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Common Sense

By JAMES B. STEWART

In response to widespread public criticism that the government has been too lenient with executives responsible for corporate crime, Deputy Attorney General Sally Quillian Yates issued tough new guidelines last year for federal prosecutors.

“One of the most effective ways to combat corporate misconduct,” she said, “is by seeking accountability from the individuals who perpetrated the wrongdoing.”

In Wells Fargo, the government may have the perfect test case.

“We should really hold the Department of Justice’s feet to the fire here,” said John C. Coffee Jr., a professor at Columbia Law School who is an expert on white-collar crime. “Do they really mean what they said in that memo? Will they pursue individuals and not just the underlings?”

Wells Fargo’s $185 million settlement with the Consumer Financial Protection Bureau and other agencies hardly puts an end to the matter. Wells Fargo has acknowledged that thousands of employees, under intense pressure to meet aggressive sales targets, opened as many as two million bogus accounts without customers’ knowledge, in some cases forging signatures.

United States attorneys from three jurisdictions — in New York, San Francisco and North Carolina — have sent subpoenas to the bank, indicating Wells Fargo now faces a number of criminal investigations.

Congress is also increasing the pressure. Wells Fargo’s chief executive, John G. Stumpf, faced withering criticism this week from Democrats and Republicans alike. Senator Elizabeth Warren called for his resignation, adding, “You should be criminally investigated by both the Department of Justice and the Securities and Exchange Commission.” On Thursday, a group of senators asked the Labor Department to investigate the bank’s employment practices.

But calling for an investigation is easy compared with actually convicting high-ranking executives of a crime, or even proving civil liability, as the government’s poor record with postfinancial-crisis mortgage fraud cases has demonstrated.

Brandon L. Garrett, a law professor at the University of Virginia and author of “Too Big to Jail,” did not want to speculate about the eventual outcome of the Wells Fargo investigations. Still, “based on past experience, it’s incredibly rare to see high-level officials prosecuted,” he said. “It’s a tiny fraction.”

Despite the long odds, and the layers of bureaucracy that typically insulate top executives from knowledge of wrongdoing, Wells Fargo may prove the exception.

Mary Eshet, a Wells Fargo spokeswoman, said the bank had no comment beyond Mr. Stumpf’s testimony and other public statements this week.

“I disagree with the fact that this is a massive fraud,” Mr. Stumpf told the Senate Banking Committee. Nonetheless, he said he was “fully committed to doing everything possible to fix this issue, strengthen our culture, and take the necessary actions to restore our customers’ trust.”

But opening accounts without customers’ knowledge, even forging signatures — and then charging them fees — isn’t some kind of gray area or borderline behavior. As Senator Patrick J. Toomey, a Pennsylvania Republican, put it this week: “This isn’t cross-selling, it’s fraud.”

Under corporate criminal law, Wells Fargo is strictly liable for the criminal behavior of its employees acting within the scope of its business.

The Justice Department has 10 guidelines for when it should pursue criminal charges against a corporation, recently updated to reflect its more aggressive posture toward individuals. Among the most important factors is “the pervasiveness of wrongdoing within the corporation, including the complicity in, or the condoning of, the wrongdoing by corporate management.”

That provision strikes at the heart of the Wells Fargo affair, given that the bank identified and fired more than 5,300 employees. This isn’t a case like that of JPMorgan Chase’s “London whale,” or a so-called rogue trader like Société Générale’s rôme Kerviel, in which the potentially criminal conduct can be pinned on just one or perhaps a handful of bad apples.

“This was an epidemic of bogus accounts,” Professor Coffee said. “This wouldn’t have happened without pressure from the top.”

Wells Fargo has stressed that while the number of affected employees is large, it amounts to just 2 percent of the bank’s total work force.

“If it was one person or even 100, you might argue that it’s a rogue contingent,” Professor Garrett said. “But you can’t seriously argue that 5,000 people have gone rogue. That’s systemic behavior. People above them had to have noticed.”

The behavior also spanned years: Wells Fargo said it was reviewing cases dating back to 2009.

High-ranking bank officials certainly knew by 2013 that the illegal conduct was pervasive. That’s when The Los Angeles Times, in an exposé that did not get nearly the attention it deserved, reported that Wells Fargo employees had “opened unneeded accounts for customers, ordered credit cards without customers’ permission and forged client signatures on paperwork.”

The article, published in December of that year, was based on interviews with 35 current and former employees who worked in nine states.

Another Justice Department guideline is the extent to which a company takes “remedial actions” once it becomes aware of illegal activity, including steps “to replace responsible management” and “to discipline or terminate wrongdoers.”

Wells Fargo said it had strengthened its monitoring programs and stepped up manager training aimed at ferreting out and preventing wrongdoing. It changed its incentive compensation. Sales goals for retail bankers will be eliminated — though not until next year. The bank said it had put in place a total of 10 major reforms spanning several years.

But Wells Fargo was extremely slow to pursue responsibility up the management chain, let alone fire or discipline any high-ranking executive. It hired outside consultants to help assess the problem only in 2015, and then only after the Los Angeles city attorney’s office started investigating.

The highest-ranking management casualty so far appears to be Carrie Tolstedt, the former head of Wells Fargo’s retail banking operations, who “retired,” to use the bank’s euphemism, in July, and was given a rousing send-off with an exit package then worth more than $100 million.

Ms. Tolstedt isn’t talking, so we haven’t heard her side of the story. (The House Financial Services Committee, which is holding its own hearing, would like to interview her.) Mr. Stumpf reiterated this week that Ms. Tolstedt simply “chose to retire” after the bank decided “to go in a different direction.”

But if it turns out she was, in effect, forced to resign for her involvement in the bogus account scandal, the bank should have said so, withheld her pay and started clawback proceedings. That’s the minimum I would consider remedial action if I were a prosecutor.

Ms. Tolstedt is surely at the top of prosecutors’ list of possible witness-suspects, strategically positioned to know just how high in the bank responsibility lies.

As the Yates memo puts it: “By focusing our investigation on individuals, we can increase the likelihood that individuals with knowledge of the corporate misconduct will cooperate with the investigation and provide information against individuals higher up the corporate hierarchy.”

Which leads to Mr. Stumpf, who as chief executive was paid over $100 million from 2011 to 2015 while the epidemic of bogus account openings was in full swing.

Ms. Warren was scathing this week: “You squeezed your employees to the breaking point so they would cheat customers and you could drive up the value of your stock and put hundreds of millions of dollars in your own pocket. And when it all blew up, you kept your job, you kept your multimillion-dollar bonuses and you went on television to blame thousands of $12-an-hour employees.”

Mr. Stumpf said that decisions regarding high-ranking executives, including himself, were matters for the board. But why would the board be pondering those issues only now? Surely directors have been aware of the pervasive nature of the problem for years — and if they weren’t kept informed, that alone might be grounds for replacing Mr. Stumpf.

Wells Fargo and its top executives, of course, insist they never told anyone to open fake accounts, or break the law. On the contrary, they stressed repeatedly that employees would be held to the highest ethical and legal standards. Mr. Stumpf sounded that theme this week: “We never directed nor wanted our employees, whom we refer to as team members, to provide products and services to customers they did not want or need.”

But that should be no defense.

“Every company says that,” Professor Coffee said. “But to survive, these employees had little option but to cheat. If they didn’t meet the impossible targets. they’d be fired. This was very high pressure from the top, where the top was being motivated by high incentive compensation.”

In sum, I couldn’t find a single Justice Department guideline that, based on what we know now, cuts in Wells Fargo’s favor.

“Wells Fargo says this is over: ‘We’ve solved the problem; it won’t happen again,’” Professor Garrett said. “It’s mind-boggling. Fines aren’t working. We’re not going to see deterrence until we see some high-level individual cases.”

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