Too-big-to-fail Wells Fargo, with its too-big-to-whitewash scheme of charging customers for two million bogus accounts, has done something consumer champions have seldom accomplished on their own: showing ordinary Americans that even the most respected big corporations can opt for blatant, systematic cheating if their leaders believe they can get away with it. Even the banking industry’s most reliable defenders, the Republicans on the Senate Banking and House Financial Services committees, joined their Democratic colleagues in pillorying Wells Fargo’s affably defiant CEO, John Stumpf.
On October 12, two weeks after the committee hearings ended, the members got their man. Wells Fargo announced that it had accepted Stumpf’s resignation and that he would be replaced by his CFO, Timothy Sloan.
The bank’s critics on the Hill and in the media have taken an invaluable first step by exposing the scam as no aberration but an integral component of the bank’s business model, forcing out a financial industry star like Stumpf, and triggering multiple regulatory and criminal investigations. But framing the matter as an ethical failure on the part of individual executives will not solve the underlying problem.
To turn this teachable moment into a lever for systemic change, reformers must help the public connect the dots that lead past Stumpf and his management cadre to the legal environment that made them think they could get away it. A primary architect of that permissive environment is the United States Supreme Court—in particular, the conservative bloc of five justices (including the now-deceased Justice Antonin Scalia), which established the most pro-business record in cases split 5-4 in over a half-century.
The good news, or so it would seem at first blush, is that new legislation is not essential to achieve systemic reform. After all, charging consumers for unauthorized fake accounts runs afoul of centuries-old common law fraud and equity prohibitions, codified and strengthened by statutes, agency regulations, and judicial precedents in every state as well as in multiple provisions of the United States Code. Of special relevance to Wells Fargo’s caper, robust new federal consumer protections were enacted in the 2009 Dodd-Frank financial-reform law and entrusted to Dodd-Frank’s new consumer cop on the beat, the Consumer Financial Protection Bureau.
But therein lies the rub. For decades, industry advocates have waged a multi-front campaign to cripple consumer protection laws and their enforcement, in legislatures, executive agencies, and the courts. The Supreme Court has been industry’s prime battlefront of choice. For good reason: As Senator Patrick Leahy has observed, “[I]n many cases, the Supreme Court has ignored the intent of Congress, oftentimes turning laws on their heads, and making them protections for big business rather than for ordinary citizens.” The Roberts Court in particular has neutralized various federal and state provisions designed to redress and deter precisely the type of small bore, large-scale fraud perpetrated by Wells Fargo. The Court has made it harder for consumers to establish legal standing to sue, to draft legally sustainable complaints, and to collect evidence essential to prove their cases. Most consequential, in a series of increasingly aggressive decisions, the Roberts Court’s conservative bloc has granted businesses carte blanche to bury, in the fine print of sales, employment, and other standard non-negotiable contracts with individuals, waivers of their employees’ or consumers’ rights to enforce any law in court, by requiring those employees or consumers to channel all disputes into private arbitration proceedings. Corporations, including Wells Fargo, have rushed to include, in such forced arbitration provisions, restrictions that bar individuals from pooling similar claims through a group or class proceeding, whether in court or in the arbitration itself—in many instances effectively shielding companies from accountability to consumers for small-dollar law-breaking.
Until five years ago, numerous state courts had invalidated such compulsory arbitration provisions as “unconscionable” under state statutes and common law and equity principles. But in 2011, the Supreme Court, by a 5-4 vote, struck down such state laws and decisions, declaring them “preempted” by the 1925 Federal Arbitration Act—even though that act expressly authorizes courts and legislatures to bar enforcement of such provisions on traditional legal or equitable grounds, of which “unconscionability” is a quintessential example.
In his second term, President Obama has moved to limit or shelve the Court’s grant of de facto immunity from liability for businesses subject to federal regulations—vendors and lenders to military personnel, colleges and universities benefitting from the federal student loan program, long-term care facilities receiving Medicare and Medicaid funds, and, most relevant to the Wells Fargo scam, banks. The CFPB has proposed regulations that ban arbitration clauses barring class relief for bank depositors and credit card holders.
To thwart these efforts to preserve consumers’ access to courts, business advocates have looked to the courts. Conservative legal activist Boyden Gray, a former White House counsel to President George H. W. Bush, and former Bush Solicitor General Ted Olson, brought lawsuits before the D.C. Circuit Court of Appeals that attacked the constitutionality of Dodd-Frank, including its provisions barring the president from firing the agency’s director except for “inefficiency, neglect of duty, or malfeasance in office.” On October 11, two members of a D.C. Circuit panel of three Republican appointees upheld that challenge, terming the law “unprecedented” in conferring “unilateral” and “massive power” on a single agency head—allegedly different from heads of multi-member agencies like the Federal Trade Commission, which combine regulatory mandates and restrictions on presidential removal that are substantially identical to those at the CFPB. The judges’ decision does not involve the CFPB’s pending forced arbitration regulations, and indeed, Judge Brett Kavanaugh’s majority decision purports not to threaten the CFPB’s existence or its “ongoing operations.” Moreover, the decision will likely be appealed to the full D.C. Circuit or to the Supreme Court, where it could well be reversed. However, just as the Supreme Court has helped big banks think they can get away with consumer fraud, it will be the Supreme Court that finally decides whether its gift to the banks keeps on giving, or gets scrapped by the CFPB. It will be the Supreme Court that also decides the fate of other agencies’ actions to limit forced arbitration.
Conveying to the public the high court’s role in encouraging corporate malfeasance, while no easy lift, shouldn’t be impossible in the current political climate. Few real-life examples better illustrate the belief that “the system is rigged” than the Court’s evisceration of legal safeguards against corporate abuse, especially its handing corporations get-out-of-jail-free passes in the form of mandatory arbitration clauses. Consumer advocates, progressive politicians, media investigators and government agencies, especially the CFPB, now repeatedly publicize compilations of corporate abuses.
But reformers also need to expose the conservative justices’ arbitration doctrine as legally baseless and illegitimate. As acidly observed by former Justice (and Reagan appointee) Sandra Day O’Connor, even before the post-2005 conservative bloc stretched the law to its current extremes, the Court has “abandoned all pretense” of faithfully applying the text and legislative history of the Federal Arbitration Act, “building instead … an edifice of its own creation.” With disarming candor, the late Justice Scalia himself outed the dubious motivation behind the conservative bloc’s tortured doctrines—condemning “class arbitration” in the 2011 decision noted above, because it “greatly increases risks to [corporate] defendants.”
Precisely. It’s time for reformers to focus not just on the corporate scammers, but on the court decisions that so greatly decreased the risks of scamming.