Additional Wells misdeeds obscured by arbitration: Calif. official

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Revelations of fraud and customer harm at Wells Fargo have been emerging for two years, and a California state official predicts more problems will surface.

"I am convinced that we will continue to see new controversies and allegations of misdeeds tumble out, month after month," the state's treasurer, John Chiang, said this week.

Governmental authorities in California have played a leading role in cracking down on Wells' fake-accounts scandal, which came to light in September 2016.

New problems are likely, "at least in part because the bank is able to keep its patterns of customer abuse hidden from public view through forced arbitration," Chiang said at a press conference held to highlight the dangers of resolving customer disputes through private arbitration, as opposed to the public courts.

Wells did not respond directly to Chiang's comments about its use of forced arbitration, but it provided the following statement: "Our No. 1 priority is to make things right for our customers. We have taken significant steps to make sure that each customer affected by unacceptable retail sales practices has every opportunity for remediation. As part of our work to transform Wells Fargo, we are committed to closely examining every part of our company, fixing the issues we find, and making things right for all of our stakeholders."

In addition to opening some 3.5 million fraudulent accounts under its customers’ names, more recently Wells has admitted to causing hundreds of people to lose their homes to foreclosure and causing members of the military to lose their cars to repossession. Because of "widespread consumer abuses," the Federal Reserve Bank capped the bank's size at $1.95 trillion in assets this year, and various federal agencies have been investigating its wealth management unit for possible abuse of clients.

Wells and many other large banks compel their customers and advisors to submit to private arbitration to resolve conflicts.

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Chiang and investor advocacy groups are raising concerns about a related issue. The Securities and Exchange Commission is considering whether to allow companies to force shareholders in initial public offerings into arbitration to settle disputes with those companies about misrepresentations or outright fraud that overstate the value of shares being sold. Participants in the press conference held Tuesday included the American Legion veterans group and the Consumer Federation of America and Public Justice activist groups.

Together, they presented a white paper to the SEC this week urging the commission to continue its decades-old practice of forbidding companies from forcing their IPO shareholders into arbitration.

To illustrate the dangers arbitration poses, Chiang used Wells Fargo as a case study, citing the bank's use of arbitration as one reason it has been able to hide so many problems for so long.

"Corporate and financial misconduct should not be forced into a closed-door and out-of-public view process," Chiang said. "We see how well that worked in allowing the deep structural problems that now plague Wells Fargo, a once proud homegrown California institution."

While Wells "can gag and bind their customers and stop them from going to court, all while keeping the public in the dark," he added, "the problems continue to fester and remain unaddressed."

If the SEC allows forced arbitration to keep IPO shareholders from filing class actions, global confidence in the U.S. securities markets could take a hit, investor advocates say.

"Through their deterrent effect, private lawsuits contribute to our markets’ reputation for transparency and integrity," Barbara Roper of the Consumer Federation said. "Foreign companies choose to list here as a result, precisely because U.S. markets are perceived to be the best-policed in the world."

Regulatory bodies alone cannot recover sufficient losses to compensate for shareholders in the case of many frauds, Roper said, using the example of the 2001 fraud by the energy company Enron that roiled U.S. markets.

"Enron investors got $7.2 billion through a private lawsuit," Roper said, "and $440 million from the SEC." Their total losses, she added, were measured in the tens of billions.

To look at a more current example, a shareholder class action mounted by U.S. investors against Petrobras, Brazil's state-controlled oil concern, led to a $2.95 billion settlement in January, Roper said.

By contrast, she added, other "foreign investors [in Petrobras] recovered nothing because they were covered by a mandatory arbitration clause."

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Fraud detection Arbitration Enforcement SEC enforcement Compliance Risk management State regulators Wells Fargo Wells Fargo Advisors SEC