FORCED ARBITRATION IN CONSUMER TRANSACTIONS – FROM BAD TO WORSE!

In congressional hearing rooms and on national television, Wells Fargo http://www.nytimes.com/topic/company/wells-fargo-company?inline=nyt-org has vowed to make things right for the thousands of customers who were given sham accounts. The bank’s new chief executive, Timothy J. Sloan, in his first week on the job, said his “immediate and highest priority is to restore trust in Wells Fargo.”

But in federal and state courtrooms across the country, Wells Fargo is taking a different tack. The bank has sought to kill lawsuits that its customers have filed over the creation of as many as two million sham accounts by moving the cases into private arbitration — a secretive legal process that often favors corporations.

Lawyers for the bank’s customers say the legal motions are an attempt to limit the bank’s accountability for the widespread fraud and deny its customers their day in open court. Under intense pressure to meet sales goals http://www.nytimes.com/2016/09/17/business/dealbook/wells-fargo-warned-workers-against-fake-accounts-but-they-needed-a-paycheck.html, Wells employees used customers’ personal information to create unauthorized banking and credit card accounts in a far-reaching scandal that has rattled the San Francisco bank to its core, forcing the retirement http://www.nytimes.com/2016/10/13/business/dealbook/wells-fargo-ceo.html of its longtime leader, John G. Stumpf, and enraging regulators and politicians of all stripes.

The bank’s arbitration push in recent weeks is fanning those flames anew. “It is ridiculous,” said Jennifer Zeleny, who is suing Wells Fargo in federal court in Utah, along with about 80 other customers, over unauthorized accounts. “This is an issue of identity theft http://topics.nytimes.com/your-money/credit/identity-theft/index.html?inline=nyt-classifier — my identity was used so employees could meet sales goals. This is something that needs to be litigated in a public forum.”

In arbitration, consumers often find the odds are stacked against them. The arbitration clauses prevent consumers from banding together to file a lawsuit as a class, forcing them instead to hash out their disputes one by one and blunting one of most powerful tools that Americans have in challenging harmful and deceitful practices by big companies.

Strict judicial rules limiting conflicts of interest also do not apply in arbitration, enabling some companies to steer cases to friendly arbitrators, according to a 2015 investigation by The New York Times https://www.nytimes.com/2015/11/02/business/dealbook/in-arbitration-a-privatization-of-the-justice-system.html.

Arbitration is also conducted outside public view, and the decisions are nearly impossible to overturn.
Ms. Zeleny, a lawyer who lives outside Salt Lake City and opened a Wells Fargo account when she started a new law practice, said it would be impossible for her to agree to arbitrate her dispute over an account that she had never signed up for in the first place.

The bank’s counterargument: The arbitration clauses included in the legitimate contracts customers signed to open bank accounts also cover disputes related to the false ones set up in their names.
Some judges have agreed with this argument, but some lawmakers and others consider it outrageous.
“Wells Fargo’s customers never intended to sign away their right to fight back against fraud and deceit,” said Senator Sherrod Brown, an Ohio Democrat, who introduced a bill last week that would prevent Wells from forcing arbitration in the sham account cases.

Yet even as the bank reels in the court of public opinion, Wells Fargo has been winning its legal battles to kill off lawsuits. Judges have ruled that Wells Fargo customers must go to arbitration over the fraudulent accounts. In dismissing one large case seeking class-action status in California, a federal judge ruled last year that it was not “wholly groundless” that customers could be forced to arbitrate over accounts they had never agreed to. That case is now being settled, according to legal filings.

In a statement, Wells Fargo said it was working with customers to reimburse any improper fees. If the issues are still not resolved, the bank offers free mediation services. Arbitration, the bank said, is a “last resort.” “We want to make sure that no Wells Fargo customer loses a single penny because of these issues,” the statement said.

Although the extent of the scandal became known only in September, some fraudulent acts may have started a decade or more ago http://www.nytimes.com/2016/10/12/business/dealbook/at-wells-fargo-complaints-about-fraudulent-accounts-since-2005.html. And Wells Fargo has been moving disputes about unauthorized accounts into arbitration for years, which lawyers say may have helped keep the problems from bursting into public view sooner.

In 2013, David E. Douglas, a Wells Fargo customer in Los Angeles, filed a lawsuit claiming that several bank employees had forged his signature and opened many sham accounts in his name to meet sales quotas. The actions he described in his complaint are precisely the kinds of illegal acts the company acknowledged this year, when it paid $185 million to settle cases http://www.nytimes.com/2016/09/09/business/dealbook/wells-fargo-fined-for-years-of-harm-to-customers.html brought by federal regulators and the Los Angeles city attorney.

But Mr. Douglas’s testimony never reached a courtroom. A judge granted Wells Fargo’s request to move the case to arbitration, whisking it out of public view. Wells Fargo’s legal success shows the overwhelming power that arbitration clauses have in shaping disputes between everyday Americans and huge corporations.

Since a pair of Supreme Court rulings in 2011 and 2013 allowed for the widespread use of arbitration, companies have had great success enforcing these clauses. Proponents of arbitration say the process is a more efficient way to settle disputes than class-action lawsuits that end up mostly enriching plaintiffs’ lawyers.

“By resolving legal disputes through arbitration, both the consumer and the business have the ability to reach a positive resolution at a lower cost,” Wells Fargo said in its statement. Arbitrators are typically lawyers or retired judges who are paid large fees to conduct hearings. The arbitrators, critics say, have an economic interest in siding with the companies, which bring them multiple cases, while individual consumers are likely to appear before them only once.

At the moment, regulators can do little to prevent a bank customer from being forced into arbitration.
Most Americans never bother to take their disputes to arbitration, particularly for a dispute over a small amount of money, the Times https://www.nytimes.com/2015/11/02/business/dealbook/in-arbitration-a-privatization-of-the-justice-system.html investigation showed. And that is likely to be the case for many of the Wells Fargo customers who are sent into arbitration, lawyers say.

In many instances, the fees that customers were charged on the unauthorized accounts were less than $100. Few lawyers will take up individual arbitration claims when the potential damages are low. “This is meant to have a chilling effect,” said Zane Christensen, a lawyer who represented customers in a suit against Wells Fargo in federal court in Utah. “They know customers will have a hard time finding a lawyer to represent them in arbitration.”

But those damages could cost the bank a fortune if multiplied over potentially thousands of customers in a class-action lawsuit. This is not the first time Wells Fargo has been accused of trying to use arbitration to its advantage. In June 2009, Wells was one of about 30 banks that were sued over overdraft policies designed to maximize the fees charged to customers. Wells first decided to fight the lawsuit in Federal District Court in Miami. Typically, once a bank decides to litigate a case in court, it gives up its right to go to arbitration.

But after more than a year in court, Wells argued that it still had the right to arbitrate the overdraft dispute. The vast majority of the banks have resolved their parts of the overdraft case, agreeing to pay, in total, more than $1.2 billion to affected customers. Wells, meanwhile, has filed several appeals.
“Wells Fargo keeps trying to push this down the road,” said Robert Gilbert, a Miami lawyer representing bank customers in the overdraft case.

Members of the Senate Banking Committee sent Wells Fargo a list of detailed questions about its arbitration history over the last nine years, including how many cases were decided in the bank’s favor. The company did not provide any specifics in its response http://www.brown.senate.gov/download/wells-fargo-questions. In the wake of the scandal, under heavy pressure from lawmakers, the bank made changes that included formally separating its chairman and chief executive roles. (Mr. Stumpf had held both.)

On Thursday, the bank’s board formally approved the separation of these roles — and simultaneously gave a huge raise to the new chairman, Stephen W. Sanger, who was named to the role in October. Mr. Sanger, a Wells Fargo board member since 2003 and a former head of General Mills, will see his annual retainer bumped to $250,000 from $60,000.

Ana Bárbara, a Mexican music star who lives in Los Angeles, sued Wells Fargo in June, saying a bank employee had created sham accounts and credit lines in her name and taken out more than $400,000 of her money. To cover his tracks, the employee regularly stopped by Ms. Bárbara’s house and stole Wells Fargo statements from her mailbox, according to her lawsuit. Devin McRae, Ms. Bárbara’s lawyer, said he would have preferred to try the case in court, where it would generate a trail of public records. But the case was moved into arbitration in September.

“I think it’s a major problem when you have a bank that is so large, doing the things that Wells Fargo did on a systematic basis, to be able to keep that under wraps,” Mr. McRae said.
ANATOMY OF A SCANDAL
For years, Wells Fargo employees secretly set up fake accounts without customers’ consent.
• $185 Million Fine http://www.nytimes.com/2016/09/09/business/dealbook/wells-fargo-fined-for-years-of-harm-to-customers.html
Regulators said the illegal practices, first reported in 2013 http://www.latimes.com/business/la-fi-wells-fargo-sale-pressure-20131222-story.html, reflected serious flaws. The bank fired 5,300 mostly low-level employees.
• Sales Goals, Broken Rules http://www.nytimes.com/2016/09/17/business/dealbook/wells-fargo-warned-workers-against-fake-accounts-but-they-needed-a-paycheck.html
“They warned us about this type of behavior,” said an ex-worker, “but the reality was that people had to meet their goals.”
• Ex-Workers File Suits http://www.nytimes.com/2016/09/27/business/dealbook/wells-fargo-workers-claim-retaliation-for-playing-by-the-rules.html
“These are the people who have been left holding the bag,” said a lawyer for the workers.
• Alarms Raised in 2005 http://www.nytimes.com/2016/10/12/business/dealbook/at-wells-fargo-complaints-about-fraudulent-accounts-since-2005.html
“Everybody knew there was fraud going on, and the people trying to flag it were the ones who got in trouble,” said a manager who was fired.
• The New Boss http://www.nytimes.com/2016/10/14/business/dealbook/shake-up-at-wells-fargo-fails-to-dispel-skepticism-from-regulators.html
“I remain concerned that incoming C.E.O. Tim Sloan is also culpable http://www.nytimes.com/2016/09/20/business/dealbook/wells-fargos-john-stumpf-has-his-wall-st-comeuppance.html,” said Representative Maxine Waters.
• ‘Lions Hunting Zebras’http://www.nytimes.com/2016/10/21/business/dealbook/lions-hunting-zebras-ex-wells-fargo-bankers-describe-abuses.html
The bank targeted immigrants who spoke little English and older adults with memory problems, ex-workers said http://www.nytimes.com/2016/10/21/business/dealbook/voices-from-wells-fargo-i-thought-i-was-having-a-heart-attack.html.
• Scrutiny for U5 Files http://www.nytimes.com/2016/11/04/business/dealbook/wells-fargo-faces-scrutiny-for-black-marks-on-ex-employee-files.html