Harvard Law & Policy Review

Wall Street

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Is This What Accountability Looks Like?

By Edward Nasser*

Wells Fargo & Co. Chairman and CEO John Stumpf resigned this week, effective immediately, under intense public pressure for the bank’s sales-tactics scandal and his inelegant handling of the fallout. Mr. Stumpf won’t receive a severance package, relinquished $41 million in unvested equity awards, and agreed to forgo salary during an independent investigation led by the board. He will not receive a bonus either. Timothy Sloan, whose most recent role was as Wells Fargo’s president and chief operating officer, replaced Mr. Stumpf as CEO.

Carrie Tolstedt, the divisional senior VP who supervised the roughly 6,000 retail branches where the wrongdoing took place, also stepped down. In July, she announced her plans to retire at the end of the year, but instead chose to resign along with Mr. Stumpf. Ms. Tolstedt agreed to forfeit $19 million in unvested equity awards.

The abrupt resignations of Mr. Stumpf and Ms. Tolstedt came as a surprise. As recently as two weeks ago, the Wall Street Journal reported that “there are no signs” either contemplated stepping down. Both the resignations and scale of the equity clawbacks are notable. For comparison, when the London Whale scandal broke in 2011, the board of J.P. Morgan & Chase decided to halve CEO James Dimon’s compensation from $23.1 million to $11.5 million, but did not formally claw back any equity. Mr. Dimon also kept his job.

Still, many lawmakers and progressive commenters continue to be skeptical of the bank’s response. Wells Fargo agreed to pay local and federal regulators $185 million to settle the claims ($100 million to the CFPB, $50 million to the city and county of Los Angeles, and $35 million to the Office of the Comptroller of the Currency) but as is common in civil cases of corporate malfeasance did not admit wrongdoing. Some, like Representative Maxine Waters (D-CA), expressed concern over the hiring of Mr. Sloan, noting that he too might be culpable in the recent scandal.

The resignations and clawbacks only came after an extraordinarily sharp line of questioning by one of the banking industry’s most vocal critics, Sen. Elizabeth Warren (D-MA). Sen. Warren repeatedly rebuked Mr. Stumpf during the September 20th Senate Banking Committee hearing on the matter. She questioned why, at the time, no high level executive had resigned despite the bank firing, over five years, 5,300 mostly low-level employees related to the scandal. Sen. Warren also urged criminal accountability for the executives in charge, arguing that the only way to effectively reign in Wall Street excess is to hold high-level employees liable. The U.S. Attorney’s Office for the Southern District of New York has launched its own investigation into the scandal, but prosecutors have not decided between criminal or further civil charges.

Like many white-collar investigations, the final resolution in the Wells Fargo matter will likely leave critics somewhere between unsatisfied and downright furious. Mr. Stumpf sold $61 million worth of Wells Fargo shares in the month prior to the public announcement of the regulatory settlements, a move sure to infuriate the public but unlikely to result in any legal consequences Further, the settlement with the CFPB leaves much to be desired, requiring that the bank identify and refund customers affected by the fraud—but not if it is “impracticable” to do so. (The carefully worded settlement, the largest in the agency’s history, also fails to mention the word “fraud” a single time).

Mr. Stumpf and Ms. Tolstedt have faced some penalties for their roles in overseeing one of the most egregious examples of corporate abuse in recent memory. Time will tell if either will have to face the criminal justice system.

*Edward is a 2L at Harvard Law School and an Online Editor for HLPR.

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A “Blow” to the Office: How We Think About Failed Prosecutions

By HLPR Online Staff

Prosecutors seem to be caught in a bind.

Last week, the Manhattan D.A.’s high-profile fraud trial against three former leaders of the now-defunct law firm Dewey & LeBoeuf came to an anticlimactic end with the judge declaring a mistrial.  After more than 22 days of deliberation, the jury agreed to acquit on some charges, but deadlocked on the majority of the more than 150 counts.  The press characterized the result as a “blow” for District Attorney Cyrus Vance.

Several weeks before, the U.S. Attorney for the Southern District of New York, Preet Bharara, suffered his own “blow” when the Supreme Court denied cert. from a Second Circuit decision overturning two major insider trading convictions.  The convictions were part of Bharara’s larger crackdown on insider trading in the hedge fund and expert networking industries, with the Second Circuit’s decision forcing Bharara to drop charges against seven others who were part of that effort—itself another “blow.”

At the same time, the political winds are turning fast in the direction of more individual prosecutions in corporate white-collar cases.  What started as a critique about a lack of C-suite prosecutions stemming from the financial crisis has now hit the mainstream.  The Justice Department recently announced a policy shift toward increasing its focus on individuals when investigating and prosecuting corporations, and Hillary Clinton has made individual prosecutions a central tenet of her plan to regulate Wall Street.

For the Justice Department, this is a sharp departure from practice.  Since even before the financial crisis its preferred strategy has been to charge the firms themselves, enter into deferred- or non-prosecution agreements, extract enormous fines, and monitor the firms as they institute new compliance measures.  It’s a nice method for the government because it involves no trials, no appeals, no juries—so no opportunity for the government to lose.  The problem, however, is that it quickly starts to look like culpable employees are getting away with murder, while shareholders are left footing the bill for massive fines.  Moreover, these sorts of corporate crimes—on Wall Street and elsewhere—seem to keep happening.  So the conventional wisdom has now become that we need the deterrence that only the threat of jail time can offer.

The thing about prosecuting individuals, however, is that it can get messy.  Unlike corporations, which will practically always settle charges, individuals sometimes exercise those pesky constitutional rights to trial.  And with trials comes swaths of unpredictability: judges, juries, witnesses, appeals.  This means that sometimes the government is going to lose.  And here is where prosecutors find themselves in a bind: on the one hand they are supposed to be focusing on individuals in white-collar cases, but on the other every time this riskier strategy results in a loss the prosecutor is chastised.

Addressing this issue requires more than just recognizing that prosecutors have a tough job to do.  It’s prosecution 101 that you shouldn’t bring charges unless you are convinced that the defendant is guilty and you can prove it.  The human cost to a defendant of being charged with a crime and facing trial is tremendous even if the end result is acquittal.  But even when bringing the case was the right decision at the outset, the unpredictability of trial will sometimes mean that the prosecutor still loses.  And in these cases, we need to stop thinking about their result as a “blow” to the Government.   This common view has the potential to chill the exact thing that so many are clamoring for: a focus on individuals over corporations in white-collar cases.  In the end, if everybody plays their part right—the prosecutor properly brings charges, the judge fairly adjudicates, and the jury fairly finds for the defendant—then that’s not a blow, that’s justice.