fargo said.
According to the Commission, however, the cross-sell metric was inflated by sales practices that encouraged the opening of bogus customer accounts, among other misconduct. "If executives speak about a key performance metric to promote their business, they must do so fully and accurately," said Stephanie Avakian, Director of the SEC’s Division of Enforcement. "The Commission will continue to hold responsible not only the senior executives who make false and misleading statements but also those who certify to the accuracy of misleading statements despite warnings to the contrary." In February 2020, Wells Fargo agreed to pay $3 billion in a global settlement resolving civil and criminal allegations arising from the cross-selling practices.
Community Bank head. The Commission's complaint against the Senior Executive Vice President of Community Banking, Carrie L. Tolstedt, says that she publicly touted the cross-sell strategy, and its associated metric, as a key means of distinguishing Wells Fargo from its competitors. Community Bank, however, used a volume-based sales model in which products were sold to customers with little regard to their actual need or expected use. As a result, for several years until mid-2016, millions of accounts were opened or products were sold that were unauthorized, unwanted, or fraudulent, yet these sales were included in Community Bank's cross-sell metric.
According to the Commission, Tolstedt publicly described the cross-sell metric as a measure of Wells Fargo's relationships with its customers. Yet, she knew, or was reckless in not knowing, that the metric's growth was the result of "rampant sales misconduct" rather than sales of products that customers wanted, needed, and used. Even after the news of these practices began to surface, Tolstedt continued to tout the strategy while profiting from selling her shares in Wells Fargo. Tolstedt left the company in September 2016.
Tolstedt is charged with violations of the antifraud provisions of the securities laws and aiding and abetting Wells Fargo's violations of the Exchange Act's reporting and books and records requirements. The SEC seeks a permanent injunction, civil penalties, disgorgement with prejudgment interest, and an officer-and-director bar.
Wells Fargo CEO John Stumpf. In a settled administrative proceeding, the Commission found that former Wells Fargo CEO John Stumpf signed and certified misleading statements regarding the cross-sell metric. As the CEO, Stumpf was required to certify the accuracy of Wells Fargo's SEC filings, and he knew, or should have known, that the statements about the cross-selling strategy and the cross-sell metric contained material inaccuracies. Stumpf's attesting to the accuracy of these disclosures, reported from the second quarter of 2015 through the second quarter of 2016, in reliance on several senior officers, including Tolstedt, was unreasonable, the Commission found.
Stumpf agreed to cease and desist from his violations of the antifraud provisions in Section 17(a) of the Securities Act. Stumpf was also ordered to pay a $2,500,000 civil penalty. The Commission said that Stumpf's penalty will be combined with $500 million paid by Wells Fargo in a previous settlement for distribution to harmed investors.
The release is No. 33-10887.
Companies: Wells Fargo & Company
MainStory: TopStory Enforcement FraudManipulation GCNNews PublicCompanyReportingDisclosure SecuritiesOfferings CaliforniaNews
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