Wells Fargo Settles Shareholder Lawsuit Over DEI Hiring Practices

Wells Fargo & Company (NYSE: WFC) and its shareholders have reached a settlement in principle regarding a federal class-action lawsuit concerning the bank's Diversity, Equity, and Inclusion (DEI) hiring practices. The lawsuit, filed in 2022 by SEB Investment Management AB and West Palm Beach Firefighters' Pension Fund, alleged that bank executives breached their fiduciary duties by making false or misleading statements about the company's diverse hiring practices and failing to disclose ongoing federal investigations.

This development, announced in a Monday court filing in the U.S. District Court for the Northern District of California, resolves claims stemming from allegations of "sham" interviews conducted to meet diversity quotas. A court hearing regarding the settlement is scheduled for November, with a motion for preliminary approval expected to be filed by October 13.

Origins of the Controversy and Corporate Response

The shareholder derivative lawsuit originated from reports by The New York Times in 2022, which detailed claims from current and former employees that "fake interviews" were being conducted. These interviews allegedly involved diverse candidates for positions where another candidate had already been selected, primarily to satisfy Wells Fargo's "diverse slate" policy. Introduced in 2020, this policy mandated that for U.S. job openings paying $100,000 or more annually, at least half of the interviewed candidates must be women, nonwhite, veterans, LGBTQ individuals, or those with disabilities.

Following public scrutiny, Wells Fargo shelved the original "diverse slate" policy in June 2022 and implemented a revised hiring policy, applying its diverse-candidate requirement based on job level rather than compensation. Federal prosecutors and the Securities and Exchange Commission (SEC) also initiated investigations into the bank's hiring practices. However, Wells Fargo disclosed in 2023 that both the Justice Department and the SEC had closed their investigations without taking action.

Market Reaction and Broader Implications

Initial reports of the alleged "sham" interviews in 2022 contributed to an 8.6% decline in Wells Fargo's stock price. The current settlement, while specific financial terms remain undisclosed, removes a significant legal overhang for the bank. This resolution is likely contributing to the currently assessed market sentiment as "Uncertain to Slightly Positive," as it mitigates the potential for prolonged litigation and further reputational damage.

This case also highlights a broader trend of increased scrutiny on corporate DEI initiatives and potential legal repercussions for companies perceived to be misrepresenting their commitments. Experts like Roger Cooper of Cleary Gottlieb Steen & Hamilton LLP emphasize that politically charged policies such as DEI carry complex risks requiring thoughtful disclosure. The lawsuit against Target Corp. regarding its 2023 Pride-themed marketing campaign, for instance, set a precedent for claims of inadequate disclosure of DEI-related risks to investors.

"We believe the claims were without merit," a spokesperson for Wells Fargo stated, adding that the bank is "pleased to have reached a settlement in principle in this matter."

Shareholder derivative actions, filed on behalf of a company against its leadership, are becoming a more frequent form of securities litigation related to DEI risks, as suggested by Joseph Motto of Winston & Strawn LLP. This trend underscores the evolving landscape of corporate governance, where social responsibility and internal policies are increasingly under investor microscope.

Path Forward for Wells Fargo

With the agreement in principle established, the next immediate step involves the filing of a motion for preliminary approval of the settlement by mid-October. While the settlement brings closure to this particular lawsuit, Wells Fargo will likely continue to face heightened scrutiny regarding its internal hiring processes and its ongoing commitment to DEI. The financial sector, in general, is navigating an environment where public and investor expectations for ethical corporate conduct and transparent DEI practices are steadily rising.