Investors Sue Wells Fargo for Fake DEI Initiative

Wells Fargo, one of the largest banks in the United States, has long claimed a commitment to increasing diversity and inclusion in its hiring practices. However, a recent class-action lawsuit has raised serious questions about the bank's commitment to these values.

Wells Fargo’s History With Diversity

Even if you don’t use it, you’ve probably heard the name Wells Fargo. It's a major player in the financial services game, offering everything from banking to mortgages and investments. Founded in the California Gold Rush and headquartered in San Francisco, it employs thousands of people across the globe.

Unsurprisingly, the early days of Wells Fargo were marked by a lack of diversity in its hiring practices. Like many companies at the time, it was predominantly white, male-dominated, and excluded people of color, women, and other underrepresented groups from employment opportunities.

In the last several decades, Wells Fargo launched various diversity and inclusion initiatives. These included programs for minority employees already at the company (employee resource groups, mentorship and development programs), but also diversity recruitment programs to bring in more diverse talent.

According to Wells Fargo's self-reported 2023 Diversity, Equity & Inclusion (DEI) Report, the numbers have changed a lot in 200 years. As of December 2022, the report states that 52% of Wells Fargo's global workforce is female, and 55% of its U.S. workforce is female. Within the U.S., the company states that 46% of its workforce is racially or ethnically diverse. It also claims that among American employees, 8% self-identify as having a disability; 4% self-identify as veterans; and 3% self-identify as LGBTQ+.

Diverse Search Requirement

The bank has held itself out as an institution that’s committed to increasing its diversity. One of their big initiatives to this end is what they call the "Diverse Search Requirement." The idea is to ensure that at least 50% of interview candidates for certain roles come from historically underrepresented groups. The initiative also included putting at least one person from Wells Fargo on each interview panel that was from such a minority group.

Wells Fargo is not the only large company to invest in such an initiative. It is similar to the NFL's "Rooney Rule" or, in the legal profession, the "Mansfield Rule." The idea is to get diverse candidates in front of a hiring manager to ensure all qualified candidates are interviewed.

Ugly Truth Revealed

This all sounds great in theory, but as it turns out, Wells Fargo might not be walking the talk. Allegations have surfaced that the bank conducted fake job interviews just to meet their diversity quotas.

In May of 2022, the Times published an article called “At Wells Fargo, a Quest to Increase Diversity Leads to Fake Job Interviews.” The article reported that Wells Fargo employees conducted fake job interviews with diverse candidates for positions that had already been promised to other individuals. This practice was allegedly done to meet the Company's Diverse Search Requirement.

The article also mentioned that a Wells Fargo employee was fired after complaining to his bosses about this practice. Following the publication of this article, Wells Fargo’s common stock price fell by $0.44 per share (1.04%) over the period of two trading sessions – a drop which affected a lot of the bank’s investors.

Investors Sue

One of those investors was Khosrow Ardalan. After Wells Fargo’s stock dropped, Ardalan filed a class action lawsuit against the bank as a corporation and several of its top executives. He claims that Wells Fargo misled investors about its commitment to diversity in the workplace, specifically alleging that the company conducted fake job interviews to meet its Diverse Search Requirement.

According to Ardalan, this misconduct by Wells Fargo resulted in artificially inflated stock prices, causing financial harm to him and other investors when the truth was revealed and the stock dropped. In his complaint, Ardalan, accused the defendants of violating certain sections (Section 10(b) and Rule 10b-5) of the Securities and Exchange Act of 1934. Specifically, he claims they made false or misleading statements regarding Wells Fargo's Diverse Search Requirement. The plaintiffs claim that Wells Fargo conducted sham interviews with diverse candidates who had no real chance of being hired, thereby misleading investors about the company's commitment to DEI initiatives.

Ardalan seeks to represent all similarly affected investors in recovering damages for these alleged violations of federal securities laws.

Bank Tries to Get Suit Dismissed

Last October, the defendants moved to dismiss the complaint on the grounds that the plaintiffs insufficiently pled  “material misrepresentation” and scienter, which are necessary elements for their claims under the SEC Act that the plaintiffs were using to sue.

A material misrepresentation refers to a false or misleading statement or omission that is significant enough to influence the decision of a reasonable investor. In the context of securities fraud, a statement is considered "materially misleading" if it directly contradicts what the defendant knew at the time, or even if it just omits material information that would be necessary to prevent investors from being misled. Even if a statement is technically not false, it can still be misleading if it omits material information.

The bank and its executives contended that their statements regarding the Diverse Search Requirement were not misleading because they only promised that 50% of interview candidates would be diverse, without addressing whether those diverse candidates would be hired. They argued that the plaintiffs' allegations about sham interviews did not sufficiently demonstrate that the statements were false or misleading.

"Scienter" is a legal term meaning knowledge of wrongdoing. It implies that a person acted with intent or awareness of their actions being wrong or illegal, especially in cases of fraud or deception. Essentially, it means they knew what they were doing was wrong.

The defendants argued that the plaintiffs did not provide particularized facts supporting the conclusion that the defendants actually reviewed the communications (emails from Phillip Miller and Joseph Bruno) that allegedly put them on notice of the sham interviews. They also contended that the plaintiffs' circumstantial evidence of scienter, such as the defendants' focus on diversity issues and the resignation of an employee, was insufficient to establish a strong inference of scienter.

Court Lets Suit Continue

But last week, the court denied the bank’s motion to dismiss. It found that the plaintiffs did sufficiently plead both material misrepresentation and scienter. Regarding material misrepresentation, the court noted that a reasonable investor would expect the Diverse Search Requirement to be implemented in a manner that could achieve its stated goal.

Regarding the scienter, the court said that the plaintiffs provided direct and indirect evidence that the defendants were aware of the sham interviews and the issues with the Diverse Search Requirement. This included specific complaints submitted to the Board and senior management, the involvement of the defendants in diversity initiatives, and the peculiar timing of an employee's resignation following the complaints. The court found that these allegations, when viewed holistically, raised a strong inference that the bank and its people knew what they were doing.

This all means that the case against the bank and its execs can move forward. But the case is still in early stages, so we’ll have to wait and how it plays out at trial.

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