The former head of Wells Fargo & Co’s community bank, Carrie Tolstedt, has agreed to pay a $3m penalty stemming from charges brought in 2020 for her role in allegedly misleading investors, the SEC said Tuesday.

In March, Tolstedt pleaded guilty to obstructing regulators who tried to examine allegations of sales misconduct at the business she ran. The SEC previously settled related charges against Wells Fargo itself and its former CEO and chairman, John Stumpf.

Tolstedt, who retired from the San Francisco-based bank in 2016, was a pivotal figure in the fake-accounts scandal. Regulators alleged that executives set unrealistic and overly aggressive sales goals that encouraged low-level employees to open fake and unauthorized bank accounts for the bank’s clients.

Other legal actions

The deal with the SEC, which comes nearly seven years after Tolstedt left Wells Fargo, is the latest in a series of legal actions she has faced for her role in the scandal.

In March, she agreed to plead guilty to a criminal charge of obstructing a bank examination in connection with the company’s phony-accounts scandal, prosecutors said Wednesday. The deal, which has yet to be approved by a judge, calls for a sentence of up to 16 months behind bars, the US Attorney’s Office in the Central District of California said in a press release.

A separate settlement agreement with the Office of the Comptroller of the Currency called for Tolstedt to pay a $17m fine and accept a ban from the banking industry.

The phony accounts scandal

According to the SEC’s complaint against Tolstedt, from mid-2014 through mid-2016, Tolstedt publicly described and endorsed Wells Fargo’s “cross-sell metric” as a means of measuring the bank’s financial success, despite the fact that this metric was inflated by accounts and services that were unused, unneeded, or unauthorized.

The complaint further alleges that Tolstedt knew the cross-sell metric did not accurately track accounts or products that customers needed or used, since she was aware of misconduct at the community bank that led to bankers pushing products on customers that they did not need or want, including the unauthorized opening of accounts.

The complaint says that Tolstedt made misleading public statements to investors at Wells Fargo’s investor conferences in 2014 and 2016, and signed misleading sub-certifications as to the accuracy of Wells Fargo’s public disclosures when she knew or was reckless in not knowing that statements in those disclosures regarding Wells Fargo’s cross-sell metric were materially false and misleading.

“Companies do not act on their own. Where the facts warrant it, we will hold senior executives accountable for conduct that violates the securities laws,” said Monique C Winkler, Regional Director of the SEC’s San Francisco Regional Office.

Penalties

The final judgment permanently enjoins Tolstedt from violating, or aiding and abetting violations of, the anti-fraud and other provisions of the federal securities laws and imposing a permanent officer-and-director bar.

In addition to the $3m civil penalty, Tolstedt agreed to pay disgorgement of almost $1.5m, plus prejudgment interest of $447,874. The SEC will combine this money with $500m paid by Wells Fargo when it settled with the SEC in February 2020 and the $2.5m penalty paid by Former Wells Fargo CEO John Stumpf in November 2020, the securities regulator said.

In case it looks like Carrie Tolstedt is paying a larger penalty than her boss, Stumpf has been banned from ever working at a bank again and has paid $17.5m collectively for the actions and inactions with which he is associated in this fake-accounts scandal. Wells Fargo also clawed back some compensation and had him forfeit some stock holdings.

According to calculations by Bloomberg, even after subtracting the clawback and forfeitures, the former CEO still stepped away with stock worth more than $80m. He collected more than $60m of salary and bonuses during his years at the bank and had accumulated a pension worth $22.7m by the time he departed and had to pay those fines.

CRO had ‘limited authority’

After the scandal came to light, a group of Wells Fargo’s independent directors, along with the law firm Shearman & Sterling, engaged in a six-month investigation into the bank’s retail banking sales practices in 2016.

The review took aim at the bank’s decentralized structure, citing “a culture of strong deference to management of the lines of business, embodied in the oft-repeated ‘run it like you own it’ mantra.”

Further, “the Chief Risk Officer had limited authority with respect to the community bank,” the report of investigation notes.

“As events were unfolding, his visibility into risk issues at the community bank was hampered by his dependence on its group risk officer, and he was essentially confined to attempting to cajole and persuade Tolstedt and the community bank to be more responsive to sales practice-related risks,” the report says.