A US District Judge has approved a $320 million derivative action settlement between Wells Fargo, the Fire & Police Pension Association of Colorado, and the City of Birmingham Retirement & Relief System.
The settlement includes a monetary consideration of $240 million, and Wells Fargo agrees and acknowledges that facts alleged in the derivative action were a significant factor in causing certain corporate governance changes undertaken by Wells Fargo, which include improvement to Wells Fargo’s internal controls, internal reporting, and expanded and enhanced oversight of risk management by Wells Fargo’s board of directors.
The settlement resolves claims that Wells Fargo officials breached their fiduciary duties by knowing about or disregarding the creation of millions of unauthorized, bogus customer accounts by bank employees, and failing to stop their creation.
The parties also agreed that corporate governance reforms and clawbacks have a value to Wells Fargo of $80 million, for a total settlement value of $320 million.
The complaint alleged that Wells Fargo’s board of directors and executive management perpetuated a business model of aggressively cross-selling additional products to existing customers since 2011.
Wells Fargo was accused of setting unreasonably high sales quotas and threatening to fire employees who failed to meet the quotas. The complaint alleged that this effectively forced bankers to open more than 2 million unauthorized accounts to keep their sales numbers competitive, which resulted in serious and systematic violations of federal and state laws.
“The goal of Wells Fargo’s high pressure cross-selling strategy was to show steady quarterly growth in the opening of customer accounts, maintain the company’s industry leadership in cross-selling, and, most importantly, drive up the Bank’s share price,” said the complaint. “The artificially inflated stock price resulted in enormous compensation for the bank’s executives.”
The complaint also alleged that Wells Fargo’s board of directors knew about the significant weaknesses in the company’s internal controls that should have warned of the misconduct at the bank’s branch level. However, according to the complaint the board consciously and knowingly allowed the abuse to continue so that the bank’s cross-selling statistics—which was the primary reason for the sharp rise of Wells Fargo stock—remained strong.
The complaint also claimed that the board’s failure to take action resulted in fines of $185 million, a 9% drop in the bank’s stock, and “severe reputational damage and liability.”