SAN FRANCISCO (CN) — Wells Fargo’s board of directors and senior executives cannot dodge a class action accusing them of misleading investors about the phony accounts scandal that has cost the bank more than $300 million in penalties, a federal judge ruled.
U.S. District Judge Jon Tigar refused to dismiss most claims against 15 members of Wells Fargo’s board of directors and five senior executives on Wednesday.
In a 49-page order, Tigar found the executives and directors were made aware as early as 2011 about the bank’s sham accounts scandal, which the bank acknowledged in August this year included as many as 3.5 million unauthorized accounts.
Despite knowing of the fraud, shareholders say, the managers continued to insist that Wells Fargo’s cross-selling program was successful and critical to the bank’s revenue growth.
The San Francisco-based bank’s “Gr-Eight” cross-selling initiative pressured its employees to open at least eight accounts for each customer, leading employees to create unauthorized accounts to meet the aggressive sales quotas.
Shareholders say the bank misled investors by touting the company’s “adherence to regulatory guidelines” in public filings and including the fraudulent, cross-sold accounts in those filings.
In addition to the legal penalties, the scandal has caused Wells Fargo untold harm in reputational damage, plus the costs of extensive advertising, in The New York Times and other national publications, trying to assure consumers that the bank is addressing the fraud.
Tigar wrote: “The Court finds that plaintiffs have plausibly alleged that the director defendants made material and misleading statements through their participation in and approval of Wells Fargo’s public filings.”
Tigar found several red flags that should have alerted Wells Fargo to the scope of the scandal long before it paid $185 million to federal regulators in September 2016 for the misconduct.
Those red flags include former CEO John Stumpf’s testimony to Congress that he was made aware of “issues” related to sham accounts in 2011; earlier communications between employees and board members about the fraudulent activity; lawsuits filed against the bank alleging creation of fraudulent accounts; a December 2013 article in the Los Angeles Times exposing the scandal; investigations by federal regulators as early as 2012; widespread employee terminations apparently aimed at silencing whistleblowers; and the company’s emphasis on cross-selling in financial reports.
Tigar concluded that shareholders presented sufficient allegations to sue three senior executives — CEO and former COO Timothy Sloan, former vice president of community banking Carrie Tolstedt, and CFO John Shrewsberry — for issuing allegedly misleading statements.
Tigar also said shareholders can sue former and current executives Stumpf, Sloan, Tolstedt, Shrewsberry, and chief risk officer Michael Loughlin, on allegations of insider trading. The investors say the executives used their inside knowledge to profit from selling shares back to Wells Fargo through the bank’s share repurchase program.
Tigar dismissed without prejudice securities law claims against Loughlin, finding the shareholders failed to allege the chief risk manager made any specific false or misleading statements.
And Tigar refused to let the investors hold the bank’s managers liable to cover Wells Fargo’s legal costs for to its alleged violations of federal securities laws. He found that claim unripe because no judgment has been reached on whether the bank or its directors and executives violated securities laws.
But Tigar gave shareholders a green light to seek rescission of contracts between Wells Fargo and the accused managers for allegedly violating securities laws while performing their job duties.
Tigar dismissed California law claims with prejudice, finding that because Wells Fargo is incorporated in Delaware, its managers can be sued for violating only Delaware’s corporate misconduct laws.
Wells Fargo and attorneys for both sides did not respond to emails and phone calls seeking comment Thursday afternoon.
Wells Fargo is represented by Brendan P. Cullen, with Sullivan & Cromwell in Palo Alto.
The shareholders’ lead attorney is Richard Heimann with Lieff Cabraser Heimann & Bernstein in San Francisco.