How far should punishment of banks go?

[Glenstache]

There is an interesting op-ed in the NYT today that attempts to make the case that a 1 billion judgment against Wells Fargo goes to far because it damages shareholders, and not management that made the decisions. It also goes on to say that the board, etc have seen a lot of turnover.

https://mobile.nytimes.com/2018/04/19/business/punishing-wells-fargo.html?action=click&module=Top%20Stories&pgtype=Homepage

I’ll lead off by saying that I disagree with it pretty adamantly. Shareholders are owners of the company and reaped the profits of the shady practices. That management did not see a criminal prosecution is a failure of the prosecutors, not an off ramp for the corporate entity. I think it also pulls at the thread of the differences between people and corporate persons. An individual who perpetuated massive fraud would have seen significant penalties (see Shkreli and Madoff). Wells Fargo is getting a slap on the wrist. They hold assets in the neighborhood of 1 trillion dollars. I feel that letting shareholders off the hook only serves to increase moral hazard. If the shareholders do get a massive devaluation, perhaps it will spur more discretion and support for early detection of these types of shady practices. I also think it is stunning that there was almost no personal accountability given the scale of the fraud practiced by Wells Fargo.

As investors, how do we see this. Should we expect to take a haircut if a business we are investing in is penalized as described above? Do you agree with the author that it is over reach?

Discuss.

[VoteCthulu]

I don't think fines do much to right the wrong they did or prevent them from doing it again. I would support legislation that treated their management and sales forces like the common thieves they are, so that whatever punishment a bank robber would see, they would see the same prison time after stealing from their customers.

Failing that, I won't shed a tear for them even if they're fined $10 billion.

[EricL]

Considering a bank would have to be such a massive part of my portfolio for a fine to make financial hardship, I’m totally OK with it.  In a diversified portfolio it’s hardly a few nickels. If I did own such a large chunk that it might, it’s my responsibility for “my business” to be operating honestly.  Or at least know if it’s not.  That’s basic due diligence. If I’m too stupid to or to dishonest to I should suffer for it.  I and the actual CEOs should be as liable for dishonest practices as actual bank robbers.  I also think the assumption of guilt should be the reverse of normal crimes.  If a bank does something illegal and direct responsibility can’t be pinned decisively to an employee or a sub office, prosecutors should proceed as if it came from the top. 

[marty998]

Topical, given what is happening in Australia right now and the Royal Commission into Financial Institutions.

I do think automatically debiting a client account without providing a service to be making to bog standard run-of-the-mill theft and thievery.

The law recognises you cannot send a corporation to jail, which is why fines and penalties are so much higher than they are for individuals.

Yep, shareholders should take a haircut. But in big institutions it is difficult for accountability to be sheeted home to one individual. So unless it is clear cut fraud/dishonesty, jail time is unlikely.

[chemistk]

Fine 'em. Take as much money as possible. What's the best way to attempt to make a company more accountable? Hit 'em where it hurts the most.

For many, many corporations now, shareholders might as well be gods in a temple. Anger the shareholders, and you're guaranteed to see the most heads roll.

Unless anyone here owns an outsized amount of Wells Fargo in their portfolio, the wonderful act of rebalancing will make sure we all gain from whatever companies are gaining from Wells Fargo's loss.

Look at VW and the diesel emissions debacle. It's incredulous to imagine the number of upper-level types that were kicked to the curb, and the company's better for it. Electric vehicles, hybrids, charging stations, the whole kit and caboodle! Imagine if the files levied were just a fraction of what they are now...

[inline five]

I support criminal charges against those who commit the fraud and some sort of financial penalty towards the overriding entity, however not enough that impacts their profitability or ability to do business.

The VW diesel fine was an outrageous overreach and unprecedented.

I'm sure Warren does his due diligence and owns a sizable portion of WFC. Stockholders can't control the company from doing illegal things. However what is important however is to only invest in companies with good management. Does WFC have an inbred historynofmthese sorts of things? If not there really isn't much stockholders can do to protect themselves.

[inline five]

Fine 'em. Take as much money as possible. What's the best way to attempt to make a company more accountable? Hit 'em where it hurts the most.

For many, many corporations now, shareholders might as well be gods in a temple. Anger the shareholders, and you're guaranteed to see the most heads roll.

Unless anyone here owns an outsized amount of Wells Fargo in their portfolio, the wonderful act of rebalancing will make sure we all gain from whatever companies are gaining from Wells Fargo's loss.

Look at VW and the diesel emissions debacle. It's incredulous to imagine the number of upper-level types that were kicked to the curb, and the company's better for it. Electric vehicles, hybrids, charging stations, the whole kit and caboodle! Imagine if the files levied were just a fraction of what they are now...

Very few VW employees lost their jobs or were indicted. One that was was protected by VAG. One was arrested while coming through the US on vacation and flipped on his boss.

[jlcnuke]

IMO, the company didn't commit fraud, a number of its employees did. I'm all for charging them for the crimes they committed. If I go and open bank accounts, credit cards, etc with other people's names I'd go to jail. Tons of WF employees did just that and none of them were charged at all. The CEO didn't do it, the "deck level" employees did and they got away with it unfortunately. They committed the crime, they should be held accountable.

The company fostered an environment where such a thing ended up happening. As such, I have no problem with fines being levied to discourage such an environment at companies in the future, even if it hurts the shareholder's some. That's the price of investing in a company which allows its employees to commit criminal acts.

[fuzzy math]

IMO, the company didn't commit fraud, a number of its employees did. I'm all for charging them for the crimes they committed. If I go and open bank accounts, credit cards, etc with other people's names I'd go to jail. Tons of WF employees did just that and none of them were charged at all. The CEO didn't do it, the "deck level" employees did and they got away with it unfortunately. They committed the crime, they should be held accountable.

The company fostered an environment where such a thing ended up happening. As such, I have no problem with fines being levied to discourage such an environment at companies in the future, even if it hurts the shareholder's some. That's the price of investing in a company which allows its employees to commit criminal acts.

Why punish the little guy and spare the higher ups? Do we think that all the little guys came up with this idea of their own accord and all just happened to do the same thing? There had to have been illegal pressure (which was documented) from high level management for an employee to have felt it was necessary to do it to keep or advance in their job. If anything the employees should sue for having had a hostile work environment.

Remember, you and me and the rest of this forum are the little guy. Unless you are on the board of a billion dollar business, encouraging punishment of only the most down stream employees just creates a historical environment where retribution is more likely to occur against you someday.

[jlcnuke]

IMO, the company didn't commit fraud, a number of its employees did. I'm all for charging them for the crimes they committed. If I go and open bank accounts, credit cards, etc with other people's names I'd go to jail. Tons of WF employees did just that and none of them were charged at all. The CEO didn't do it, the "deck level" employees did and they got away with it unfortunately. They committed the crime, they should be held accountable.

The company fostered an environment where such a thing ended up happening. As such, I have no problem with fines being levied to discourage such an environment at companies in the future, even if it hurts the shareholder's some. That's the price of investing in a company which allows its employees to commit criminal acts.

Why punish the little guy and spare the higher ups? Do we think that all the little guys came up with this idea of their own accord and all just happened to do the same thing? There had to have been illegal pressure (which was documented) from high level management for an employee to have felt it was necessary to do it to keep or advance in their job. If anything the employees should sue for having had a hostile work environment.

Remember, you and me and the rest of this forum are the little guy. Unless you are on the board of a billion dollar business, encouraging punishment of only the most down stream employees just creates a historical environment where retribution is more likely to occur against you someday.

I'm 95% certain that the government has evidence that "little guys" violated 18 USC 1005.  I have no such certainty that they could prove that the CEO etc did so. I'm not aware of any laws making it a crime to "pressure" people into signing up more people for accounts, or for "fostering an environment where people might commit criminal acts". If you can point out such laws I'd be interested in reading about them, but until someone shows me what law was actually broken (and could be proven to have been broken) by an individual in upper management, I'll support fining the business (using the laws that say that's appropriate) and prosecuting the people we do have evidence of laws being broken.

Also, as a reminder, neither you nor I know who the other people on this forum are. For all you know, I could be upper management for BoA (I'm not, but you have no way of knowing that). Either way, I believe that people who commit crimes should be charged as such. I don't believe in retroactively trying to punish people for things that weren't crimes just because "they did a bad thing".

[dogboyslim]

IMO, the company didn't commit fraud, a number of its employees did. I'm all for charging them for the crimes they committed. If I go and open bank accounts, credit cards, etc with other people's names I'd go to jail. Tons of WF employees did just that and none of them were charged at all. The CEO didn't do it, the "deck level" employees did and they got away with it unfortunately. They committed the crime, they should be held accountable.

The company fostered an environment where such a thing ended up happening. As such, I have no problem with fines being levied to discourage such an environment at companies in the future, even if it hurts the shareholder's some. That's the price of investing in a company which allows its employees to commit criminal acts.

As an executive in my company, this philosophy doesn't fly with me.  I'm responsible for what those in my control are doing.  I have controls in place to make sure they are complying with laws and standards of practice.  When I see increases in productivity I look into it to identify if it is a repeatable process.  If they are doing something wrong, it gets corrected right then.  This was too widespread to be the idea of a few low level employees.  That many employees in that diverse a geography don't just all start doing the same thing without direction from above.  Yes, those employees did something wrong, but they probably felt it had been cleared by compliance, and they probably felt they would be fired if they didn't go along with it.

No, the executives need to pay in these situations.  Its why we get paid what we do in the first place.

[jlcnuke]

IMO, the company didn't commit fraud, a number of its employees did. I'm all for charging them for the crimes they committed. If I go and open bank accounts, credit cards, etc with other people's names I'd go to jail. Tons of WF employees did just that and none of them were charged at all. The CEO didn't do it, the "deck level" employees did and they got away with it unfortunately. They committed the crime, they should be held accountable.

The company fostered an environment where such a thing ended up happening. As such, I have no problem with fines being levied to discourage such an environment at companies in the future, even if it hurts the shareholder's some. That's the price of investing in a company which allows its employees to commit criminal acts.

As an executive in my company, this philosophy doesn't fly with me.  I'm responsible for what those in my control are doing.  I have controls in place to make sure they are complying with laws and standards of practice.  When I see increases in productivity I look into it to identify if it is a repeatable process.  If they are doing something wrong, it gets corrected right then.  This was too widespread to be the idea of a few low level employees.  That many employees in that diverse a geography don't just all start doing the same thing without direction from above.  Yes, those employees did something wrong, but they probably felt it had been cleared by compliance, and they probably felt they would be fired if they didn't go along with it.

No, the executives need to pay in these situations.  Its why we get paid what we do in the first place.

There's a difference between being responsible and accountable for the actions of those who are under you and breaking a law. I've yet to hear anyone explain what criminal statute they believe that upper management at BoA broke at the time.  The "need to pay" sounds great, but that's not how a lawful society works.  Just because something is bad, or immoral, or "just not right", doesn't make it a crime. The people who falsified bank records using other peoples information illegal, to their personal gain (keeping jobs by meeting targets etc etc), broke a criminal statute.  People who "fostered an environment where their employees might break a law" didn't necessarily break a law (I've yet to hear of a statute criminalizing that anyway).

[dogboyslim]

I'm 95% certain that the government has evidence that "little guys" violated 18 USC 1005.

If you want to go crazy, 18 USC 1005 requires they act without the authority of the directors/branch of the bank.  As an employee instructed to do so, you could argue they are not guilty of this crime.

I'd be more interested in the argument around 18 USC 1028 a(2).  An ID is required to open an account, if the ID is provided illegally (and I'd say you could make the case that legally providing an ID to do one thing without authorizing another could be considered illegal use of the ID), then 1028 a(2) could apply.  If 1028 a(2) applies, then the management of the organization could be investigated as a potential violation of 18 USC 1962.

This also seems weak to me, but feels just as likely as 18 USC 1005, as 18 USC 1005 focuses more on protecting the bank.  It would be interesting to me to see an federal prosecutor head down this road though, and I guarantee that other executives would take note.

[diapasoun]

Individuals who broke the law should face criminal charges.

If higher ups can be shown to have pressured their employees to break the law, the company should be fined. Heavily. Imho, to at least 1.5x the tune of all profits (direct and e.g. estimated increase in market share) derived from illegal practices.

[sui generis]

I'm not a criminal lawyer, but wrt "higher ups" I'd throw "conspiracy to" commit all the crimes that were actually (or attempted to be) committed against the wall.  That's exactly what conspiracy charges are meant to do, hold accountable people that helped create the crime, but didn't actually do the steps of it.  I believe that "setting up the environment" and then employees following those "directions" or culture could be found to be the requisite "agreement" for conspiracy charges.  There's not a need for two people to actually sit together and plot something and shake hands over it.

[jlcnuke]

I'm not a criminal lawyer, but wrt "higher ups" I'd throw "conspiracy to" commit all the crimes that were actually (or attempted to be) committed against the wall.  That's exactly what conspiracy charges are meant to do, hold accountable people that helped create the crime, but didn't actually do the steps of it.  I believe that "setting up the environment" and then employees following those "directions" or culture could be found to be the requisite "agreement" for conspiracy charges.  There's not a need for two people to actually sit together and plot something and shake hands over it.

Knowledge and intent is required for conspiracy charges. To prove conspiracy, a prosecutor would have to prove that there was an agreement made between those committing the crimes and those being charged with conspiracy and that the agreement was such that any reasonable person would understand that a crime would be committed.

You hire me to "make your backyard look good" and I demolish your neighbors house to give you a better view wouldn't pass that test for instance. "The bosses set unreasonable expectations, who passed those on to their subordinates, who passed it on to the bank managers, who passed it on to other people etc" is similarly unlikely to pass such a test imo.

[Missy B]

IMO, the company didn't commit fraud, a number of its employees did. I'm all for charging them for the crimes they committed. If I go and open bank accounts, credit cards, etc with other people's names I'd go to jail. Tons of WF employees did just that and none of them were charged at all. The CEO didn't do it, the "deck level" employees did and they got away with it unfortunately. They committed the crime, they should be held accountable.

The company fostered an environment where such a thing ended up happening. As such, I have no problem with fines being levied to discourage such an environment at companies in the future, even if it hurts the shareholder's some. That's the price of investing in a company which allows its employees to commit criminal acts.

As an executive in my company, this philosophy doesn't fly with me.  I'm responsible for what those in my control are doing.  I have controls in place to make sure they are complying with laws and standards of practice.  When I see increases in productivity I look into it to identify if it is a repeatable process.  If they are doing something wrong, it gets corrected right then.  This was too widespread to be the idea of a few low level employees.  That many employees in that diverse a geography don't just all start doing the same thing without direction from above.  Yes, those employees did something wrong, but they probably felt it had been cleared by compliance, and they probably felt they would be fired if they didn't go along with it.

No, the executives need to pay in these situations.  Its why we get paid what we do in the first place.

Thank you for saying so.  Would that there had been your level of integrity, compliance and follow up with the large financial institutions before and after the 2007 meltdown.

[sui generis]

I'm not a criminal lawyer, but wrt "higher ups" I'd throw "conspiracy to" commit all the crimes that were actually (or attempted to be) committed against the wall.  That's exactly what conspiracy charges are meant to do, hold accountable people that helped create the crime, but didn't actually do the steps of it.  I believe that "setting up the environment" and then employees following those "directions" or culture could be found to be the requisite "agreement" for conspiracy charges.  There's not a need for two people to actually sit together and plot something and shake hands over it.

Knowledge and intent is required for conspiracy charges. To prove conspiracy, a prosecutor would have to prove that there was an agreement made between those committing the crimes and those being charged with conspiracy and that the agreement was such that any reasonable person would understand that a crime would be committed.

You hire me to "make your backyard look good" and I demolish your neighbors house to give you a better view wouldn't pass that test for instance. "The bosses set unreasonable expectations, who passed those on to their subordinates, who passed it on to the bank managers, who passed it on to other people etc" is similarly unlikely to pass such a test imo.

I agree it would be pretty hard to prove and in fact may not have existed.  More likely that the executives were reckless as to the achievement of a lawful ends through an unlawful means, which is not specific intent (purpose or knowledge), although there was (I think we can safely say) specific intent as to the agreement.

But I agree with others on this thread that we need to search harder (or create new legislation) that does hold executives legally liable for this sort of thing.  The market certainly isn't doing it, as many of these executives remain employed or get golden parachutes in the hundreds of millions of dollars.  Clearly perverse incentives exist, and combatting perverse incentives is where laws should come into play.

[patchyfacialhair]

I'd consider a "fair" fine to be equal to the entire business unit's profits for the period of time that the crime was occurring.

If I sell hot dogs made of actual dog meat (and some regular beef hot dogs), and tell my customers that all my sausages are made of beef, then I'm doing something wrong.

If I make 100k profit (rev-expenses) per year for 5 years (or whatever the statute of limitations is), then I should be fined $500k for my hot dog fraud. Even if only half of my hot dogs sold are actual dog meat, I should still be punished to the extent of all the money made from that business unit. If I also provide tarot card reading at my hot dog stand, the profits from that business unit shouldn't be impacted by my hot dog fraud.

If punishments were this severe, companies would face actual repercussions from their wrongdoings, and there would be more of a focus on doing the right thing from the get go. At this point, fines for companies as big as Wells are just a cost of doing business.

[fuzzy math]

IMO, the company didn't commit fraud, a number of its employees did. I'm all for charging them for the crimes they committed. If I go and open bank accounts, credit cards, etc with other people's names I'd go to jail. Tons of WF employees did just that and none of them were charged at all. The CEO didn't do it, the "deck level" employees did and they got away with it unfortunately. They committed the crime, they should be held accountable.

The company fostered an environment where such a thing ended up happening. As such, I have no problem with fines being levied to discourage such an environment at companies in the future, even if it hurts the shareholder's some. That's the price of investing in a company which allows its employees to commit criminal acts.

Why punish the little guy and spare the higher ups? Do we think that all the little guys came up with this idea of their own accord and all just happened to do the same thing? There had to have been illegal pressure (which was documented) from high level management for an employee to have felt it was necessary to do it to keep or advance in their job. If anything the employees should sue for having had a hostile work environment.

Remember, you and me and the rest of this forum are the little guy. Unless you are on the board of a billion dollar business, encouraging punishment of only the most down stream employees just creates a historical environment where retribution is more likely to occur against you someday.

I'm 95% certain that the government has evidence that "little guys" violated 18 USC 1005.  I have no such certainty that they could prove that the CEO etc did so. I'm not aware of any laws making it a crime to "pressure" people into signing up more people for accounts, or for "fostering an environment where people might commit criminal acts". If you can point out such laws I'd be interested in reading about them, but until someone shows me what law was actually broken (and could be proven to have been broken) by an individual in upper management, I'll support fining the business (using the laws that say that's appropriate) and prosecuting the people we do have evidence of laws being broken.

Also, as a reminder, neither you nor I know who the other people on this forum are. For all you know, I could be upper management for BoA (I'm not, but you have no way of knowing that). Either way, I believe that people who commit crimes should be charged as such. I don't believe in retroactively trying to punish people for things that weren't crimes just because "they did a bad thing".

I would find it highly suspect for you to be a board member (I didn't say upper management) of any bank and be advocating for fines for yourself and jail time for your employees. I'm confused as to why you felt the need to patronize me when you admit you don't have that status. My comments would stand regardless of who reads this forum, I don't feel the need to censor myself just because a rich crook might read it.

I second the comment above about conspiracy. While I also am not in the law industry, it seems that enough employees of WF were all saying the same thing. Take their testimony as evidence of the next level of management's complicit behavior, interrogate them until they give up their managers and keep going up levels until you find someone with enough power to prosecute that the powerful people quit this shit.

[scottish]

I think this type of activity is a form of organized crime and should be treated as such.

[effigy98]

So they get a fine for less than a month of revenue...

So can I forge documents, commit fraud, steal cars, houses and only get a months salary fine? Sounds like a great deal to me!! A single night I will have the fine paid off (if I get one) and then I can use the remaining days that month for profit.

1 billion sounds like a lot, and that is what they were going for to show the govenerment is tough, but when you compare it to their earnings, it really is insignificant.

I guess Warren (I own government) Buffet got his way and let them take it easy on Wells Fargo so he can keep investing into single stocks and monopolies that get tax payer bailed out at the first sign of trouble.

[Greystache]

If you are interested to learn why the justice dept. and FBI seem to favor fines instead of criminal prosecution for executives, there is an excellent book on the subject, Chickenshit Club, by Jesse Eisinger. Basically, criminal prosecutions consume a lot of resources and time and there is a risk that you wont get a conviction. Much easier to get the executives to fork over a bunch of shareholder money to make the problem go away. The Justice dept. can say we made the crooks pay and everyone is happy...except the shareholders.
As an example, it took the Justice dept and FBI about four years and a ton of manpower to prosecute and convict the Enron executives in the early 2000's.

[EngineeringFI]

I don't know if I'm more frustrated by the U.S. government's lack of action on this matter, or the general public's. To clarify, it seems to me that so many people are happy to shake their fist at their TV screen about the evil big banks, but at the same time have a megabank credit card, checking account, and mortgage. All of those credit card transactions, potential overdraft fees, and mortgage interest dollars are little "yes votes" for them to continue doing business in the manner that they have been.

[Cressida]

I won't pretend to have given this lots of thought, but my first reaction is: Anyone who owns enough stock in a bad actor to be significantly affected by a financial judgment against that actor (1) probably already made a bunch of money from their bad action, and/or (2) possibly even had enough control over the actor's operations to have stopped the malfeasance if they'd wanted to. So yeah, I'm with you in disagreeing with this thesis.

[diapasoun]

If you are interested to learn why the justice dept. and FBI seem to favor fines instead of criminal prosecution for executives, there is an excellent book on the subject, Chickenshit Club, by Jesse Eisinger. Basically, criminal prosecutions consume a lot of resources and time and there is a risk that you wont get a conviction. Much easier to get the executives to fork over a bunch of shareholder money to make the problem go away. The Justice dept. can say we made the crooks pay and everyone is happy...except the shareholders.
As an example, it took the Justice dept and FBI about four years and a ton of manpower to prosecute and convict the Enron executives in the early 2000's.

I should note that the level of fraud perpetrated in the Enron case is pretty insane, too. If you read the documents produced, it's just incredible -- I read case documents for a living and that stuff was truly ridiculous. But you need that level of ridiculous to convict, and you're probably not gonna get it in most white collar crimes.

[EricL]

I don't know if I'm more frustrated by the U.S. government's lack of action on this matter, or the general public's. To clarify, it seems to me that so many people are happy to shake their fist at their TV screen about the evil big banks, but at the same time have a megabank credit card, checking account, and mortgage. All of those credit card transactions, potential overdraft fees, and mortgage interest dollars are little "yes votes" for them to continue doing business in the manner that they have been.

For convenience I set up an account at Bank of the West for a few months.  Not long after I looked it up on the web.  It's a subsidiary of BNP Parabas, a French bank with assets over €1.994 trillion.  (Not a typo.  It's €1,994,000,000,000)  It's pretty damn sleazy with almost 1/3 of its wiki article dedicated to assorted scandals. 

I withdrew my money that same day.