John Stumpf testified today in front of Congress that in 2013, when he first learned of the million plus cases of fraud and identity theft at his bank, he did not consider the matter to be sufficiently "material" to disclose to shareholders or to the board of directors in compliance with the Securities and Exchange Act.
Let's unpack this. Using another person's social security information to open an unauthorized account or line of credit is identity theft under Federal law, and constitutes a criminal fraud. It is a separate crime for a person to use the US mail or electronic transmissions devices (such as a telephone) to commit a civil or criminal fraud - it's called wire fraud or mail fraud. When two or more persons commit mail fraud or wire fraud on at least two separate occasions across state lines, the fraud comes under the conspiracy provisions under the Racketeering Influenced Corrupt Organizations Act (RICO, for short).
As a banker, John Stumpf would be well aware of the provisions of RICO. He was aware that his employees at the bank use phones, that the fraud was perpetrated across state lines, and that more than one employee was involved and on more than one occasion. The facts clearly fall under RICO, John Stumpf would have been aware that in 2013, Wells Fargo technically fit the definition of a "criminal enterprise" under that statute. This is not far-out legal theory. The Drexel investment bank faced this very issue in 1989under a fact pattern that is arguably less eggregious than what we are seeing from WFC.
RICO provides that a criminal enterprise may have all of it's assets frozen during the pendency of an investigation. For a bank, having all assets frozen fits the definition of the word "bad." Like, it's really REALLY bad. If applied against WFC, that provision would clearly have "a material impact" on the bank. (Note thatin 1989, Drexel would have been forced to post a $1b bond to avoid the application of RICO's asset freeze provisions, which would have rendered the bank entirely insolvent.) In other words, it is inconceivable that Stumpf considered, for one moment, that the account frauds were not material. What is more likely is that he stood to gain by keeping the fraud out of the public eye. Perhaps he felt he would be more likely to collect a larger bonus each year that his board of directors and shareholders were unaware of the frauds. If so, that non-disclosure in ITSELF would constitute a separate criminal conspiracy to defraud the bank, opening the potential for draconian criminal penalties against Stumpf personally and all other participants in the decision to not disclose the account frauds.
But Stumpf just testified to Congress that he did not consider the account frauds to be material. Let's recall that Stumpf is under oath when he testifies to Congress - lying under oath would constitute yet another separate criminal offense. The real smoking gun is that in 2013, after learning of the account frauds, Stumpf sold $13,000,000 worth of WFC stock through a family trust. CLEARLY he must have considered the accounts fraud to be material enough to warrant a very large sale of stock he owned. Now, that is what is called "insider trading", and constitutes yet another criminal offense. And it COMPLETELY contradicts everything Stumpf said about his belief that the account frauds were not sufficiently material to disclose to the board of directors or to shareholders.
The pattern of ongoing legal violations by Stumpf and other high ranking officials at WFC is alarming. Congress has very much taken notice, and in an election year, there will be enormous pressure to produce jail sentences for a very large number of officers at WFC - including the Chairman and CEO. This is not going to get better quickly, and let us not forget that the investigations and law suits haven't even started. Today, members of Congress analogized WFC to Enron. That comparison Congress is discussing may turn out to be prescient.
I sold the bulk of my shares of WFC today and will sell off the remaining 100 shares tomorrow. The CEO has just committed a raft of serious crimes, and surely there will be a high cost to pay. The likelihood of shareholders escaping unscathed is probably about zero. The likelihood of shareholders ending up with zero is, I am affraid to say, substantially greater than zero.
Even setting aside the potential for shareholders of WFC to suffer staggaring losses, there is the moral aspect of being a shareholder in a criminal enterprise. Victims of the WFC fraud are going to suffer years worth of credit problems because of what WFC did to them - I don't want to earn a single penny from that, and as far as I am concerned, WFC's earnings are now tainted by dirty money.
Disclosure: I am/we are long WFC.
Additional disclosure: I have already sold the overwhelming bulk of my shares of WFC, and am selling every single last share of this stock I own soon. I am not suggesting anyone else do anything with regards to WFC stock. I am writing about my own thinking on the subject and what I plan to do - it is not investment advice and may not be the right action for other investors.