It's now clear that the former chairman and CEO of Wells Fargo (NYSE: WFC), John Stumpf, was wrong when he said last year that the bank's fake-account scandal wouldn't have a material impact on the bank's financial performance.
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Whether he believed this at the time or not, it's hard to say. But by claiming it wasn't material, Stumpf was able to keep the issue a secret from shareholders even though the bank had fired the equivalent of 5% of its branch-based employees from 2011 to 2015.
Former chairman and CEO of Wells Fargo, John Stumpf. Image source: Wells Fargo.
Either way, Wells Fargo's latest quarterly regulatory filing proves that the scandal is, in fact, having a material impact on the nation's third-biggest bank by assets.
There's the $327 million that it's already agreed to pay in legal fines and settlements. Then there's the fact that Wells Fargo eliminated product sales goals in its branches, which has caused new checking account openings and credit card applications to fall by between a third and a half compared to the prior-year period. The scandal has also sullied the bank's once-sterling reputation.
But it wasn't until Wells Fargo filed its first-quarter 10-Q with the Securities and Exchange Commission that investors got a sense of the extent of the California-based bank's ongoing legal travails.
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In the three months ended March 31, Wells Fargo spent $264 million more on outside professional services than it did in the same quarter last year. Some of that was for project and technology spending, but higher legal expenses related to its sales scandal was also a cause. All told, the bank now predicts that "reasonably possible" losses from legal actions could exceed its current litigation provisions by $2 billion.
The higher expenses are coming from Wells Fargo's two-front legal war. On one front, it's dealing with a variety of governmental investigations. As the bank explained in its 10-Q:
Federal, state and local government agencies, including the United States Department of Justice, the United States Securities and Exchange Commission and the United States Department of Labor, and state attorneys general and prosecutors' offices, as well as Congressional committees, have undertaken formal or informal inquiries, investigations or examinations arising out of certain sales practices of the Company that were the subject of settlements with the Consumer Financial Protection Bureau, the Office of the Comptroller of the Currency and the Office of the Los Angeles City Attorney announced by the Company on September 8, 2016.
On the second front, it's dealing with lawsuits filed by consumers, shareholders, and employees.
- Consumers are suing Wells Fargo after allegedly receiving products or services without their authorization or consent;
- Shareholders are suing the bank for securities fraud and breach of fiduciary duty; and
- Employees are suing the bank for retaliating against whistleblowers who tried to bring the scandal to light.
The net result is that Wells Fargo is likely to be tied up in the courts for years before its fake-account scandal is fully resolved. That doesn't mean investors should necessarily avoid the bank's stock, but it does imply that Wells Fargo's performance will, at least for the time being, continue to be materially impacted by cleanup costs.
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