Retaliation Against Whistleblowers – The Wells Fargo Lesson

Alan R. Kabat

Wells Fargo is finding out, the expensive way, that retaliation against whistleblowers is never a good idea. Over the past several years, a number of Wells Fargo whistleblowers have filed Sarbanes-Oxley retaliation complaints with the U.S. Department of Labor and with the federal and state courts. Many of these complaints arose from the bank's practice of giving bonuses to branch managers and staff based on how many accounts they opened. That bonus scheme, not surprisingly, caused them to open over 2.1 million phantom accounts for current customers, solely to run up their bonus numbers. These phantom accounts caused harm to the real customers in downgrading their credit ratings, while allowing Wells Fargo to report falsely inflated account numbers to its shareholders.

Of the complaints that were filed with the Department of Labor in 2017, at least three have already settled over the past five months, leaving only two that are still known to be in active litigation with an administrative law judge. One of the cases that settled earlier this month - Claudia Ponce de Leon v. Wells Fargo Bank, 2017-SOX-00053 - involved an employee who was fired back in 2011.

These whistleblower complaints and related government investigations have been extraordinarily expensive for Wells Fargo. In its most recent quarterly reports to the Securities and Exchange Commission (Form 10-Q) filed in August 2017 and December 2017, Wells Fargo admitted that it was facing numerous administrative actions and lawsuits, both individual and class action, arising from "Sales Practice Matters," referring to the practice of improperly opening accounts for customers without their permission. In addition to settling a class action for $142 million, and paying the government $185 million in another settlement, Wells Fargo also reported to the SEC that it faced "multiple single plaintiff Sarbanes-Oxley Act complaints and state law whistleblower actions filed with the Department of Labor or in various state courts alleging adverse employment actions for raising sales practice misconduct issues." Wells Fargo estimated that its legal costs for these and other lawsuits could reach $3.3 billion.

Ironically, the underlying scheme also cost Wells Fargo, since it was paying bonuses to branch managers for opening phantom accounts that never actually generated revenue for the bank. But, this was a self-inflicted loss for Wells Fargo, since its compensation system rewarded branch staff based on how many accounts they opened, and not on the actual revenue generated by those accounts. Wells Fargo's compensation system motivated the churning of new accounts, as could have been easily predicted at the outset. As a result, Wells Fargo is out not only the unjustified bonuses that it paid, but also the even larger settlements and the costs of litigation, as well as the incalculable damage to its reputation among customers, regulators, and the general public.

Wells Fargo is an object lesson to corporate America. If it had listened to the whistleblowers when they first raised their concerns - as early as 2011 - Wells Fargo could have immediately conducted an investigation - which would have confirmed what should have been obvious - and promptly ended its practice of rewarding managers for opening phantom accounts. Instead, it needlessly allowed this fraud to continue through 2016, greatly escalating its legal liability and expenses.