Lots of news to catch up on the Wells Fargo unauthorized account mess from when I was on vacation last week.
A few articles for your consideration:
- What, if anything, should have been disclosed about the investigation while it was underway?
- Disclosures likely in the next round of filings with SEC.
- Hints the fake account fiasco could extend into the small business division.
- Bank’s CEO resigns.
- The Congress and CFPB were late to the party.
- California AG opens investigation of possible identity theft.
9/29 – Michael Rapoport at Wall Street Journal – To Disclose or Not to Disclose? Wells Fargo Woes Shine Light on a Knotty Problem – Wells Fargo did not disclose the existence of the investigation and settlement talks regarding the fake account scandal.
Interesting question for companies and auditors arises: should it have been disclosed?
Article provides a good non-technical explanation of materiality:
Generally speaking, materiality depends on whether a reasonable investor would consider the information important enough to affect the investor’s decision to buy a company’s securities.
Article explains that each regulator has a different perspective of materiality. Also mentions many companies and investors have a mechanical definition, such as 10% of revenue or 5% or earnings (far too high a threshold for a public company, but that is my opinion as someone who stays as far away from public companies as I can possible run).
Using the perfect vision of hindsight, this was obviously material. Unfortunately, hindsight cannot be used to determine what will be material in 3 months or a year in the future.
In recent months, I’ve learned of a $4M settlement for violating law regarding collections of loans to solders, an $85M settlement a year ago for tripping over the same law, the $185M settlement for the fake account fiasco in retail department, and hints there are fake account issues in the small business division (see following article).
I mention those settlements, which are all quantitatively immaterial (if not trivial in accounting terms) to say that I’m confident there are another dozen incidents within the third largest bank in the country where the bank has tripped over some law or requirement or regulation.
Here is the question for those outside the accounting world:
- Which of those one or two dozen issues will be material after the first of the year or next summer?
Without even opening the Wells Fargo disclosure material, I’m confident that for a bank as large as Wells Fargo there are hundreds of lawsuits pending in courts around the country.
Here’s another question:
- Tell me which of those hundreds of minor business transaction cases are indicative of a systemic issue which is invisible now but which is so large that it will generate a month’s worth of headlines two years from now?
If you can give a firm, definitive answer to those questions, please call any of the Big 4 audit firms. They would love to hire you and would offer a very attractive compensation package.
10/13 – Francine McKenna at MarketWatch – Here’s what Wells Fargo may disclose in its coming earnings and SEC filings – Now that the issue has blown up, there are a lot of things likely to be disclosed in the next 10Q.
Article discusses just a few, such as range and exposure of other investigations that have now begun, Department of Labor investigation of alleged whistleblower retaliation, litigation regarding whistleblower claims, full details of the $185M settlement, possible additional clawbacks, and other risks such as legislation some senators are threatening.
10/5 – Reuters – Exclusive: Wells Fargo account scandal extends to small business – U.S. Senator – Reuters breaks the story that Senator David Vitter (R-LA) claims his staff have found thousands of small business owners who had multiple accounts opened at Wells Fargo without their permission.
If substantiated, this means the fake account fiasco at Wells Fargo was not limited to the consumer banking staff. The same techniques may have been used by the commercial banking staff.
You might want to keep an eye on this dimension of the story.
10/12 – Emily Glazer at Wall Street Journal – Wells Fargo CEO John Stumpf Steps Down – It was only a matter of time before he had to go, obviously. The current COO will take over as CEO. A prominent independent board member will take over as chair of the board.
10/14 – Holman Jenkins Jr at Wall Street Journal – Elizabeth Warren Claims a Scalp / The resignation of Wells Fargo CEO John Stumpf will boost entrenched politicians more than it will protect consumers – In case you thought the Congress found and resolved the Wells Fargo fiasco, this article reminds us of many pesky little details that haven’t been very visible in reporting of recent weeks.
The fake account fiasco was already in the court system back in 2012 and 2013 as employees in South Carolina sued for wrongful termination over following the common practice of opening fake accounts and a customer in LA sued for many unauthorized accounts opened in his name.
The Los Angeles Times broke the story in December 2013.
The LA city attorney picked up the case at that point and was well into settlement talks before the CFPB even got wind of the issue and started to pay attention.
So the mess was close to resolution before the Senators and Representatives started huffing and puffing this fall, after the settlement was announced.
On one side of the aisle, Senators put on their mean faces while the cameras were running and declared how terrible big banks are. On the other side of the aisle, Senators put on their mean faces while the cameras were running and declared the CFPB didn’t catch on to anything until the settlement talks were underway.
Mr Holman asserts the goal of the hearings was to further the careers of those asking the questions.
10/19 – Bloomberg – Wells Fargo Probed for Identity Theft Over Fake Accounts – With the election of a new California Senator only five weeks in the future, the California Attorney General launched an investigation of whether the opening of unauthorized accounts constitutes identity theft in violation of state law.
The AG’s office served a search warrant on October 5 to gather information on employees who opened unauthorized accounts. The possible criminal violations behind the search warrant include impersonation and unauthorized use of personal information.
I’m not an attorney so I don’t immediately see the possible criminal violation. As a vague guess, I could see an argument that a staff person had to pretend to be the customer in order to approve opening an otherwise unauthorized account (that could be impersonation). The staffer received a personal benefit from doing so by meeting sales quotas (that could show intent and a direct personal gain which seems to be needed for a criminal violation). Also, the staffer was not authorized to look again at the personal information after the requested accounts had already been opened and thus there was not any legitimate need to look at the information again or use it again in any form (that could be unauthorized use of personal information).
Any thoughts on whether I am on track with the thought process for the criminal investigation?