Another scandal at Wells Fargo & Co. has politicians calling to remove the bank's board, but regulators might be hesitant to act given a checkered history of enforcement actions against individual bankers.
Wells Fargo's scandals are so voluminous that some lawyers think regulators could forcefully remove board members. Most recently, the bank revealed it charged auto loan borrowers for insurance even if they had their own policies, and the company disclosed a pair of investigations into its checking account and mortgage rate-lock products.
"It seems to be an egregious example of a bank gone wrong," said David Axelrod, a partner with Ballard Spahr and a former SEC prosecutor. "From what I've read in the paper, the rotten culture starts at the top of the organization, so it seems like an example where regulators could push for changes at the CEO and C-suite level."
Wells Fargo has already undergone dramatic change. John Stumpf retired as chairman and CEO in October 2016. The bank implemented an independent chairman, changed its pay structure and launched a "rebuilding trust" program that also highlights senior leadership changes and executive accountability measures. "That work continues and remains a core part of our efforts to build a better Wells Fargo for the future," said Wells Fargo spokeswoman Jennifer Dunn in an emailed statement.
Still, the changes might not be enough. Sen. Elizabeth Warren, D-Mass., recently renewed her call for the Federal Reserve to remove the bank's board, and The Wall Street Journal reported on Aug. 4 that regulators plan to bring sanctions on the auto insurance matter.
While regulators are structurally independent from Capitol Hill, politicians can influence financial policy, said Robert Hockett, a professor at Cornell Law School.
"I don't think that any regulator wakes up one day and says, 'We're getting all this pressure from Congress and therefore I will or won't pursue an enforcement action against an individual.' But I do think there is a feeling of a constant barrage from legislators and the broader public," Hockett said.
In response to Sen. Warren, Fed Chair Janet Yellen confirmed in a July 11 letter that the regulator "does have that legal authority."
And regulators have wiped entire boards before. In 1984, the bailout plan for Continental Illinois included removal of the company's top management and board of directors.
Lawyers interviewed by S&P Global Market Intelligence said regulators would most likely rely on a provision of federal law known as Section 1818. The statute authorizes removing a banker or officer if the individual engages in misconduct, enjoys a personal gain and compromises the safety and soundness of the financial institution. In September 2016, regulators said the fake accounts scandal represented "unsafe or unsound practices."
At the same time, Warren's campaign against Wells Fargo could paradoxically make regulatory action less likely. After a Texas savings-and-loan failed in 1988, the Federal Deposit Insurance Corp. sued banker Charles Hurwitz for $800 million and sought to seize his 3,500 acres of endangered California redwood trees, according to a write-up by the American Bar Association. A court battle ensued over the next 20 years, with Hurwitz emerging victorious in 2008 when a judge ruled regulators had to pay $10 million to cover legal costs. The judge found regulators acted at the behest of environmental groups, Congress and former President Bill Clinton's administration.
"This is at least one example where a court said, 'It looks like you're motivated by political hostility.' Wells Fargo is obviously a very different situation, but you could see a parallel being made," said Joseph Cioffi, a partner for law firm Davis & Gilbert LLP.
Regulators have filed suit against plenty of bankers over the years. From 2009 through 2017, the FDIC has filed 109 lawsuits naming 832 directors and officers. All of those suits, however, were against failed institutions in the FDIC's role as receiver. Regulators have had less success going after individuals of banks that are still operating. In 1991, the erstwhile Office of Thrift Supervision ousted Lawrence Seidman as chairman of Crestmont Savings And Loan Association and sought to ban him from banking for life. But Seidman won a reversal in 1995, the regulator settled on a less-damaging cease-and-desist order and Seidman went on to a successful activist investing career, serving on several boards.
On the other hand, when the facts are compelling, regulators can get cases to stick. In 1987, the Fed removed John William Van Dyke Jr. from his position as president of Toy National Bank in Sioux City, Iowa. Regulators alleged Van Dyke ran a check-kiting scheme that included writing a $50,000 check from his own bank against a balance of roughly $355, and an Appeals Court upheld the Fed's removal of Van Dyke as bank president.
Given an uneven history, politicians agitating for change at Wells Fargo might have a tough time convincing regulators to act. But if scandals continue to pile up and public outrage accumulates further, regulators might see an opportunity to quell populist rage that spawned "Audit the Fed" and Occupy Wall Street movements and arguably played a role in the most recent election cycle, Cornell's Hockett said.
"You can imagine regulators going after Wells and then saying, 'Look, we did it,'" he said.
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