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California cuts ties with Wells Fargo in wake of fake account scandal

State Treasurer: This is a legal and ethical outrage that cannot go unpunished

The state of California is suspending several of it business relationships with Wells Fargo as the fallout from the bank’s fake account scandal continues.

California’s state treasurer, John Chiang, announced Wednesday that the state is suspending the state’s “most highly profitable business relationships” with Wells Fargo for at least one year.

“Wells Fargo's admission that thousands of its bank employees opened over two million fraudulent consumer accounts is a legal and ethical outrage that cannot go unpunished,” Chiang said Wednesday.

“Wells Fargo’s fleecing of its customers by opening fraudulent accounts for the purpose of extracting millions in illegal fees demonstrates, at best, a reckless lack of institutional control and, at worst, a culture which actively promotes wanton greed, Chiang continued.

According to Chiang’s office, the state of California is suspending all investments made by the Treasurer’s Office in all Wells Fargo securities.

Additionally, California is suspending the use of Wells Fargo as a broker-dealer for purchasing of investments by the Treasurer’s office, as well as suspending the use of Wells Fargo as a managing underwriter on negotiated sales of California state bonds where the Treasurer appoints the underwriter.

According to Chiang’s office, the California treasurer oversees nearly $2 trillion in annual banking transactions, manages a $75 billion investment pool, and is the nation’s largest issuer of municipal debt.

But, for at least one year, none of that business will be conducted with Wells Fargo.

Each of those suspensions take effect immediately, but Chiang cautions that if Wells Fargo does not comply with the consent orders from the Consumer Financial Protection Bureau, the Los Angeles City Attorney, and the Office of the Comptroller of the Currency, then more sanctions will be coming.

Chiang’s office states that if Wells Fargo does not comply with the consent orders or “evidence surfaces that Wells Fargo has engaged in the same behavior,” the bank will face tougher sanctions up to and including the “complete and permanent severance of all ties between the Treasurer’s Office and Wells Fargo.”

Additionally, Chiang’s office stated that his office will work with both the California Public Employees’ Retirement System and the California State Teachers’ Retirement System, which combine to have more $2.3 billion invested in Wells Fargo fixed income securities and equity, to ensure that “this type of behavior and systemic corruption” does not happen again.

Specifically, Chiang’s office stated that it will seek to separate the chief executive officer and chairman of the board positions at Wells Fargo. Currently, John Stumpf serves in both positions.

Chiang’s office will also seek the appointment of a consumer ombudsman at Wells Fargo. Chiang’s office said that it will also work for the development of an anonymous ethics reporting process and whistleblower protection program at the bank, as well as conduct a review of Wells Fargo’s compensation practices.

Chiang’s office will also seek “clawbacks of ill-gotten compensation for executives most directly linked to Wells Fargo’s deceptive and predatory sales practices.”

Stumpf and Carrie Tolstedt, the former head of Wells Fargo unit responsible for the fake account scandal, already had millions of dollars in compensation revoked by the company’s board, but Chiang’s office wants more.

“I have a duty as a leader in the financial marketplace to take action aimed at helping you understand that integrity and trust matter,” Chiang wrote in a letter to Wells Fargo.

“How can I continue to entrust the public’s money to an organization which has shown such little regard for the legions of Californians who have placed their financial well-being in its care?,” Chiang said. “‘Just as Lehman Brothers and Bear Stearns learned the hard way that no bank is truly too big to fail, those banks which survived the Great Recession must now learn that they are not so powerful as to be untouchable.”

In response to the California sanctions, Wells Fargo said that it will work to regain the state’s trust.

“Wells Fargo has diligently and professionally worked with the state for the past 17 years to support the government and people of California,” a Wells Fargo spokesperson said in a statement.

“Our highly experienced and proven government banking, securities and treasury management teams stand ready to continue delivering outstanding service to the state,” the spokesperson continued.

“We certainly understand the concerns that have been raised. We are very sorry and take full responsibility for the incidents in our retail bank,” the spokesperson concluded. “We have already taken important stepsand will continue to do so, to address these issues and rebuild the state’s trust.”

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