Wells Fargo’s hopes that a $142 million June

The New York Times broke the story after obtaining an internal audit that showed more than 800,000 people who took out vehicle loans from the San Francisco-based banking giant “were charged for auto insurance they did not need, and some of them are still paying for it … . The expense of the unneeded insurance, which covered collision damage, pushed roughly 274,000 Wells Fargo customers into delinquency and resulted in almost 25,000 wrongful vehicle repossessions.”

Wells Fargo executives interviewed by the Times vowed to fully reimburse anyone adversely affected by its policy, but another class-action lawsuit with a massive payout seems likely. While bank executives suggested they deserved credit for having “self-identified” the problem, the size of the scandal seems likely to have a far-reaching effect on a company that has gone from being a stock analyst darling for its considerable long-term growth to a symbol of a banking industry seen as villainous by many Americans for its role in the economic meltdown that began in 2007.

In the previous scandal, besides the class-action payout, the company was fined $185 million by federal regulators in September 2016. CEO John Stumpf abruptly resigned soon afterward, voluntarily giving up $41 million in bonuses he was scheduled to receive.

Wells Fargo initially appeared to have shrugged off the scandal. While its stock price fell under $44 after Stumpf left, it topped $59 in March. Its market value remained well north of $250 billion, its profits were strong and it had a significant presence in all 50 states, employing nearly 270,000 workers.

Of late, however, Wall Street has soured on the company – even before the new scandal emerged. On July 21, CNBC reported a respected analyst predicted a more than 30 percent drop in Wells Fargo’s stock price, then in the $55 range. It plunged 2.6 percent Friday after the Times report came out and is now under $53.

Were wrong workers punished for first scandal?

The new scandal is likely to not only prompt regulators to take close looks at every aspect of Wells Fargo’s business but to re-examine how they dealt with the previous scandal.

Wells Fargo’s CEO may have left, but the company was partially successful in deflecting the idea that the setting up of unwanted new accounts by employees eager to meet quotas was the fault of the employees – not those who set the aggressive quotas. The company fired more than 5,000 mostly low-level workers who had set up the accounts, but the vast majority of managers were unaffected.

This was even though the initial Los Angeles Times investigation in 2013 that broke the scandal depicted the later-fired workers as doing the bidding of their mid-level bosses, who were facing pressure from their top-level bosses – suggesting the wrong people were paying the price for the scandal. The auto loan scandal only adds to the narrative that Wells Fargo’s ethical problems begin from the top down.

The New York Times report on the new scandal said the internal report only looked at “insurance policies sold to Wells customers from January 2012 through July 2016.”

This is likely to prompt calls for regulators and journalists to look back far earlier than 2012. Perhaps the biggest complicating factor in the $142 million settlement of the unwanted accounts scandal was the evidence offered by some plaintiffs’ attorneys that the scandal began in 2002, not 2011. They argued that the high-range estimate of  unwanted accounts created by Wells Fargo agents was far too low and should have been 3.5 million, not 2.1 million.

San Francisco-based banking giant Wells Fargo continues to struggle to get past the worst scandal in its history.

The company – which has a market value of $265 billion and nearly 270,000 employees in all 50 states – was fined $185 million by federal regulators in September. The scandal involved employees, seeking to make quotas, creating up to 2.1 million unwanted new accounts for customers from 2011-2015. More than 5,000 employees who had improperly set up the new checking, savings and credit-card accounts were fired.

Wells Fargo CEO John Stumpf resigned soon after the fine was announced, surrendering $41 million in bonuses he was on track to receive.

But the company’s hopes to leave the scandal behind by settling related class-action lawsuits for $142 million have been complicated by new allegations by plaintiffs’ attorneys. They say the scandal’s origin was in 2002, not 2011, and that the actual number of unwanted accounts created by Wells Fargo agents is up to 3.5 million, not 2.1 million.

U.S. District Judge Vince Chhabria said last week at a hearing in San Francisco that he was inclined to accept the settlement but also to let some of 10 other plaintiff lawsuits proceed – denying Wells Fargo the tidy resolution it wanted. He also said he would consider scrapping the settlement entirely if new information arises exposing new wrongdoing.

The settlement also could unravel because of its complexity. As it is now structured, Wells Fargo customers who were charged fees for unwanted accounts would be refunded and those whose credit scores suffered because of unwanted credit cards would be compensated based on a formula. But Chhabria appeared receptive last week to the argument that the damage in some cases was far more excessive than others. The example cited was of customers who had unwanted upgrades in checking accounts in which overdrafts were automatically paid by unwanted credit cards – bills that went unpaid because customers didn’t know they had the credit cards. Plaintiffs’ attorneys also argued that the unwanted accounts had in some cases resulted in identity theft.

The judge was far less receptive to Wells Fargo’s lawyers’ argument that the company had gone a long way toward reimbursing affected customers and that it shouldn’t have to pay damages to customers who had no proof they’d been adversely affected.

Appeal of class-action settlement seems certain

Chhabria plans to call attorneys in the case back to court in early June. If he decides to accept the settlement, an appeal is near certain, even if he includes provisions providing more relief to affected Wells Fargo customers.

That’s primarily because of the huge distrust some plaintiffs’ attorneys have for Wells Fargo. While the company CEO was forced out and more than 5,000 agents were fired as a result of the scandal, the attorneys argue that the problems with the unwanted accounts were known company-wide and persisted even after the Los Angeles Times first exposed the creation of the accounts in 2013.

Given this corporate history, the attorneys object to the fact that the federal fine and the parameters of the potential settlement of the class-action lawsuit are based on the report of a Wells Fargo consultant – not an independent investigation.

Zane Christensen, representing affected Wells Fargo customers from Utah, told Bloomberg News, “There’s been no real discovery; there’s no way to know the real extent of the damages. This settlement is entirely based on numbers that come from Wells Fargo’s own admission. We don’t believe Wells Fargo is airing all of its dirty laundry publicly.”

Critics of Wells Fargo’s scandal are raising questions about why the California Public Employees’ Retirement System — which for three decades has demanded that corporations it invests in must operate under a clear ethical code — didn’t question illicit banking practices by the San Francisco-based banking giant that were first revealed in 2013 and which resulted in huge federal sanctions in September.

Wells Fargo has been one of CalPERS’ largest holdings in recent years. According to Bloomberg financial records, CalPERS’ $950 million-plus stake in the bank is its fourth biggest holding after Apple, ExxonMobil and Microsoft.

A member of the CalPERS board — state Treasurer John Chiang — says it’s unfair to expect CalPERS to be a corporate watchdog in addition to all its other duties. While the Wells Fargo stake may seem large, it amounts to one-third of 1 percent of CalPERS’ $289 billion portfolio.

In a San Francisco Chronicle report earlier this month, CalPERS was also defended on the grounds that many investigators and watchdogs also didn’t do their due diligence.

“It’s something that should have been caught. … It surprises me the fraud went on as long as it did,” former Citigroup risk officer Clifford Rossi told the newspaper.

The Wells Fargo scandal involved bank employees establishing up to 2 million new accounts and credit cards in the name of customers. The employees faced quotas on how many new sign-ups from existing account holders they were expected to get and had financial incentives to create accounts without customers’ knowledge.

Wells Fargo CEO John Stumpf resigned this fall after federal regulators fined the company $185 million in September, forfeiting $41 million in bonuses he stood to make. The company also said that more than 5,000 employees who created the unwanted accounts had been fired.

CalPERS began demanding best practices in 1980s

Despite the strong defense of CalPERS offered by Chiang and finance industry figures, others say that criticism is inevitable because of CalPERS’ long history of demanding corporate accountability.

Beginning in the 1980s, CalPERS began compiling a list of “target” companies with issues of concern — ranging from acting in ways that didn’t benefit the environment or were abusive to stockholder interests, such as overpaying CEOs or board members, or not taking shareholder and regulatory complaints with the seriousness they deserved.

This has led to national coverage of CalPERS, the largest U.S. government pension fund.

In 2004, The New York Times noted an internal power struggle over how hard CalPERS should go after such entities as Disney, Safeway, the New York Stock Exchange and Kohlberg Kravis Roberts. It led to the ouster of CalPERS board President Sean Harrigan. A union official, Harrigan was particularly aggressive about going after what he saw as extreme pay and poor oversight by corporate boards. But he also raised eyebrows when urging CalPERS to criticize hospital pricing tactics and getting CalPERS to support a health insurance reform ballot initiative that failed.

At the time, this was depicted as an anti-oversight coup by business-friendly board appointments made by Republican Gov. Arnold Schwarzenegger.

But that claim was belied by the board’s actions in 2006 when it and other groups sued UnitedHealth Corp. over its decision to sweeten the compensation of CEO William McGuire by allowing him to backdate his stock options to a more favorable point in time.

In 2011 and 2012, CalPERS lobbied and eventually succeeded in getting Apple’s board to be more responsive and open to shareholders’ concerns about corporate governance, such as presenting comprehensive decisions about stock categories and dividends as yes-or-no proposals. It has remained critical of Apple in the years since.

In 2013, CalPERS led the successful push to force Ray Lane out as chairman of struggling Hewlett-Packard.

But there is no evidence that CalPERS followed up on the 2013 Los Angeles Times’ story that broke open the Wells Fargo scandal. The September announcement that federal regulators had fined the bank $185 million had far more information about the extent of the scandal, but its basic parameters were established by the original Times story. It noted that senior Wells Fargo officials had been aware for years of many accounts being opened without authorization but had done little to address the fraud, which came in an era in which the financial services firm’s stock price was soaring.

There is also no documentation that CalPERS, formally or informally, complained about Stumpf’s compensation — which was $19.3 million in 2015 — until Chiang’s fall critique.