By Ben Eisen
Wells Fargo & Co. will pay $3 billion to settle investigations by the Justice Department and the Securities and Exchange Commission into its long-running fake accounts scandal, closing the door on a major portion of the legal problems that for years have beset one of the country's largest banks.
The deal resolves civil and criminal investigations. It includes a so-called deferred prosecution agreement, in which the Justice Department reserves the right to pursue criminal charges. The bank has to satisfy the government's requirements, including its continued cooperation with further investigations, over the next three years.
Friday's settlement is a victory for Charles Scharf, an outsider who took over as chief executive in October and was tasked with fixing the crisis that has claimed two CEOs.
"The conduct at the core of today's settlements -- and the past culture that gave rise to it -- are reprehensible and wholly inconsistent with the values on which Wells Fargo was built," Mr. Scharf said in a statement. "We are committing all necessary resources to ensure that nothing like this happens again, while also driving Wells Fargo forward."
The bank, though, still faces major regulatory problems. Most notably, it is under sanction by the Federal Reserve, which has taken the unusual step of capping the bank's growth. Settling with the Justice Department and SEC could allow the bank to focus on persuading the Fed to lift the cap.
As part of the settlement, Wells Fargo admitted that it "unlawfully misused customers' sensitive personal information" and harmed some customers' credit ratings, collecting millions of dollars in fees and interest in the process.
The scandal severely damaged the bank's reputation with customers and regulators alike, providing a case study of sorts on how success in banking depends on customers trusting a firm enough to leave their money there. It also has unsettled customers who have long thought of retail banking as a service that takes deposits and makes loans, not a sales-driven industry hawking as many products as possible.
Regulators first fined Wells Fargo over the sales practices in 2016, alleging that executives created a pressure-cooker environment in branches where low-level employees were so beset by high sales goals that they opened up fake and unauthorized bank accounts.
Afterward, regulators and lawmakers were outraged not just by the allegations but by what they perceived as the bank's slow response to them. What's more, with the bank under increasing scrutiny, additional legal and regulatory problems sprang up across other business units, including wealth management and foreign-exchange trading. What was once a fast-growing lender whose profits towered above those of rivals became a firm with declining revenue that is leaning heavily on cost cuts.
The SEC portion of the settlement accused the bank of misleading shareholders. According to the charges, Wells Fargo touted to investors its ability to sell additional products to current customers, a practice known as cross-selling, even though numbers were inflated because of the fake accounts.
Aside from Friday's settlement, regulators and prosecutors could still take action against former executives, according to people familiar with the situation. Last month, the Office of the Comptroller of the Currency charged eight former Wells Fargo executives over the fake-account scandal, including a former CEO.
Wells Fargo for years enjoyed a reputation as a folksy industry darling that catered to Main Street customers. But that reputation was left in tatters after the sales scandal became public.
"Wells Fargo traded its hard-earned reputation for short-term profits, and harmed untold numbers of customers along the way," Nick Hanna, U.S. Attorney in Los Angeles, said Friday.
Prosecutors said the practices date to 1998, when Wells Fargo began to rely more heavily on sales growth. It pressured employees to cross-sell additional products to current customers.
The heightened pressure pushed many employees to open checking and savings accounts without customer knowledge and make up identification numbers to activate unauthorized debit cards.
Employees, afraid they would be fired otherwise, sometimes forged customer signatures to open accounts or altered customers' contact information to prevent them from learning about unauthorized accounts, the government said. Sometimes they persuaded friends and family members to open accounts they didn't want or need.
Regulators and prosecutors said top managers knew of these issues years ago. In 2004, an internal investigator called it a "growing plague." In 2005, a corporate investigations manager described the problem as "spiraling out of control." Employees continued to raise concerns internally, the government said.
It also said certain executives "impeded" the OCC from scrutinizing the sales practices.
After the scandal erupted in 2016, the bank's top executives faced heavy criticism for holding lower-level employees responsible. Wells Fargo fired thousands of branch employees, but regulators, lawmakers and even the bank's own board questioned whether the junior staffers were the ones to blame.
A board investigation found that the bank's decentralized structure allowed top executives to avoid addressing these issues as they got bigger.
Without referring to her by name, the Justice Department heavily criticized Carrie Tolstedt, the former head of the consumer bank. By 2012, regional executives "were regularly raising objections" to Ms. Tolstedt about "unlawful and unethical sales practices."
Ms. Tolstedt is one of the former executives the OCC charged last month. Her lawyer said Friday she "acted appropriately and in good faith at all times, and the effort to scapegoat her is both unfair and unfounded."
The House Financial Services Committee said Friday it is holding three hearings about Wells Fargo in March. Mr. Scharf will testify at one of them, his first appearance before the committee since he took over as CEO. Members of the board will testify at another, a spokeswoman for the bank said.
--Rachel Louise Ensign, Aruna Viswanatha and Dave Michaels contributed to this article.
Write to Ben Eisen at email@example.com