BRK.A Berkshire Hathaway Inc

It was clear John Stumpf, chief executive of Wells Fargo & Co., was in trouble on Sept. 20, when senators from both parties castigated him over the bank's sales practices. "It's gutless leadership…you should be criminally investigated," said Sen. Elizabeth Warren (D., Mass.) "This is fraud," said Sen. Pat Toomey (R., Pa.).

The bank could have been better prepared. Summoned for hearings in Washington, Mr. Stumpf and other executives didn't answer many questions from legislators—in public or private—about sales practices that had led the bank to agree to a $185 million fine and regulatory enforcement action.

Jon Tester (D., Mont.), said he went into the Senate banking hearing on Wells Fargo with an open mind but was left "pissed off" that the CEO didn't answer some questions. The bank didn't try mollifying the senator likely to be Mr. Stumpf's most dangerous foe, Sen. Warren. "This is a crisis-management 101 mistake," said an aide to Sen. Warren.

Even before the hearings, Wells Fargo had been slow-footed in responding to outrage over employee behavior that included opening as many as 2 million unauthorized accounts without customer knowledge. It misjudged the significance of firing 5,300 employees over five years for related bad behavior, failing to tell its own board of the number before regulators made it public.

The botched response, a textbook example of how not to handle a crisis, reached a peak when Mr. Stumpf stepped down Wednesday after nearly 35 years at the bank and nine years as CEO. It was an ignominious end to a chief who had overseen Wells Fargo as it grew, at one point, to be the largest bank in the world by market value.

At the root of Wells Fargo's crisis-control debacle is an insular corporate culture, fostered by executives with decades of tenure, which left it ill-prepared for the tumult that followed its regulatory settlement, said several former Wells Fargo executives. Having passed through the financial crisis mostly unscathed, the bank's brass was largely untested by crisis, these executives said.

And while Wells Fargo has in recent years become the third-largest U.S. bank by assets behind J.P. Morgan Chase & Co. and Bank of America Corp., it tried to stay apart from the Wall Street crowd. That, and a San Francisco base, helped it operate largely outside the banking and political limelight.

"They have not projected a sense that how they treated their customers is an extremely important issue or that they understand why it is extremely important," said Richard Breeden, a former Securities and Exchange Commission chairman who has worked with other companies in crisis. "The recurring themes here seem to be complacency, arrogance or being disengaged."

Wells Fargo said Mr. Stumpf declined to comment. Wells Fargo spokeswoman Mary Eshet declined to comment on behalf of other executives for this article.

Ms. Eshet said: "Immediately following the settlement announcement we reached out to customers, team members, government officials, investors and media through various means and we continue to have active dialogue with all our stakeholders," adding that "we are focused on ensuring we have the culture, processes and controls to move the company forward and restore the trust of our customers and the public."

The bank's failures were especially surprising given the time it had to prepare. The Los Angeles Times detailed its questionable sales culture in 2013. Pressure to meet sales goals allegedly led employees to sign up customers for products they didn't ask for, including credit cards and bank accounts. In May 2015, the Los Angeles City Attorney's office, led by Michael Feuer, filed a lawsuit alleging it pressured employees to commit fraud. Although the bank denied bad behavior in court filings, it became apparent to executives there early this year that the legal action would result in either a trial or settlement, said people close to the bank.

Wells Fargo's problems escalated soon after the accord was announced Sept. 8 by the Office of the Comptroller of the Currency, the Consumer Financial Protection Bureau and Mr. Feuer's office. The bank didn't admit or deny wrongdoing in the settlement.

The CFPB, in settlement materials, disclosed the bank had fired 5,300 employees over a five-year period related to the alleged misdeeds. Wells Fargo responded that the number of affected employees only represented about 1% of branch employees in each of the five years. The bank wouldn't say how high up the corporate chain the firings went, making it seem that few, if any, high-level executives were affected.

'Scapegoating'

The firings became a lightning rod for outrage and gave rise to questions of accountability. "This was a systemic problem," Sen. Jeff Merkley (D., Ore.) told Mr. Stumpf during the Senate hearing, "and you are scapegoating the people at the very bottom."

The day of the settlement, Mr. Stumpf sent an internal message to employees, which the Journal reviewed, saying the bank takes action when it makes mistakes. The chief didn't say he was sorry. On Sept. 9, in a full-page ad in The Wall Street Journal and other newspapers, the bank said it took "full responsibility." The ad wasn't signed by any executive. Mr. Stumpf didn't make any public statement.

The silence persisted four days. On Sept. 13, the bank took its first stab at addressing the furor, disclosing it would end product-sales goals that many employees said drove bad behavior. Initially, those weren't to be phased out until January 2017. Later, the bank moved the date to October 2016.

Shortly after, Chief Financial Officer John Shrewsberry, at an investor conference, said the bank had invested $50 million to monitor banking activities in response to the problems, including increasing the number of people engaged in oversight and adding a mystery-shopper program with an external vendor that conducts more than 15,000 visits a year to check on sales practices.

As analysts questioned him, Mr. Shrewsberry implied the problem was over: "It was people trying to meet minimum goals to hang on to their job. That's my take. It's performance management."

Later that day, in his first interview since the scandal broke, with the Journal, Mr. Stumpf also focused on the dismissed employees. That evening, he did his only broadcast interview, with CNBC's Jim Cramer, in which he tiptoed around the question of his responsibility.

"To the extent that we don't get it right 100% of the time...if we don't make that plan, I'm responsible, I'm accountable," he said. "Anybody else in the company, we all feel when we fall short of that plan we feel accountable and responsible."

He continued to extol the bank's "cross-selling" efforts, a longstanding goal to sell as many as eight products to each customer household. Wells Fargo, Mr. Stumpf said, is "not abandoning cross sell; we love cross sell."

The next morning, on Sept. 14, he spoke by phone with Wells Fargo's biggest investor, Warren Buffett, whose Berkshire Hathaway Inc. owns about 10% of the bank. Mr. Buffett told Mr. Stumpf he didn't think the CNBC interview went well, Mr. Buffett told a CNBC reporter on Sept. 29, CNBC reported.

Mr. Buffett said he thought the problem was much bigger than Mr. Stumpf seemed to think it was, and public reaction to it should not be measured by the size of the fine, the channel said. Mr. Buffett's assistant, Debbie Bosanek, said the CNBC report was accurate and that Mr. Buffett wouldn't expand on it.

A few days later, the bank learned the Senate Banking Committee would call Mr. Stumpf, and it retained law firm Gibson, Dunn & Crutcher LLP for advice.

With a week to prepare, Mr. Stumpf met repeatedly with Gibson, Dunn partner Michael Bopp, who with his team prepped the CEO. The work focused on making sure Mr. Stumpf wouldn't "get rattled" by lawmakers and "inflame the situation any more than it is," said a person familiar with the discussions. The person said Mr. Stumpf and the lawyers felt limited in what the CEO could say given continuing investigations.

Outside communications strategists weren't included in all the sessions, sometimes known as "murder boarding." The overarching message was that the CEO wouldn't "win" and would likely be attacked from all angles, the person said.

The atmosphere grew heated, with the Journal reporting the Justice Department had opened an investigation. Timothy Sloan, the bank's chief operating officer, and Anita Eoloff, a Wells Fargo government-relations executive in Washington, headed to Capitol Hill. They met with staff representing Ohio Sen. Sherrod Brown, the banking committee's ranking Democrat, said people familiar with the meeting.

Unanswered questions

Mr. Sloan tried to respond to questions as Ms. Eoloff took notes on those he couldn't answer, said one of the people. When did Mr. Stumpf first learn of the sales-practices problems? Mr. Sloan said it was some time in late 2013, without offering specifics. What was the specific timeline of when and how the bank informed regulators of the problems? Again, Mr. Sloan didn't offer specifics.

That frustrated Sen. Brown's staff, the person said. They tried a simpler question: Who was the consultant that did the independent study for Wells Fargo that calculated that 5,300 people were fired? Mr. Sloan said he was "contractually barred" from answering.

On Sept. 16, the Journal reported it was PricewaterhouseCoopers. Three days later, Ms. Eoloff reported to Sen. Brown's staff that PwC was the contractor—one of the few follow-ups the office received, the person said. A PwC spokeswoman declined to comment.

When Mr. Stumpf finally appeared in the Dirksen Senate Office Building for the hearing, he, too, had few concrete answers. He repeatedly said decisions about pay for top executives— a new element in the crisis—were matters for the board, not him, to discuss. He maintained the sales problems didn't show a deeper cultural flaw or constitute "massive fraud."

Sen. Tester met days before the hearing with Mr. Sloan, the COO. He was surprised Wells Fargo "never got back to me with any answers" to questions from that meeting.

That day, Sen. Tester was willing to delay judgment until he heard Mr. Stumpf's side of the story. Then Mr. Stumpf waffled in the hearing. "It's been going on for five years, and he walks in in front of the Senate Banking Committee and he doesn't have any answers for this problem?" Sen. Tester said in an interview. "By the time the questioning got to me, I was pretty well pissed off."

One flashpoint involved a decision about two months before the settlement was announced. That's when Mr. Sloan met with Carrie Tolstedt, the former retail-banking head whose unit was responsible for the bad behavior. Mr. Stumpf and Mr. Sloan had decided the bank needed to make a leadership change to accelerate revamping that part of the business.

After the meeting, Ms. Tolstedt, a 27-year Wells Fargo veteran, decided to retire at year's end. Mr. Stumpf told the board of Ms. Tolstedt's decision, said people familiar with the matter. The board also learned in June that the CFPB settlement was looming, the people said. By retiring, Ms. Tolstedt would leave with around $100 million in compensation earned over time at Wells Fargo.

Sen. Brown demanded of Mr. Stumpf: "So 5,300 team members earning perhaps $25,000, $30,000, $35,000 a year have lost their jobs while Ms. Tolstedt walks away with up to $120 million."

Days after the Senate hearing, the House Financial Services Committee announced it, too, would call in Mr. Stumpf.

The bank's board, without Mr. Stumpf, met most of that Sunday afternoon at the Midtown Manhattan office of Shearman & Sterling LLP. It had just hired the law firm to do an independent investigation of the sales-practices problem, about three years after management brought the issue to directors' attention.

The board decided, at Mr. Stumpf's recommendation before the meeting, that he would forfeit equity, awarded but unvested, of $41 million. It also took away his 2016 bonus and salary during the investigation. The board clawed back about $19 million of unvested equity from Ms. Tolstedt and insisted she leave immediately. Ms. Tolstedt couldn't be reached for comment.

Two weeks later, Mr. Stumpf told Mr. Sloan he was becoming too much of a distraction and would retire. He officially informed the board Wednesday afternoon.

Brody Mullins, James V. Grimaldi and Anupreeta Das contributed to this article.

Write to Emily Glazer at emily.glazer@wsj.com

(END) Dow Jones Newswires

October 13, 2016 15:05 ET (19:05 GMT)

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