Last Friday, as per a U.S. Securities and Exchange Commission filing, Wells Fargo & Company WFC agreed to resolve a consolidated securities fraud class action suit related to the fake-accounts scandal revoked in September 2016. The settlement amount comes to around $480 million.
Wells Fargo stated it had "reached an agreement in principle" with the parties that brought the complaint in the United States District Court for the Northern District of California. However, though the deal awaits certain customary conditions and final court approval, the San Francisco-based bank has already fully reserved the amount, as of Mar 31, 2018. Per the filing "reasonably possible" legal charges could be equivalent to $2.6 billion beyond amount reserved as of Mar 31, 2018.
Notably, Wells Fargo refrained from the allegations but said it had "entered into the agreement in principle to avoid the cost and disruption of further litigation."
"We are pleased to reach this agreement in principle and believe that moving to put this case behind us is in the best interest of our team members, customers, investors and other stakeholders," noted CEO Tim Sloan. "We are making strong progress in our work to rebuild trust, and this represents another step forward," he further added. The Story So Far
The above-mentioned case relates to the revelation of a sales scam, wherein the bank's employees allegedly opened millions of unauthorized accounts illegally, to meet their aggressive internal sales goals.
This financial bigwig has been under inquiry for setting impractical sales targets for its employees, compelling them to adopt fraudulent means for meeting the same. Wells Fargo's aggressive sales tactics were first disclosed by The Los Angeles Times in 2013, when Los Angeles City's Attorney Mike Feuer had begun investigation. This probe led to a lawsuit accusing the bank of high-pressure sales goals that encouraged unfair, illegal and fraudulent conduct, such as issuing unwanted credit cards to customers.
The scandal was agitated in September 2016 following which the bank paid a combined penalty of $190 million to the Consumer Financial Protection Bureau (CFPB), the Office of Comptroller of the Currency (OCC), and the City and County of Los Angeles. In addition, the amount included $5 million in customer remediation.
Per the above-discussed class action lawsuit, the investors' claims included misappropriation of facts by Wells Fargo related to its cross-selling strategy which was not used for benefit of customers. However, the bank tried to "designed to fulfill sales quotes or otherwise advance the interests of Wells Fargo or its employees and increase sources of profitability while simultaneously burdening customers with financial products they did not authorize, need and/or even know about," the suit claimed.
Therefore, this led the shares to trade at "artificially inflated prices," per the suit.
Notably, investors filing the suit include buyers of Wells Fargo's shares between Feb 26, 2014, and Sep 15, 2016, following the bank's $185-million settlement which resulted in a dip in its share prices. Union Investment - a European asset-management firm - was the lead plaintiff in the case, appointed by the court.
Currently, the banking giant is caught in a horde of litigations over several malpractices which have come into the spotlight. It is going to be a long and expensive journey for Wells Fargo till it gets all the dust settled.
In February 2018, the Federal Reserve ordered the bank to replace four board directors and also not increase its assets position beyond $1.95 trillion (as of Dec 31, 2017).
Recently, the banking giant faced a penalty of $1 billion imposed by the CFPB and OCC due to its wrongdoings in the auto insurance and mortgage-lending business. As a result, the company's first-quarter 2018 preliminary financial results got adjusted by an additional accrual of $800 million, which is not tax deductible. The accrual reduced the reported first-quarter net income by $800 million or 16 cents per share to $4.7 billion, or 96 cents per share.
The bank's performance over the past year underlines investors' disappointment. Shares of Wells Fargo have declined 4.8%, significantly underperforming the industry 's rally of 12.3%.
Wells Fargo currently carries a Zacks Rank #3 (Hold).
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