White Out
By Bartlett Naylor, Public Citizen
Disclosures from a sick Wells Fargo obviously soil the efforts of deregulators on many issues. One of these is the very issue of disclosure.
In the Wells Fargo scandal, more than 5,300 employees created more than 2 million accounts unsolicited accounts for their customers.
Photo courtesy J B/Flickr, CC BY 2.0.
First, the Wells Fargo employees faked the accounts to avoid being fired for failing an account creation quota. Then, their bosses pressured them to meet quota because the bosses got bonuses based on quotas. And finally, their bosses and bosses’ bosses all the way to the CEO got bonuses when investors drove up the stock price as those investors figured those ever expanding account creation numbers demonstrated exceptional management.
Twelve times in the last half decade, CEO John Stumpf made reference to those account numbers on the quarter calls with Wall Street analysts.
The very core of this pathology involves disclosure. In this case, both non-disclosure and fake disclosure.
Yet at this very time, Chair White’s Securities and Exchange Commission is railroading through a monster rule designed explicitly to reduce disclosure. Keeping with the tradition of misdirection, this reduction is misnamed the “Disclosure Update and Simplification.”
As Wells Fargo was diligent in reporting rigidly account sales figures, here are simply a few of the inconvenient items that are obviously material to how an investor values this stock that Wells Fargo elected not to disclose.
- In 2009, Wells Fargo executives recognized that certain ambitious sales programs – such as “Jump into January” – were generating fraudulent accounts. This was not disclosed.
- In February 2011, Chairman and CEO John Stumpf reportedly received an email from a 22 year veteran of the company explaining how the appearance of growth in new accounts could be faked; this employee was subsequently terminated. This was never disclosed.
- In 2011, employee satisfaction surveys reportedly found that bank employees were uncomfortable with instructions from management to push customers to buy products. This was not disclosed.
- In 2012 the community banking unit began to investigate suspicious practices in areas with high levels of customer complaints, such as Southern California. These investigations reportedly led to the firing of 200 employees in February 2013. This was not disclosed.
- In 2013 and 2014, the board and management took action in response to these signals and at the behest of regulators— including increased risk management standards in the community banking divisions, modification of some sales goals, and an internal investigation by Accenture and Skadden, Arps on which the board was reportedly updated. This was not disclosed.
- The Consumer Financial Protection Bureau began its investigation in 2013. This was not disclosed.
- Wells Fargo employees delivered petitions with more than 10,000 signatures to the board at both the 2014 and 2015 annual meetings that urged the board to recognize the link between Wells Fargo’s high-pressure sales quotas and the fraudulent opening of accounts without customer permission. These petitions called on Wells Fargo to cease using these high-pressure quotas. This was not disclosed.
- The New York Times reports that even after the company began to recognize the problem and provide ethics training that warned against creating false accounts, the continued sales pressure from management overwhelmed the ethical training. When employees either refused to sell customers products they did not want, or reported fraudulent account creation to the Wells Fargo ethics line, they were subject to discipline including termination. This was not disclosed.
While viewing this perfect example of non-disclosure, Chair White has been speeding through her SEC a major proposal to gut disclosure rules. The bewilderment of changes includes gutting disclosure on executive compensation.
The Agency proposes to delete its requirement that CEO and other senior officer pay be disaggregated. Disaggregation allows investors to see what in the pay package is cash, stock, options, etc. Had it been clear to investors that the millions in bonuses for the top brass stemmed from line salespeople (paid $25,000 a year) to open an absurdly high eight accounts per customer,[1] or be fired, or cheat and try not to get caught, then this runaway fraud might have lasted two years, instead of a possible two decades.
In addition, White plans to reduce what firms using repurchase agreements (repo) for loans must disclose. Repo is like a pawn shop, where you deposit a watch worth $1,000 and get $900 for a day, then you buy back the watch for $1,100, which you agreed to from the outset. (You need to do well at the horse race track in the interim for this to work out for you.) The financial crisis demonstrated that firms such as Lehman had grown addicted to repo, and had manipulated tax and other rules to enable its dependency. In fact, repo disclosure should be enhanced, not deleted.
There are a number of other disclosure rules that Chair White wants to white out.
On many items, White says the SEC won’t require a disclosure if GAAP requires it. GAAP may stand for “generally accepted accounting principles,” but that must be an inside joke since they’re not generally accepted. U.S. GAAP differs from accounting standards in other countries (an acute problem given that many public companies operate in multiple nations). And it can change, regardless of what the SEC does. As with many other proposals, the Agency is ceding its responsibility to safeguard disclosure.
That’s not a very cheery pep talk to write comment for the Nov. 2 deadline. So, Citizens, just try this:
Write Ms. White at regulations@sec.gov, put this in the subject line: Re: “Disclosure Update and Simplification,” Proposed Rule; File No. S7-15-16; RIN 3235-AL82, and write something like: “Chair White, Wells Fargo shows that all’s not well that ends well short of full disclosure. Wells Fargo shows that your disclosure idea goes in the opposite direction. Investors want to know. Sincerely, your name.”
(Oh, and white-out apparently doesn’t work on computer screens, which is double-entendre.)