SAN FRANCISCO (Reuters) - California State Treasurer John Chiang on Wednesday announced a sweeping suspension of business relationships with Wells Fargo & Co as punishment for the company’s defrauding of customers.
In addition, Chiang vowed to work with the state’s two giant public pension funds to change the management structure at the bank, which is California’s oldest financial institution.
The sanctions, which will last for 12 months, include suspending Wells Fargo as a managing underwriter on state negotiated bond sales. California is the nation’s largest issuer of municipal debt.
“We want to make sure that Wells Fargo understands its errors, and we want to make sure there is meaningful change,”
Chiang told reporters, adding that the bank would not be happy with the State’s actions.
“We hit them with the three most highly profitable lines of business,” Chiang said.
Wells Fargo responded that company understood “the concerns that have been raised,” and promised to “address these issues and rebuild the state’s trust.” The company’s stock rose 0.48 percent to close at $45.31.
Wells Fargo on Sept. 8 agreed to pay $190 million to settle a case by California prosecutors and federal regulators over what were potentially more than 2 million unauthorized credit card and deposit accounts opened by branch employees scrambling to meet sales quotas. The bank said it fired 5,300 employees over the issue.
Chiang, who oversees nearly $2 trillion of California’s annual banking transactions and manages a $75-billion investment pool, called for the state to suspend Wells Fargo’s “most highly profitable business relationships with the state of California.”
On Tuesday, the day before the announcement of sanctions, California postponed two bond sales totaling nearly $740 million in order to replace Wells Fargo as the senior manager.
The sanctions also suspended state investments in all Wells Fargo securities and halted the use of Wells Fargo as a broker-dealer for investment purchasing.
“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 said in a letter to Wells Fargo’s chairman and chief executive, John Stumpf, and bank board members.
Chiang called Stumpf’s responses to a U.S. Senate Finance Committee inquiry “disheartening” and “callous.”
Chiang promised to work closely with the state’s two public pension funds, the California Public Employees’ Retirement System and the California State Teachers’ Retirement System, to among other things, advocate for the separation of the bank’s CEO and chairman roles and to appoint a consumer ombudsman.
Together, these funds hold more than $2.3 billion in Wells Fargo fixed income and equity instruments. Chiang called for the bank to develop a whistleblower protection program and to “claw back” some executive compensation.
Stumpf is already forfeiting unvested equity awards of $41 million and will not get a salary during a board investigation.
The bank will face tougher sanctions or permanent severance with the California’s Treasurer’s Office if it does not comply with the sanctions, Chiang said.
Reporting by Robin Respaut; Additional reporting by Dan Freed in New York; Editing by Nick Zieminski and Alan Crosby