United States District Court, N.D. California
ORDER GRANTING IN PART AND DENYING IN PART MOTION TO
DISMISS RE: ECF NO. 99
TIGAR United States District Judge.
the Court is nominal Defendant Wells Fargo &
Company's (“Wells Fargo”) motion to dismiss
the Consolidated Amended Verified Amended Stockholder
Derivative Complaint (“the Complaint”) pursuant
to Rules 12(b)(6) and 23.1 for failure to adequately plead
demand futility.The Court will grant the motion as to
Plaintiff's claim under California Corporations Code
section 25403, and deny it in all other respects.
a shareholder derivative action on behalf of nominal party
Wells Fargo against the company's officers and directors.
Compl. ECF No. 83 at 6, ¶ 64. Plaintiffs allege that,
“[f]rom at least January 1, 2011 to the present
(‘the Relevant Period'), Defendants knew or
consciously disregarded that Wells Fargo employees were
illicitly creating millions of deposit and credit card
accounts for their customers, without those customers'
knowledge or consent.” Id. ¶ 1.
Fargo is a financial and bank holding company that provides
retail, commercial, and corporate banking services.
Id. ¶ 66. The company is incorporated in
Delaware and headquartered in San Francisco, California.
Id. Wells Fargo's largest reportable operating
segment during the relevant period, the Community
Banking division, “focuses on diversified financial
products and services to customers and small businesses,
including checking and savings accounts, credit and debit
cards, as well as auto, student, and small-business
lending.” Id. ¶ 69.
Lead Plaintiffs are Fire and Police Pension Association of
Colorado and the City of Birmingham Retirement and Relief
System. Id. ¶¶ 61, 63. Plaintiffs have
owned Wells Fargo common stock since at least January 1, 2011
and remain current stockholders of the company. Id.
¶ 1, 65.
Individual Defendants were officers and directors of the
company during the relevant period. Defendant John G. Stumpf
served as Wells Fargo's CEO from June 2007 until his
resignation on October 12, 2016. Id. ¶ 70. He
was also a director between June 2006 and January 2010, when
he became Chairman of the Board. Id. Following
Stumpf's resignation in October 2016, Defendant Timothy
J. Sloan became Wells Fargo's CEO. Id. ¶
71. Defendant Carrie Tolstedt served as Senior Executive Vice
President of the Community Banking division from June 2007 to
July 2016. Id. ¶ 72. The Director Defendants
during the relevant time period include: John D. Baker II
(director since January 2010); Elaine L. Chao (director from
July 2011 to January 2017); John S. Chen (director since
September 2006); Lloyd H. Dean (director since June 2005);
Elizabeth A. Duke (director since January 2015); Susan E.
Engel (director since May 1998); Enrique Hernandez (director
since January 2003); Donald M. James (director since January
2009); Cynthia H. Milligan (director since July 1992);
Enrique Peña (director since November 2011); James H.
Quigley (director since October 2013); Judith M. Runstad
(director from May 1998 to April 2016); Stephen W. Sanger
(director since 2003); Susan G. Swenson (director since
November 1998); Suzanne M. Vautrinot (director since February
2015). ¶¶ 76-91.
the relevant period, Wells Fargo's financial condition
and prospects were dependent upon cross-selling ‒ i.e.,
the sale of new products and services to existing customers.
Id. ¶ 3.
explained in Wells Fargo's 2006 Annual Report,
“‘[s]elling more products to [its] customers
‒ or “cross-selling” ‒ is the
foundation of [its] business model and key to [its] ability
to grow revenue and earnings.'” Id. ¶
126. The 2007 Annual Report further explained that “the
Bank's ‘primary strategy to achieve [its]
vision' was ‘to increase the number of products our
customers buy from us and to give them all of the financial
products that fulfill their needs.'” Id.
¶ 127 (brackets added). The same 2007 Report went on to
explain that the “cross-sell strategy and diversified
business model . . . ‘facilitate growth in strong and
weak economic cycles, as we can grow by expanding the number
of product out current customers have with us.'”
Id. That Report further noted that “Wells
Fargo was ‘known across [its] industry as number one,
second to none, for cross-sell and revenue
growth.'” Id. (emphasis omitted). The 2010
Annual Report similarly touted Wells Fargo as “the king
of cross-sell.” Id. ¶ 130. Likewise, the
2013 Annual Report stated that “cross-sell of our
products is an important part of our strategy to achieve our
vision to satisfy all our customers' financial needs . .
. . We believe there is more opportunity for cross-sell as we
continue to earn more business from our customers.”
Id. ¶ 134 (emphasis omitted). Wells Fargo's
2013 SEC filings explained that cross-selling was critical to
the company's financial success:
Our “cross-selling” efforts to increase the
number of products our customers buy from us … is a
key part of our growth strategy, and our failure to execute
this strategy effectively could have a material adverse
effect on our revenue growth and financial results. Selling
more products to our customers ‒
“cross-selling” ‒ is very important to our
business model and key to our ability to grow revenue and
earnings… Id. ¶ 135.
company tracked and reported yearly cross-sell numbers, and
this “was often the first metric announced in the
Annual Reports to shareholders.” Id. ¶
numbers progressively grew between 1998, “when the
products per retail banking household was 3.2, ” and
2010, when that number reached an average of 6.14 products
per household. Id. ¶ 142. That number reached
its zenith in 2014, at 6.17 products per household.
Id. ¶ 144.
achieve their cross-selling goals, “Defendants imposed
strict quotas regulating the number of products Wells Fargo
bankers must sell.” Id. ¶ 2.
early as 1999, the bank established the “Great
Eight” or “Gr-Eight” initiative, which set
a goal of selling eight products per household. Id.
number of accounts Wells Fargo employees opened were also
closely tracked. Several former Wells Fargo employees have
recounted they were required to open 15 new accounts for
products each day.” Id. ¶ 146. Daily
sales for each branch were reported to the district manager
four times a day. Id. And “[e]mployees who
were unable to meet their sales goals faced the prospect of
allege “[t]hose quotas translated into unrelenting
pressure on bankers to open numerous accounts per
customer.” Id. ¶ 2. “And because
Wells Fargo's success in cross-selling was central to its
financial results and market participants' assessment of
the Company, Defendants were also highly motivated to foster,
and perpetuate, those unlawful practices.” Id.
Letter to Stumpf and the Audit and Examination Committee in
September 2007, Stumpf and the Board's Audit and
Examination Committee received letters from an employee
discussing how the Gr-Eight Initiative created a high
pressure sales culture that resulted in unethical and illegal
activity, including fraud. Id. ¶¶ 22, 484.
The letter warned that, “[l]eft unchecked, the
inevitable outcome shall be one of professional and
reputational damage, consumer fraud and shareholder lawsuits,
coupled with regulator sanctions. Id.
Fargo began tracking employee complaints regarding unethical
sales practices through EthicsLine ‒ a service through
which employees can report ethics and compliance concerns to
Wells Fargo via a third party ‒ in 2008. Id.
¶¶ 23, 159. Through this system, employees could
report “gaming” ‒ defined as “the
manipulation and/or misrepresentation of product solutions or
product solutions reporting in order to receive or attempt to
receive compensation, or to meet or attempt to meet
goals” and “sales incentives.” Id.
¶¶ 23, 158. After an employee reported an ethics or
compliance concern through EthicsLine, the information was
provided to Wells Fargo's Office of Global Ethics.
Id. ¶ 151.
later confirmed in his written responses to questions posed
by the Senate Banking Committee that “from at least
2011 forward, the Board's Audit and Examination Committee
received period reports on activities of Wells Fargo's
Internal Investigations group (which investigates issues
involving team members), as well as information on EthicsLine
and suspicious activity reporting. Among other things,
several of those reports discussed increases in sales
integrity issues or in notifications to law enforcement in
part relating to the uptick in sales integrity issues.”
Id. ¶ 155.
Litigation between 2008 and 2013
2008 and 2013, several lawsuits against the company involved
allegations of unauthorized account-creation practices.
Id. ¶¶ 24-26, 33, 35, 212˗219, 501.
a former Wells Fargo employee won a whistleblower lawsuit
against the company relating to the creation of fake
brokerage accounts in 2008. Id. ¶ 24. “In
the case, a division of the U.S. Department of Labor
(“DOL”) found there was ‘reasonable cause
to believe' Wells Fargo violated whistleblower protection
laws by transferring the employee after he flagged illegal
2009, six former employees brought wrongful termination suits
in which they alleged that they were fired for reordering
debit cards without customer authorization after they had
been instructed to do so by their manager. Id.
¶ 25, 213.
2010, two former Wells Fargo employees filed a discrimination
lawsuit in which they pointed to unethical sales activities
and unauthorized account openings at the Company.
Id. ¶¶ 26, 214.
2012, seven former Wells Fargo employees filed a complaint
asserting similar allegations. Id. ¶¶ 33,
2013, another former employee filed a lawsuit “alleging
she was retaliated against and wrongfully terminated after
her supervisor forced her to open accounts in the names of
family members.” Id. ¶¶ 35, 218.
Communications to Stumpf and Human Resources Executives in
2011, two branch managers ‒ one in New Jersey and one
in Arizona ‒ emailed Stumpf warning him that employees
were creating fake accounts to meet the company's sales
quotas. Id. ¶ 28. One of those branch managers,
Rasheeda Kamar, stated in her email that she was fired after
failing to meet sales quotas because she did not tolerate the
creation of fake accounts. Id. ¶ 200. The other
branch manager, Ricky Hansen, reported the fraudulent
accounts to Human Resources and EthicsLine. Id.
¶ 201-02. He was fired a month later for improperly
looking up the fraudulent account information, which he did
at EthicsLine's request. Id.
Los Angeles Times Article in December 2013
December 21, 2013, the Los Angeles Times published
an article reporting that, “[t]o meet quotas, [Wells
Fargo] employees have opened unneeded accounts for customers,
ordered credit cards without customers' permission and
forged client signatures on paperwork.” Id.
¶ 37. The article further noted “[t]he relentless
pressure to sell [that] has battered employee morale and led
to ethical breaches.” Id. The article's
conclusions were based on “a review of internal bank
documents and court records, and from interviews with 28
former and seven current Wells Fargo employees who worked at
bank branches in nine states, including California.”
later admitted during his testimony before the Senate Banking
Committee in September 2016 that he discussed the December
2013 Los Angeles Times article with the Board.
Id. ¶ 40.
Communication to Stumpf and the Board in April 2015
April 3, 2015, a former Wells Fargo banker mailed and emailed
a letter to Stumpf and the Board advising them of
‘unethical practices in sales due to the continuous
management threat of negative consequences if they did not
produce ‘solutions' in double digits on daily
basis, the threat has come to ‘do whatever it takes to
get this [sic] numbers.'” Id. ¶¶
44, 205. “During the next several months, the former
employee repeatedly emailed Wells Fargo representatives,
copying the Board, asking for updates.” Id.
¶ 44, 207.
Litigation in May 2015
December 2013 Los Angeles Times article prompted a
year-long investigation into the illicit account-creation
practices by L.A. City Attorney Michael Feuer, which led to
the filing on May 4, 2015 of a civil enforcement action on
behalf of California consumers. Id. ¶ 42. In
that complaint, the L.A. City Attorney alleged “that .
. . Wells Fargo employees opened banking and financial
accounts, products, and services for California customers
without their knowledge or consent . . .” Id.
¶¶ 499, 172˗78, 42.
14, 2015, a consumer class action challenging the illicit
account-creation scheme was filed against Wells Fargo in this
district. Id. ¶¶ 45, 179-82, 500.
OCC Supervisory Letters between 2014 and 2016
Office of the Comptroller of the Currency (“OCC”)
began supervising Wells Fargo's governance and risk
management practices in January 2012. Id. ¶ 31.
2014, “[t]he OCC specifically identified the need to
assess cross-selling and sales practices as part of its
upcoming examination of the Bank's governance
processes.” Id. ¶ 222.
2015, the OCC issued several Supervisory Letters
“regarding required corrective action in the Bank's
enterprise-wide risk management and oversight of its sales
practices, ” among other issues. Id. ¶
485, 220-238, 46. For example, the OCC issued a Supervisory
Letter in June 2015 highlighting the following “MRAs,
” or “Matters Requiring Attention”:
“the lack of an appropriate control or oversight
structure given corporate emphasis on product sales and
cross-selling, ” “the lack of an enterprise-wide
sales practices oversight program, ” “the lack of
a formalized governance process to oversee sales practices
and effectively oversee and test branch sales practices,
” and “the failure of the Bank's audit
services to identify the above issues or to aggregate sales
practice issues into an enterprise view.” Id.
September 8, 2016, the L.A. City Attorney, U.S. Consumer
Financial Protection Bureau (CFPB) and the OCC issued
separate consent orders and press releases disclosing
widespread deficiencies and unsafe or unsound practices in
Wells Fargo's risk management and oversight of its sales
practices. Id. ¶ 9.
CFPB's consent order stated “that from January 1,
2011 to September 8, 2016 thousands of Wells Fargo employees
engaged in improper sales practices ‘to satisfy sales
goals and earn financial rewards under [the Company's]
incentive-compensation program, ' leading the Company to
terminate approximately 5, 300 employees for engaging in
those practices.” Id. ¶ 10 (quoting Wells
Fargo Bank, N.A., 2016-CFPB-0015 (Consumer Financial
Protection Bureau Sept. 8, 2016)). “In all, the CFPB
found that the Bank ‘opened hundreds of thousands of
unauthorized deposit accounts and applied for tens of
thousands of credit cards for consumers' without their
knowledge or consent.” Id.