Wells Fargo: a fake account scandal that started in 2016 and is still going on
The Wells Fargo scandal is one that became public in 2016 and in 2021, it is still relevant. Why? Because it is still an ongoing scandal. Early during the year, new accounts of frauds have been discovered. This does not bid well for Wells Fargo, right? Let’s not forget that the financial institution is the third largest bank in the United States and the scandal is so huge that its reputation has taken a serious fall. The discovery of the fake accounts Everything was disclosed in 2016 when people woke up to the news that Wells Fargo has committed a serious crime. Its employees had been creating millions of fake accounts on behalf of clients to satisfy quotas and meet sales goals that were realistically not just possible. The general concept underpinning the fraud is cross-selling. Things started well before that. According to media reports, this practice began as early as 2002, which is when cross-selling was taken to another level and employees started using fraud to meet sales goals. What did they do specifically? Well, they opened online banking services and ordered debit cards without customer consent. According to the American Bankruptcy Institute Journal, the employees “opened as many as 1.5 million checking and savings accounts, and more than 500,000 credit cards, without customers’ authorisation”. When ordering credit cards for pre-approved customers, employees used their own personal information to fill out the necessary details. They also created fraudulent checking and savings accounts, which means that movement of money out of legitimate accounts took place, creating fake personal identification numbers and even forging signatures. They even used the pinning process which involves setting customers’ PIN number to 0000 to be able to control their account without their knowledge. However, this scam could not have lasted forever. With time, clients started to discover that something was wrong. This was only a matter of time since they were being charged unanticipated fees or receiving unexpected credit or debit cards or lines of credit. Naturally, they started questioning charges for accounts they did not own or request. So many complaints were filed that authorities started to look into the matter and the fraud began to gain the attention of the wider public. A culture of employee abuse So who was to be blamed? While at first individual branch workers and managers were considered to be at fault, it was soon discovered that matters were much more complicated than that. In fact, there was a culture of employee abuse going on at the institution. It was found out that there was pressure from higher management to open as many accounts as possible and they were in fact, encouraged for these actions. Many advanced that they did this out of desperation, for fear of termination. In court papers, there are reports of a pressure cooker environment in which employees were mentally abused and harassed to meet goals set by the management. Every year, low-level workers were squeezed tighter and tighter since senior executives keep ignoring the signs that the goals were unrealistic and they kept raising them. Those who did meet sales goals, by hook or by crook, were held up as examples for the rest of the staff. They claim that they were warned that “if they did not achieve sales goals, they would be ‘transferred to a store where someone had been shot and killed’ or ‘forced to walk out in the hot sun around the block.’” One employee even said, “I had less stress in the 1991 Gulf War than working for Wells Fargo”. According to the U.S. attorney for the Central District of California, this scandal demonstrate a failure of leadership at multiple levels within the bank. FX transactions: the recent scandal However, that is not the end of Wells Fargo’s scandals. More recently, it was found out that the bank defrauded 771 customers on FX transactions. FX refers to the international trade in currency. This is a complex market wherein money is made, and lost in a complex and constant shifting array of selling and buying. The firm defrauded customers by marking up the prices on currencies that it sold and market down those it bought. The FX sales group had agreements with customers for fixed spreads between buy and sell prices; however it systematically charged higher spreads, which allowed Wells Fargo to pocket millions. The group would cherry pick rates to get a greater advantage for the bank. Some of the personnel would make up rates and calculations as a pretence of meeting their obligations. They would also play with the number to inflate profits and some salespersons would take advantage of those they thought did not know much about FX. The employees would receive incentive for the money that they brought in. What happened when they got caught? Well in some cases, they would claim it was an honest mistake and in others, they would lie and create fake transaction data. Repercussions of the scandals It goes without saying that Wells Fargo had to face several repercussions for everything that have happened. The Federal Reserve has imposed bruising unprecedented sanctions on Wells Fargo and it is facing several lawsuits and legal actions from former and current employees. The bank has paid $72.6 million to settle a government lawsuit and just recently, CNN News revealed that as part of the total $3 billion settlement, the bank has agreed to pay restitution to customers. Additionally, it has had to face more fines with regards to delays in the process. Let’s not forget the most important repercussion: the firm’s brand reputation has been tarnished, something that it has spent 20 years building. For many years, Wells Fargo has enjoyed the reputation for sound management but since 2016, both its business and image experienced a steady downfall. After the scandal broke, new credit card applications in the fourth quarter of 2016 decreased to 43% and checking account openings fell by 40%. The public simply refused to give its business to
The story of Carlos Ghosn, Nissan’s fallen hero
A story no less than a Hollywood movie… That is how we can describe the life of Carlos Ghosn. In fact, he is no less than our fallen hero. He reached the peak, brought his firm to the top, to then fall down, be charged and arrested. He has now escaped, seeking refuge in Lebanon! Fascinating, isn’t it? Let’s have a look at the story of Nissan Motor’s ex-chairman Carlos Ghosn. Nissan Motors, the Alliance and Carlos Ghosn To fully understand the role of Carlos Ghosn, we have to go back to 1999 when Nissan was on the brink of bankruptcy and it was rescued by Renault. The Alliance was then formed. In 2016, Mitsubishi, who was damaged by scandal and struggling financially, joined these two. How did this Alliance work? The three companies retained their distinct identities, however, they operated under a global car grouping. They leverage the same technologies to manufacture their vehicles and purchase parts from the same suppliers. At the time, Carlos Ghosn was the chairman of Nissan and Mitsubishi and the chairman and chief executive of Renault. He was also chairman and chief executive of the Alliance, which has its own board. So you can imagine the power that this man held! With time, all three firms became successful. However, Nissan grew even more quickly. It made a third more vehicles than Renault and the credit of the success could be attributed to Carlos Ghosn who ruthlessly made Nissan’s earning rise, until the financial crisis. While Nissan recovered from the crisis quite quickly, things degenerated as from then. Declining sales, rising costs and a quality control scandal in Japan… all of these affected its profit margin. What went wrong for Carlos Ghosn? Amidst all of this drama, Carlos Ghosn had been earning a lot of money. In 2017, he was paid approximately $17m in salary, share options and bonuses. His earnings were so much that a lot of controversies about his pay packet emerged. When things started going down, Nissan conducted investigations and claimed that Ghosn had been systematically under-reporting his earnings to security regulators and had been misusing company assets for personal benefit. With time, two main charges were reported against Carlos Ghosn: Under-reported earnings According to Japanese prosecutors, Ghosn conspired with a fellow board member Greg Kelly to under-report about half the 10 billion yen ($88 million) Ghosn earned at Nissan over five years. Moreover, other media outlets announced that he had received share price-linked compensation of about 4 billion yen over a five-year period to March 2015. This was not disclosed in Nissan’s financial reports. Ghosn had also understated his remuneration at Nissan by around 8 billion yen in the eight years through the fiscal year that ended in March, including 3 billion yen over the last three fiscal years. These are only a few examples of the several rumours that were going around about under-reported earnings. Misappropriation of funds Moreover, following an internal investigation which was carried out for months, it was found that Ghosn used company funds for personal purposes and misrepresented the company’s investments. For instance, the Japanese public broadcaster NHK revealed that the automaker disbursed millions of yens for the purchase and renovation of homes for Carlos Ghosn in several locations such as Rio de Janeiro, Beirut, Paris and Amsterdam. It should be noted that these have no business purposes and they were not listed as benefits in filings to the Tokyo bourse. Like above, there were several other cases here as well. For instance, Nissan spent hundred thousands of dollars for vacations for the Ghosn family, Ghosn’s sister was paid for a non-existent advisory role, etc. When these charges were made public, it is obvious that he was arrested for financial misconduct. He was also dismissed as the chairman of Nissan Motors. Besides charges by Japanese authorities, Ghosn was also charged with fraud in the US by The Securities and Exchange Commission. It is not surprising that that this scandal has caused rifts in the Alliance, the future of which is being held by a thin thread. Lawsuits v/s lawsuits Following this scandal, things started going even more wrong for Nissan. Shareholders became angry and there were a lot of damages to deal with. Following repercussions, the automaker decided to file a $91 million lawsuit against Carlos Ghosn. It is no surprise that executives were furious following the financial frauds allegations. Moreover, it had to pay fines in both the US and in Japan because of the overpayments to Ghosn. Let us not forgets that sales and earnings plummeted at a rapid rate. Thus, as Nissan advanced, this lawsuit is an attempt to recover damages that it suffered “as a result of years of misconduct and fraudulent activity”. What did Ghosn have to say about of all this? Did he keep quiet? No he did not. In fact, he fought back! After spending four months in detention in Tokyo, he was released on bail which gave him the opportunity to escape and flee to Lebanon, where he holds citizenship. Ghosn has been claiming his innocence all along. In fact, he hit Nissan back with a $18 million damage suit in the Netherlands and another claim in France for $273,000 against Renault over pension payments. A toxic culture lacking transparency Speaking about this issue, Nissan’s former top lawyer talks about a toxic corporate culture and internal conflicts. Nonetheless, it seems to be that the main problem here seems to be transparency, or a lack thereof. According to speculations, “there’s been scant oversight by the automaker’s board of directors regarding internal conflicts of interest by senior staff, as well as executive compensation and stock option award policies”. In fact, till now, it is still unclear as to what happened or how much money was “swindled”. This case is yet another example of the importance of transparency and the enforcement of regulations both within a company and a jurisdiction. Mauritius boasts of an organisation called ‘Transparency Mauritius’ which assists
Enron Corporation scandal: lessons to be learnt from the havoc
This scandal is not something recent. However, the lessons it involves is something useful and relevant even in today’s time. The firm peaked in the industry and fell down and crashed! The crash was even bigger than its success and it affected the whole of Wall Street. Thousands of employees lost their jobs and the most shocking part is that one of the most powerful firms in the US just crumbled overnight. Enron Corporation: a high street darlingThe firm saw its beginnings in 1985 when the two natural gas companies Houston Natural Gas Company and InterNorth Incorporated. Following this, Kenneth Lay, the CEO of the former firm became Enron’s CEO and chair. The firm was rebranded into an energy trader and supplier and being very ambitious, he wanted to expand the firm’s capabilities beyond natural gas. As such, it made an aggressive move into electrical power. It invested into power plants and other electrical generation assets. However, Enron took another direction from other energy companies. Its executive tried to generate a profit from energy trading. How did it do so? Instead of producing and delivering natural energy to clients like conventional firms would, it used future contracts to deliver energy at specific times in the future, which allowed it to make money via the bias of those who wanted to speculate on price movements or to hedge against the risks of unexpected energy-price volatility. As such, Enron became more like a Wall Street investment company. In 1999, Enron created Enron Online (EOL). This was an electronic trading website that looked at commodities and the firm Enron became the counterparty to all transactions completed on EOL. The company managed to entice a lot of clients because of its reputation, credit and expertise in the energy sector. Following trades etc, it ended up creating completely new markets, such as contracts tied to weather events and internet bandwidth. However, these were only loosely connected to weather events and internet bandwidth capacity. Despite this, the firm was highly praised in the industry. By 2000, its stock grew at a very rate and Enron became one among the top 10 businesses in the country. It was applauded by many for its expansions and ambitious projects. Moreover, for six consecutive years, Fortune named the firm “America’s Most Innovative Company”. The fall of the Wall Street darling Nonetheless, by fall 2000, the firm started to crumble under its own weight and its success turned out to be a mirage. It turns out that the firm used accounting techniques to conceal the fact that it was undergoing huge business losses and it was in massive debt. For instance, it used mark-to-market accounting. This is a technique which measures the value of a security based on its current market value instead of its book value. While this is a strategy that can be efficient for trading securities, it is disastrous for businesses. Nonetheless, thanks to this, Enron appeared to be a success financially. Moreover, executives used off-balance-sheet special purpose vehicles to hide its debts and toxic assets from investors and creditors. However, with time, the techniques stopped working and by 2001, the firm revealed a huge quarterly loss and debts. It was then revealed that it had been consistently overstating its earnings for at least four years. After that, it had to file for bankruptcy and the authorities started paying attention to its operations. As everyone would have guessed, criminal charges against executives ensued. They were charged with conspiracy, insider trading and securities fraud and Wall Street’s darling experienced a fall from grace. In fact, the whole industry felt the impact of this fraud. It is estimated that shareholders lost $74 billion during the years leading up to the bankruptcy and the havoc that was caused led to new regulations and compliance measures being implemented. Lessons learnt from the debacles If there is one good that came out of this situation, it is that we could learn several lessons from this chaos. Learn about a firm well before investingAs mentioned before, Enron was quite different from other traditional energy companies and many of its investors did not understand its business model. Even experts in the sector could not understand some of the transactions. Moreover, the firm used a lot of fancy derivatives which were unnecessary. One of the dangers of the firm is that it relied too much on these speculations and derivative contracts. As such, as an investor, you must be careful when dealing with a firm. Some of the red flags that you must be on the lookout for is whether the company has a complicated business model or its financial derivatives are completely different from others. There is a lack of transparency or a false semblance and these may confuse you. Prioritise firms that are completely transparent in their operations and that offer help and support whenever you need it. For instance, Blue Azurite has a team of experts at your disposal. They are always available to answer your questions, clear your doubts and make sure that you are completely satisfied. Another important factor that comes into play when speaking about Enron its ethic-a moral code of conduct. All companies have a set of rules that they have to abide to and these are based on principles and values. Enron completely disregarded this structure of trust that support a firm and instead, it built a mirage of a reliable one. The fact that that this was possible and the charade kept going on for years says a lot about the jurisdiction in which the firm operates. It is only after the scandal that the US set up more rules and regulations to ensure that such a havoc does not happen again. But by then, it was too late. That is why it is important to choose firm in jurisdictions having well-established laws protecting investors and the likes. For instance, in Mauritius, in which Blue Azurite operates, there are several institutions regulating the activities of financial
