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Wells Fargo Gets Judge's Nod for $480M Sales Scam Settlement

Zacks Equity Research

Wells Fargo & Company WFC has finally attained the customary final court approval for settlement of the fake accounts scandal related to class action lawsuit that was filed against the company by its shareholders in September 2016.

The settlement amount of $480 million was approved by both the parties in May 2018. Also, shareholders who bought Wells Fargo’s common stock in the period between Feb 26, 2014 and Sep 20, 2016 will be eligible to claim the refund. Notably, the San Francisco-based bank had fully reserved the amount, as of Mar 31, 2018.

A Brief Background

The class action lawsuit relates to the revelation of a sales scam, wherein the bank’s employees allegedly opened millions of unauthorized accounts illegally, in order to meet aggressive internal sales goals.

The news broke out in September 2016, post which the company was subjected to investigations of several departments and businesses. As a result, a cap on the company’s asset growth has been imposed by the authorities, which will remain in place until the bank is able to give a reasonably assurance to stay out of trouble. The revelation also led to several layoffs and restructuring of operations.

Wells Fargo has also paid a combined penalty of $190 million to the Consumer Financial Protection Bureau, the Office of Comptroller of the Currency, and the City and County of Los Angeles on the matter. In addition, the amount included $5 million in customer remediation.

In May 2018, the District Court for the Northern District of California had approved a $142-million settlement related to the lawsuit filed by the customers wronged by Wells Fargo.

Per the above-discussed class action lawsuit, the investors’ claims included misappropriation of facts by Wells Fargo related to its cross-selling strategy, which was not used for the benefit of customers.

However, the bank tried to "designed to fulfill sales quotes or otherwise advance the interests of Wells Fargo or its employees and increase sources of profitability while simultaneously burdening customers with financial products they did not authorize, need and/or even know about," the suit claimed.

Therefore, this led the company’s shares to trade at "artificially inflated prices," per the suit.

Notably, Union Investment — a European asset-management firm — was the lead plaintiff in the case, appointed by the court.

Bottom Line

Though this settlement will help Wells Fargo move past a major hurdle in its growth, it will still be left with a long list of ongoing probes that continue to impact the bank’s reputation.

One of the goals in the company’s 2019 priority list is to enhance compliance and operational risk management systems, along with timely remediation practices. Also, Wells Fargo is spending more on technology so as to ensure better data management and cybersecurity. These activities, along with close supervision of regulatory authorities, might help Wells Fargo move past the scandals and make way for growth.

Shares of Wells Fargo have lost 16% over the past six months compared with 15.4% decline recorded by the industry it belongs to.

 

Wells Fargo currently carries a Zacks Rank #4 (Sell).

Stocks to Consider

1st Constitution Bancorp FCCY has witnessed 8.9% upward estimate revision over the past 60 days. Also, the company’s shares have risen nearly 10% in the past two years. It sports a Zacks Rank #1 (Strong Buy) at present. You can see the complete list of today’s Zacks #1 Rank stocks here.

Old Second Bancorp, Inc. OSBC has witnessed 2.6% upward estimate revision for current-year earnings over the past 60 days. Also, the company’s shares have risen nearly 15% in the past two years. It carries a Zacks Rank #2 (Buy) at present.

Citizens Financial Services Inc.’s CZFS Zacks Consensus Estimate for current-year earnings has remained stable over the past 60 days. Also, the company’s shares have risen nearly 23% in the past two years. It currently carries a Zacks Rank of 2.

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