Former Wells Fargo CEO John Stumpf and other Wells Fargo executives could still face criminal charges over how much the bank’s management knew about the more than 2 million fake accounts that 5,000 of the bank’s former employees opened in order to get sales bonuses.
If Stumpf and other Wells Fargo execs end up facing charges for the bank’s actions, it would be a rarity, as most of the punishment handed down on banks for their conduct before, during, and after the financial crisis focused on the banks themselves, rather than the executives who led the banks.
For example, when called to task, Stumpf blamed the bank's transgression on those aforementioned low-level staffers.
Now, in order to end exactly that kind of reaction, change is supposedly afoot in that department as the Department of Justice announced last year that it planned to begin targeting individual employees for corporate misconduct in addition to the companies themselves.
Even if Stumpf and the others don’t end up facing criminal charges, the Wells Fargo situation could still prove to be a tipping point as one financial regulator is proposing big changes that would hold executives personally responsible for the actions of their companies.
In its quarterly report to Congress, published Wednesday morning, the Special Inspector General of the Troubled Asset Relief Program proposes a new rule that bring an end to the “insulated CEO” by requiring the CEO and other executives to sign an annual certification that conducted due diligence within their organization and can “certify that that there is no criminal conduct or civil fraud” in their company.
“The American people have called for stronger reforms on Wall Street, frustrated by the lack of senior executive accountability at the largest banks,” SIGTARP Christy Goldsmith Romero said in a letter to Congress attached to the quarterly report.
To be sure, Wells Fargo is not headquartered on Wall Street, but rather in San Francisco, but it is believed Goldsmith Romero is using the term broadly to encompass the activities of systemically important financial institutions.
“I have called for Wall Street reform based on the difficulties SIGTARP has faced as a law enforcement agency in proving criminal intent of senior executives at large institutions given how isolated they are from knowledge of fraud in their company,” Goldsmith Romero continued. “This isolation is part of the culture at large institutions, and is something that is unlikely to change absent reform. That is why I am proposing a reform to bring accountability to the ‘Insulated CEO’ and other high-level executives.”
Goldsmith Romero’s proposal would “remove the insulation around Wall Street CEOs and other high-level officials” by requiring the CEO, chief financial and “certain other senior executives” pledge annually that their company is fraud free.
“No longer allowed to stay ‘in the dark,’ a crime and fraud certification forces the CEO to be ‘in the know,’” Goldsmith Romero said. “Crime and fraud cannot be allowed to go unchecked at our largest institutions.”
According to Goldsmith Romero, the proposal is modeled after the annual Sarbanes-Oxley certification, and would “create an incentive for top executives to institute strong antifraud internal controls on lower level executives and managers.”
Goldsmith Romero said that the plan would also “motivate” lower level executives and managers to tell the leaders of the organization if fraud or crime is occurring.
Goldsmith Romero notes that her proposal comes from a position of experience when it comes to trying to hold executives accountable.
Goldsmith Romero states that SIGTARP has been successful at pursuing executives at smaller organizations, noting that SIGTARP investigations led to criminal charges being filed against 85 bankers at medium and smaller banks, including more than 10 bank CEOs.
But, bringing accountability to senior executives at the largest banks has been another matter, Goldsmith Romero tells Congress.
“We have faced significant difficulties in proving criminal intent of senior officials in large organizations that are purposely designed to insulate top officials from knowing about crime or civil fraud,” Goldsmith Romero said. “Orchestrated in boardrooms and law firms, this insulation often puts senior executives ‘in the dark’ and therefore just out of reach of prosecution.”
Currently, according to Goldsmith Romero, Wall Street [their term] CEOs and other high-level executives do not have an incentive to identify crime and civil fraud in their organization.
“They can hide behind the idea that because their firm is so big, they cannot be expected to know everything that happens within it,” Goldsmith Romero said. “This insulation presents a serious challenge to law enforcement to prove criminal intent – a challenge that requires a permanent incentive for CEOs and other high-level executives to be ‘in the know.’”
Goldsmith Romero tells Congress that incentives are needed to raise knowledge of crime and civil fraud to the highest levels of financial institutions.
“We know that the financial crisis, TARP bailout, and subsequent fraud scandals have not provided enough incentive,” Goldsmith Romero states. “Crime or fraud in an organization’s business practices should be detected in the due diligence and rise to the CEO. And if executives cannot certify, they should call law enforcement, such as SIGTARP, immediately.”
Goldsmith Romero cautions that the certifications would not relieve law enforcement agencies of the burden to prove criminal intent, which Romero calls a “bedrock principle of our justice system.”
But Goldsmith Romero argues that by the due diligence required by this rule would help ensure that knowledge of the crime or fraud would be to rise up to top leaders of each company.
“On the other hand, if after learning about the fraud, the CEO and senior officers knowingly file false statements with the FDIC or SEC, they would be more in the reach of law enforcement than in the past,” Goldsmith Romero says.
“In SIGTARP’s investigations, the annual Sarbanes-Oxley certifications can serve as evidence to prove that executives (CEO, CFO, or others who signed sub certifications) with knowledge of the fraud also knew that they were filing false financial statements, leading to charges such as bank fraud,” Goldsmith Romero continues. “A similar certification could do the same for crime and fraud at large banks.”
According to Goldsmith Romero, this reform would be a “significant step” toward greater accountability, as it would benefit large financial institutions by giving the CEO and other leaders the opportunity and accountability to stop fraud, fix it, and report it to law enforcement.
But if leadership fails to act, Goldsmith Romero says, it gives law enforcement a path to bring justice to the “insulated CEO” and other senior executives.
Goldsmith Romero says that this plan would give the public that the laws of this country apply to everyone, executive or employee.
“If a CEO says that their institution is too big or too complex to be able to certify about crime or fraud, then they have a much bigger problem – one that should be unacceptable, particularly at banks deemed so systemic that taxpayers bailed them out,” Goldsmith Romero states.
“Examples of Wall Street culture driven by dollars without regard for consequences are too well known, and examples of wrongdoing have become too many to accept,” Goldsmith Romero continues.
“But our nation also has a culture, one that rewards integrity, transparency, and accountability – not a CEO that insulates themselves from knowing about crime and fraud in their organization,” Goldsmith Romero adds.
“The time is ripe to make a difference for the future,” Goldsmith Romero concludes. “Otherwise, without reform, history will repeat itself. Our nation must have one system of justice that applies equally. To do that, we should stop allowing Wall Street leaders to insulate themselves from justice.”
