SAN FRANCISCO (CN) — A federal judge Thursday appeared skeptical of Wells Fargo’s claim that its board of directors was unaware of the scope of the phony accounts scandal that already has cost the bank more than $300 million in penalties for the misconduct.
During a hearing on a motion to dismiss a shareholder class action, U.S. District Judge Jon Tigar appeared to reject arguments that a December 2013 article in the Los Angeles Times could not have put the board on notice about the widespread nature of the bank’s bogus accounts scandal.
“I find it very difficult to read this article and conclude the conduct was geographically limited and not about the unauthorized opening of accounts,” Tigar said.
Wells Fargo attorney Brendan Cullen said one could read the article and conclude the problem was limited to Los Angeles and Orange counties, and there was nothing inherently illegal about the company’s practice of encouraging employees to cross-sell multiple products to customers.
Cullen added that even though former CEO and Chairman of the Board John Stumpf discussed the L.A. Times article with board members at a meeting, it is not known exactly what he said there.
Tigar replied: “I’m having trouble imagining Mr. Stumpf telling the board about the L.A. Times article and saying it’s good news.”
Wells Fargo is asking the judge to dismiss the class action from shareholders who claim the board of directors breached its fiduciary duty by failing to stop a scandal that has cost the bank more than $300 million in fines and settlements and potentially billions more in lost revenue.
Wells Fargo paid $185 million in September 2016 to settle claims that its employees opened some 2.1 million unauthorized accounts, sometimes forging customers’ signatures, to meet aggressive sales quotas.
The shareholders say the board was put on notice about the scandal by “numerous red flags,” including warnings from employees, prior litigation, internal reports, investigations by regulators, and the L.A. Times article of 2013.
But John Cove, representing the board’s independent directors, said the bank’s charter includes an exculpatory clause that protects its directors from liability unless they are found to have acted in bad faith or engaged in intentional misconduct.
Because the charter falls under the jurisdiction of the Delaware’s corporation laws, the plaintiffs must allege “a particular factual allegation,” that the board knew of the conduct and did nothing, Cove said.
“The complaint is absolutely devoid of any inference that they knew the company wasn’t doing anything about it or that the controls were inadequate,” Cove told the judge.
Representing the shareholders, Richard Heimann said the board had been on notice for years about its employees’ illegal conduct, stemming from the bank’s very public strategy to maximize profits.
“It comes down to whether the totality of circumstances give rise to a reasonable inference that the board would have been made aware,” Heimann said.
The class attorney pointed out that the 2013 Times article detailing how the bank’s sales quotas pushed employees to break the law was based on interviews with seven employees and 28 former employees, from nine states.
Heimann said “no reasonable board member” could have believed the problem was limited to Southern California, or that adequate controls were in place, given the revelations in that article, a steady stream of lawsuits, regulatory investigations and internal complaints from employees.
After about an hour of debate, Tigar took the arguments under submission.
Cullen is with Sullivan & Cromwell in Palo Alto; Cove with Shearman & Sterling; and Heimann with Lieff Caresser Heimann & Bernstein, both of San Francisco.
In the September 2016 class action, lead plaintiff Victoria Shave claimed the bank lost $19 billion in stock value within eight days of Sept. 8, 2016, when it paid $185 million to settle claims of misconduct.
A consulting firm concluded in October that the bank could lose $212 billion in deposits and $8 billion in revenue over the next 18 months because of the scandal, according to Forbes.
Wells Fargo announced in March that it had opened 42 percent fewer checking accounts and had 55 percent fewer credit-card applications in February this year, compared to February 2016.