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Wells Fargo’s Fraudulent Business Practices

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The newly-formed Consumer Financial Protection Bureau (CFPB), formed by Sen. Elizabeth Warren, put an end last week to one of Wells Fargo’s ongoing fraudulent business practices. For at least five years, managers at Wells Fargo used its account-holders’ money and contact information to open millions of sham deposit and credit card accounts, allowing them to fraudulently collect annual fees, overdraft-protection and interest charges as well as other fees relating to the sham accounts.

Despite the magnitude of this fraudulent conduct, Wells Fargo CEO John Stumpf denied any overarching scheme of misconduct within Wells Fargo during his questioning at yesterday’s Senate Banking Committee hearing. At the hearing, in response to questioning by Sen. Warren, he claimed the misconduct was “not a scam” and attributed it to an accidental “problem of focus” among Wells Fargo’s management.

Sen. Warren had a different view of the situation, claiming that Stumpf intentionally “squeezed employees to the breaking point so that they would cheat customers”, that he should be “criminally investigated” and should “give back the money [he] took while the scam was going on.” Warren says that, according to her calculations, Stumpf collected $200 million in stock gains during the scam.

In response to the publicity that this scam has gathered, Wells Fargo fired over 5,000 lower-level employees. Carrie Tolstedt, head of Wells Fargo’s retail banking division, announced her plans to retire with an estimated $125 million in stock options.  When Warren asked Stumpf whether he ever considered firing Tolstedt, Stumpf replied “no.” When asked whether any senior-level management employees lost their jobs as a result of the scam, Stumpf was initially evasive and then replied in the negative.

One might wonder how such a pervasive scam could continue for over five years without provoking legal action. The answer largely lies in certain provisions in Wells Fargo contracts that prevent consumers from suing in court. These “forced arbitration” provisions force consumers to seek redress for financial harm in private arbitration on an individual basis rather than in larger class action suits. Under these these forced arbitration provisions, claims are decided by private arbitration firms, usually handpicked by the defendant corporations, instead of a traditional judge or jury. Because the individual harms that these consumers suffer are relatively small compared to the costs of litigation, consumers face a significant disincentive to pursue claims against the bank if unable to proceed on a class-wide basis. In effect, these forced arbitration provisions (colloquially termed “ripoff clauses”) allow banks and other corporations to defraud their customers without being held accountable by courts.

These forced arbitration provisions have caused the dismissal of multiple suits against Wells Fargo. Over three years ago, a California Wells customer named David Douglas sued the bank for their account-opening scam. The judge ruled that the forced arbitration provision in his contract warranted dismissal of his case, citing the relatively recent Supreme Court decisions of American Express Co. v. Italian Colors (2013) and AT&T Mobility LLC v. Concepcion (2011). Another customer, Shahriar Jabbari, attempted to file a class action against the bank in 2015 resulting in a similar dismissal. Only when Sen. Warren’s Consumer Financial Protection Bureau intervened did Wells Fargo cease its practice of opening fraudulent accounts.

Prohibiting these forced arbitration clauses would allow consumers to more easily seek redress, and the CFPB has accordingly proposed a rule banning the most offensive of these provisions.

If you or someone you know has been financially harmed by a fraudulent business practice, contact our office.

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