Full opinion text
CLASS ACTION FINDINGS OF FACT AND CONCLUSIONS OF LAW AFTER BENCH TRIAL WILLIAM ALSUP, District Judge. INTRODUCTION This certified consumer class action challenges hundreds of millions of dollars in overdraft fees imposed on depositors of Wells Fargo Bank, N.A. through allegedly unfair and fraudulent business practices. This order is the decision of the Court following a two-week bench trial. SUMMARY Overdraft fees are the second-largest source of revenue for Wells Fargo’s consumer deposits group, the division of the bank dedicated to providing customers with checking accounts, savings accounts, and debit cards. The revenue generated from these fees has been massive. In California alone, Wells Fargo assessed over $1.4 billion in overdraft penalties between 2005 and 2007. Only spread income — money the bank generated using deposited funds — produced more revenue. This action does not challenge the amount of a single overdraft fee (currently $35). That is accepted as a given. Rather, the essence of this case is that Wells Fargo has devised a bookkeeping device to turn what would ordinarily be one overdraft into as many as ten overdrafts, thereby dramatically multiplying the number of fees the bank can extract from a single mistake. The draconian impact of this bookkeeping device has then been exacerbated through closely allied practices specifically “engineered” — as the bank put it — to multiply the adverse impact of this bookkeeping device. These neat tricks generated colossal sums per year in additional overdraft fees, just as the internal bank memos had predicted. The bank went to considerable effort to hide these manipulations while constructing a facade of phony disclosure. This order holds that these manipulations were and continue to be unfair and deceptive in violation of Section 17200 of the California Business and Professions Code. For the certified class of California depositors, the bookkeeping device will be enjoined and restitution ordered. PROCEDURAL HISTORY Plaintiffs commenced this action in November 2007, alleging violations of the “unfair” and “fraudulent” restrictions of Section 17200. Two of Wells Fargo’s business practices were initially targeted: (1) a high-to-low “resequencing” practice, challenged herein, and (2) an “including and deleting” practice, which plaintiffs no longer challenge. Originally, the Court certified two classes corresponding to these separate practices: (1) a high-to-low “resequencing” class represented by plaintiff Veronica Gutierrez and (2) an “including and deleting” class represented by plaintiffs Erin Walker and William Smith (Dkt. No. 98). In early 2009, Wells Fargo moved for summary judgment against all of plaintiffs’ claims, which — in addition to Section 17200 violations — included other state claims targeting the same business practices. The bank also moved for deeertification of both classes (Dkt. Nos. 176, 199, 200). In a trio of orders, these motions were granted in part and denied in part (Dkt. Nos. 245^17). Most significantly, the “including and deleting” class was decertified (Dkt. No. 245). The last vestiges of plaintiffs’ “including and deleting” claims were then abandoned at trial (Tr. 965-66). The “resequencing” class, however, survived for trial. This class was defined as (Dkt. No. 98): [A]ll Wells Fargo customers from November 15, 2004 to June 30, 2008, who incurred overdraft fees on debit card transactions as a result of the bank’s practice of sequencing transactions from highest to lowest. Plaintiffs were allowed to conduct a new restitution study covering Wells Fargo transaction data for the entire “resequencing” class period. Following the completion of this study, Wells Fargo again moved for summary judgment and class decertification (Dkt. No. 292). These motions were denied. The instant order follows a two-week bench trial that commenced on Monday, April 26, 2010, and concluded on Friday, May 7. Following the close of evidence, both sides submitted lengthy proposed findings of fact and conclusions of law, followed by responses (Dkt. Nos. 452-55). The undersigned also denied without prejudice a motion for judgment on partial findings submitted by Wells Fargo during trial and allowed the bank to reargue its points in its proposed findings of fact (Dkt. Nos. 417, 446). Closing arguments were heard on the morning of July 9. Rather than merely vet each and every finding and conclusion proposed by the parties, this order has navigated its own course through the evidence and arguments, although many of the proposals have found their way into this order. Any proposal that has been expressly agreed to by the opposing side, however, shall be deemed adopted (to the extent agreed upon) even if not expressly adopted herein. It is unnecessary for this order to cite the record for all of the findings herein. Citations will only be provided as to particulars that may assist the court of appeals. In the findings, the phrase “this order finds ...” is occasionally used to emphasize a point. The absence of this phrase, however, does not mean (and should not be construed to mean) that a statement is not a finding. All declarative statements set forth in the findings of fact are factual findings. FINDINGS OF FACT 1. The core of this controversy is a bookkeeping device adopted by the bank called “high-to-low resequencing” that transforms one overdraft into as many as ten overdrafts — ten being the voluntary limit the bank imposed on what could otherwise be an almost limitless prospect. The bank instituted this device for California accounts in April 2001 and then soon magnified its impact through closely allied practices. What now follows is an explanation of the bookkeeping device and how it changed overdrafting at Wells Fargo. Low-to-High v. High-To-Low 2. “Posting” is the procedure followed by all banks to process debit items presented for payment against accounts. During the wee hours after midnight, the posting process takes all debit items presented for payment during the preceding business day and subtracts them from the account balance. These items will typically be debit-card transactions and checks (plus a few other occasional items described below). If the account balance is sufficient to cover all such debit items, there will be no overdrafts regardless of the bookkeeping method used. If, however, the account balance is insufficient to cover all such debit items, then the account will be overdrawn. When an account is overdrawn, the posting sequence can have a dramatic effect on the number of overdrafts incurred by the account (even though the total overdraw will be exactly the same). In turn, the number of overdrafts drives the number of overdraft fees. 3. Prior to April 2001, Wells Fargo used a low-to-high posting order, as did most banks (then and now). Low-to-high posting meant that the bank posted settlement items from lowest-to-highest dollar amount. Low-to-high posting paid as many items as the account balance could possibly cover and thus minimized the number of overdrafts. This was because the smallest purchases were always deducted from the customer’s checking account first and the balance was used up as slowly as possible. 4. This changed in April 2001. Then, Wells Fargo did an about-face in California and began posting debit-card purchases in highest-to-lowest order. The reversal of the bank’s previous low-to-high posting order had the immediate effect of maximizing the number of overdraft fees imposed on customers. This was exactly the reason that the bank made the switch. 5. To illustrate, assume that a customer has $100 in his account and uses his debit card to buy ten small items totaling $99 followed by one large item for $100, all of which are presented to the bank for payment on the same business day. Using a low-to-high posting order, there would be only be one overdraft — the one triggered by the $100 purchase. Using high-to-low resequencing, however, there would be ten overdrafts — because the largest $100 item would be posted first and thus would use up the balance as quickly as possible. Scenarios very much like this happened to plaintiffs Veronica Gutierrez and Erin Walker, as will be shown momentarily. . Commingling 6. The switch in April 2001 to high-to-low posting in California was followed by two closely allied practices, both intentionally “engineered” — to use the bank’s own term at the time — to amplify the overdraft-multiplying effect of high-to-low ordering: (1) a switch to commingling of debit-card purchases with checks and automated clearing house (“ACH”) transactions in December 2001, and (2) the deployment of a secret “shadow line” in May 2002 to authorize debit-card purchases into overdrafts. 7. Regarding commingling, before December 2001, all debit-card purchases were posted prior to checks, and all checks were posted prior to ACH transactions. While transactions for each transaction type were already being resequenced in high-to-low order (since April 2001), the different transaction types were posted separately. 8. In December 2001, however, Wells Fargo began commingling debit-card purchases, checks, and ACH transactions together and posting the entire group from highest-to-lowest dollar amount. This amplified the overdraft-multiplying effect of high-to-low posting. Checks and ACH transactions- — which tended to be the larger items — now consumed the account balance even faster than if all debit-card transactions had been deducted first (debit-card purchases typically being smaller). 9. For the commingling change, the “before and after” looked like this (high-to-low posting having already been instituted in April 2001): The Shadow Line 10. The last step in the three-step plan was executed in May 2002. Wells Fargo implemented a practice involving a secret bank program called “the shadow line.” Before, the bank declined debit-card purchases when the account’s available balance was insufficient to cover the purchase amount. After, the bank authorized transactions into overdrafts, but did so with no warning that an overdraft was in progress. Specifically, this was done without any notification to the customer standing at the checkout stand that the charge would be an overdraft and result in an overdraft fee. Thus, a customer purchasing a two-dollar coffee would unwittingly incur a $30-plus overdraft fee. (This very scenario happened to plaintiff Walker.) Internally, Wells Fargo called this its “shadow line,” as in shadow “line of credit.” The amount of the credit ceiling per customer was and still is kept secret. Again, customers were not even alerted when shadow-line extensions were made to them — until it was too late and many overdraft fees were racked up. In this program, the bank correctly expected that it would make more money in overdraft fees than it would ever lose due to “uncollectibles” (ie., overdrafts that were never paid back). Class Representative Veronica Gutierrez 11. Ms. Gutierrez opened a checking account and a savings account at the Rancho Cucamonga branch of Wells Fargo in San Bernadino County on October 25, 2002. She was eighteen at the time. 12. Ms. Gutierrez had never held a bank account in her own name prior to opening these two accounts. She had also never used a debit or ATM card. This was her first real banking experience. 13. A Wells Fargo customer service representative (“CSR”) assisted Ms. Gutierrez in opening her checking and savings accounts. The CSR provided Ms. Gutierrez with various Wells Fargo documents during this process. 14. One such document given to Ms. Gutierrez was a Wells Fargo brochure entitled “Checking, Savings and More” (TX 89). Certain portions of this brochure were shown to Ms. Gutierrez by the CSR, including sections highlighting the features of “Student Checking,” “Wells Fargo Advantage Checking,” and “Wells Fargo Cards” (Tr. 373-76). The CSR highlighted these sections after asking Ms. Gutierrez what kind of account she was interested in opening and learning that Ms. Gutierrez was going to be a college student. 15. With respect to the “Wells Fargo Cards” section of the brochure, Ms. Gutierrez reviewed the subsections entitled “overdraft protection,” “ATM card,” “ATM & Check Card,” and “Visa Credit Cards” while at the branch (id. at 374-76). 16. Wells Fargo refers to its debit cards as “check cards” in all of its marketing literature. The difference between the two terms is purely branding. In all relevant respects, a debit card is the same as a check card. 17. The “ATM & Check Card” subsection of the brochure included the following statements regarding Wells Fargo debit cards (TX 89) (emphasis added): All the features of the ATM card, plus: • Make purchases at over 19 million MasterCard merchants worldwide. • Purchase amounts are automatically deducted from your primary checking account. 18. After reviewing the “Wells Fargo Cards” section of the brochure, Ms. Gutierrez asked the CSR for guidance about how to use an ATM and debit card (Tr. 381). The CSR told Ms. Gutierrez that a debit card could be used in any store where a MasterCard logo was shown (the bank has since switched to VISA-based debit cards). The CSR then assisted Ms. Gutierrez in setting up a PIN number to use for ATM transactions. 19. The CSR also mentioned to Ms. Gutierrez that she would have overdraft protection through the savings account she was opening. Ms. Gutierrez was not informed by the CSR, however, as to what “having overdraft protection” meant (Tr. 376). She had no idea at the time. 20. Ms. Gutierrez was also provided with a Wells Fargo “Welcome Jacket” while opening these accounts (id. at 377; TX 86). The front of the Welcome Jacket stated “Welcome to Wells Fargo” and “Thank You for Opening Your Account With Us.” Inside the Welcome Jacket was a pocket to hold additional materials. 21. The Welcome Jacket provided to Ms. Gutierrez contained a copy of Wells Fargo’s then-current Consumer Account Agreement (“CAA”), effective April 1, 2002 (TX 13). The CAA was 69 pages in length and was densely packed with single-spaced text in ten-point font. 22. The CSR did not go through any of the 69 pages of content in the CAA with Ms. Gutierrez when her accounts were opened at the branch (Tr. 380). The CSR also failed to inform Ms. Gutierrez about the bank’s resequencing practices, including the order in which debit-card purchases would be posted against her checking account (ibid.). 23. Also included in the Welcome Jacket given to Ms. Gutierrez was a copy of Wells Fargo’s then-current Consumer Account Fee and Information Schedule (id. at 379; TX 14). This document, which included 37 pages of densely packed text in ten-point font, detailed the amount charged by Wells Fargo for various types of account-related fees, including overdraft and returned-item (e.g., bounced check) fees. 24. Ms. Gutierrez only briefly flipped through the hundred-plus pages of text in the CAA and Consumer Account Fee and Information Schedule while at the branch (Tr. 380). 25. Finally, before leaving the branch, Ms. Gutierrez signed at least one Wells Fargo document and received a printout of the deposits she had made to open her accounts (id. at 376-78). By the end of the process, Ms. Gutierrez had acquired a Wells Fargo checking account, savings account, and an ATM and debit card (hereinafter simply referred to as a debit card). She also applied for a Wells Fargo student VISA credit card. 26. Ms. Gutierrez received her debit card in the mail sometime after opening her checking and savings accounts (id. at 381-82). She also signed up for Wells Fargo’s “online banking” service, which allows customers to view their available balance and account statements over the internet (ibid.). 27. Using her Wells Fargo checking account, Ms. Gutierrez paid for school books, gas, bills, and recreation (id. at 383). For the first few years, to keep track of her balance, she would use a check register. Ms. Gutierrez would also keep copies of receipts from purchases and carbon copies of checks to compare them with Wells Fargo monthly account statements. She did this to be “absolutely] sure that extra purchases were not being made on [her] account, without [her] knowing” (id. at 383-85). 28. After a few years, however, Ms. Gutierrez stopped using a check register. She also stopped verifying receipts against her account statements. This was because of “inconsistencies” between what Wells Fargo was reporting to her regarding her account balance and what she was “keeping track of, personally” (id. at 385). Instead, Ms. Gutierrez began relying on Wells Fargo’s online banking information and toll-free customer service phone numbers to obtain her available balance and to check which transactions had been posted to her account (ibid.). 29. On Thursday, October 5, 2006, Ms. Gutierrez walked into a Subway sandwich shop. She spent $11.27 and used her Wells Fargo debit card to pay for the meal (TX 1). That same day, she made three purchases at AutoZone, an auto-parts store where she was then employed (Tr. 395-96). The three purchases were for $47.99, $17.23, and $3.23 (TX 1). 30. For whatever reason, Ms. Gutierrez returned one of the three AutoZone purchases — specifically, the purchase in the amount of $17.23. The return was made on the same day as the purchase (ibid.). 31. The next day, Friday, October 6, Ms. Gutierrez went to an IHOP restaurant. She used her Wells Fargo debit card to pay for her meal, totaling $26.51. Ms. Gutierrez also went to a hamburger house that same day called Farmer Boys and purchased a meal with her debit card totaling $8.10. Finally, that evening, Ms. Gutierrez used her Wells Fargo debit card at a Bank of America ATM at the Hollywood Bowl to withdraw $22.00 from her Wells Fargo checking account (ibid.). Since a non-proprietary ATM was used, Ms. Gutierrez was charged a two-dollar transaction fee by Wells Fargo. 32. That weekend, Ms. Gutierrez went to an Albertsons supermarket and spent $74.39. She used her Wells Fargo debit card to complete the purchase (ibid.). 33. Finally, on Tuesday, October 10, Ms. Gutierrez used Wells Fargo’s online banking service to initiate and complete an “online transfer” of $80.00 from her Wells Fargo checking account to the checking account of a family member (ibid.; Tr. 400). That same day, a check written by Ms. Gutierrez in the amount of $65.00 was presented to the bank for payment (TX 449). These transactions are shown as follows: 34. None of the debit-card purchases was declined or otherwise rejected by Wells Fargo. In fact, all were allowed by the bank. There were no indications given to Ms. Gutierrez by Wells Fargo that any of her purchases, withdrawals, or transfers had been made against insufficient funds or would result in overdraft fees being assessed. 35. The very next day, on Wednesday, October 11, Wells Fargo assessed $88 in overdraft fees against Ms. Gutierrez’s cheeking account (TX 1, 2). These fees were triggered by four overdrafts caused by the two smallest AutoZone purchases made by Ms. Gutierrez on October 5, her Subway purchase made on October 5, and her Farmer Boys purchase made on October 6. Each overdraft carried a penalty of $22. (The overdraft fee today is $35.) 36. The four debit-card purchases that triggered overdraft fees were among twelve transactions that posted against Ms. Gutierrez’s checking account after the close of business day on Tuesday, October 10 (TX 1). These transactions are listed below in the exact order that they were posted against her checking account (ibid,.). Amounts that were debited from her account are represented below in parentheses. According to Ms. Gutierrez’s account statement, her checking account balance prior to the posting of these transactions was $316.90 (ibid.). 37. The transactions were posted by Wells Fargo in the following order: First, all credits were posted to Ms. Gutierrez’s checking account. This is why the returned AutoZone purchase was the first of the twelve items to post. Second, transactions representing cash withdrawals (or their equivalent) were posted from highest-to-lowest dollar amount. The online transfer of funds, ATM withdrawal, and associated two-dollar transaction fee were part of this “priority posting” group (as called by the bank). Third, and most significantly, debit-card transactions, checks, and ACH transactions were commingled together and posted from highest-to-lowest dollar amount. The parties agree that this is how Wells Fargo posted transactions during the class period (Dkt. No. 448). 38. The adverse impact of Wells Fargo’s high-to-low bookkeeping switch is clearly shown by these transactions. If the last eight transactions had been posted by Wells Fargo from lowest-to-highest dollar amount, only one of the debit-card purchases — the $74.39 purchase at Albert-sons supermarket — would have been an overdraft. Thus, only one overdraft fee ($22), as opposed to four overdraft fees ($88), would have been assessed. 39. The adverse impact of commingling is also well illustrated. Assuming that debit-card transactions were posted in high-to-low order, if Wells Fargo had simply posted the $65 check after all of the debit-card transactions — as was its practice pri- or to commingling — only one overdraft fee ($22) as opposed to four overdraft fees ($88) would have been assessed. This clearly illustrates the adverse impact that the commingling decision had on customers like Ms. Gutierrez, as well as the integral role that commingling had in enhancing the bank’s high-to-low bookkeeping play. 40. Finally, if Wells Fargo had posted Ms. Gutierrez’s debit-card transactions in chronological order (or as close to chronological order as possible), the $74.39 purchase at Albertsons supermarket — which was made on October 7 — would have been posted last. Under this scenario, only one overdraft fee ($22), as opposed to four overdraft fees ($88), would have been assessed. 41. At trial, Wells Fargo noted that it had instituted a one-dollar “overdraft courtesy threshold” during the class period (Tr. 356). It is clear — when examining Ms. Gutierrez’s account statement — that this minuscule threshold was not in place when she incurred these overdrafts (TX 1). 42. With a one-dollar courtesy threshold, a checking-account holder is allowed to overdraw his or her account up to the one-dollar threshold amount before the account is considered “overdrafted” and a fee is assessed. At an unknown date during the class period, this threshold increased from zero to one dollar (Tr. 356). The fact that Ms. Gutierrez was assessed a $22 overdraft fee for overdrafting her account by $0.99 shows that the one-dollar courtesy threshold had not yet been instituted. Despite being touted by the bank, it provided no benefit to her. 43. Ms. Gutierrez first learned about these four overdraft fees via an insufficient-funds notice sent by Wells Fargo using regular “snail mail” (TX 2). While it is unclear when Ms. Gutierrez actually received the notice, it is likely that she did not receive it until a few days after the fees had been assessed. The notice informed Ms. Gutierrez that the last four debit-card purchases listed above had been presented to Wells Fargo for payment on October 10 and were paid into overdraft. It also informed Ms. Gutierrez that $88 in fees had been imposed on her. 44. The notice further instructed Ms. Gutierrez to deposit $111.59 into her checking account to cover the items paid into overdraft and their corresponding fees. Thus, despite overdrafting her checking account by only $23.59, Ms. Gutierrez was required to pay $111.59 to Wells Fargo to return her account to a zero balance. 45. The high-to-low bookkeeping devices employed by Wells Fargo caused Ms. Gutierrez to be assessed four overdraft fees ($88) rather than one overdraft fee ($22) for exactly the same conduct. These manipulations mathematically ensured that the larger items would consume her balance faster, thereby allowing Wells Fargo to impose more overdraft fees. 46. When she received the insufficient-funds notice, Ms. Gutierrez had no understanding of what the $88 fee meant, or how the amount had been calculated (Tr. 388). Ms. Gutierrez also did not understand how overdraft fees could be assessed if a debit-card purchase was “approved” by Wells Fargo while making purchases at a store or restaurant. She had not been adequately apprised of the shadow-line extension. 47. With respect to the posting of debit-card purchases against her checking account, Ms. Gutierrez did not know “how the system worked” but simply assumed that when her Wells Fargo debit card was swiped when making a purchase, it would be deducted “automatically” from her account as Wells Fargo marketing literature had indicated (id. at 386). 48. Over the next two days, October 12 and 13, two additional overdraft fees were assessed on Ms. Gutierrez by Wells Fargo (TX 1). The fee imposed on October 12 was caused by a debit-card purchase of $5.68 made by Ms. Gutierrez on October 9 at a Jack in the Box restaurant. The fee on October 13 was caused by a debit-card purchase of $20.01 made by Ms. Gutierrez on October 10 at an ExxonMobil gas station. Unlike the prior overdraft fees, however, the October 13 overdraft fee was $33 (rather than $22) — a result of Wells Fargo’s two-tiered fee schedule that imposed harsher fees on account holders who had overdrafted their accounts on multiple occasions within a twelve-month period. 49. To sum up the damage, by October 13, Ms. Gutierrez had overdrafted her account by only $49.28. Due to the multiplication of overdraft penalties, however, she was required to deposit almost four times that amount — $192.28—into her checking account to return it to a zero balance (TX 4). Stated differently, three-fourths (in round terms) of her $192.28 checking-account deficit consisted of Wells Fargo overdraft penalties. 50. Had the bank not commingled Ms. Gutierrez’s debit-card purchases with her checks, she would have only had to pay $126.28 (rather than $192.28) to return her checking account balance to zero. Similarly, if Ms. Gutierrez’s transactions had been posted in low-to-high order or chronologically, she would have only had to pay $126.28 to return her checking account to a zero balance. 51. Ms. Gutierrez received a payroll payment via direct deposit from her employer, AutoZone, on October 13. The deposit, which went straight into her Wells Fargo checking account that evening, was in the amount of $412.90. While this returned Ms. Gutierrez’s checking account to a positive balance, over a third of this payroll payment went directly into Wells Fargo’s pockets to cover the overdraft penalties (TX 1). 52. While the high-to-low bookkeeping device did not directly affect the overdraft fees incurred by Ms. Gutierrez on October 12 and 13 (since her account was already overdrafted on those days), it catapulted her into a higher overdraft bracket and upped her per-occurrence fee. Moreover, as stated, the high-to-low posting of Ms. Gutierrez’s debit-card purchases dramatically increased the rate at which her balance was consumed, thereby multiplying the number of overdraft penalties she incurred on October 11. 53. Given the costs of Ms. Gutierrez’s college education and her limited income at the time, $143 in overdraft fees was a significant amount of money for her to have to pay in overdraft penalties (Tr. 405). Ms. Gutierrez would not have made the four purchases that resulted in overdraft fees if she had been advised or warned that each purchase — some as small as $3.23 — would be covered by a secret shadow line of credit and assessed a $22 or $33 overdraft fee (id. at 403-05). 54. Ms. Gutierrez did not benefit in any way, shape, or form from Wells Fargo’s high-to-low bookkeeping device. 55. After receiving these fees, Ms. Gutierrez decided not to depend on the available balance information Wells Fargo communicated to her online and over the phone (id. at 406). Instead, she had to “sort of trick [her] brain” to remind herself that she had less money in her checking account than the bank had been communicating to her. 56. Even after receiving and reviewing her Wells Fargo account statement for the period covering the transactions discussed above, Ms. Gutierrez could still not decipher the process or order in which the various transactions were posted to her checking account and how her debit-card purchases could lead to multiple overdraft fees. The Court has studied her account statements and finds that it was impossible for her or anyone else to reconstruct how the bank came up with its number of overdrafts. 57. Even if Ms. Gutierrez had meticulously maintained a chronological check register of all of her transactions (as Wells Fargo insists that she and other customers should), it could not have accurately reflected or predicted how the bank would have posted transactions. Stated differently, Ms. Gutierrez had no reason to know that Wells Fargo would resequence her debit-card transactions in a way that would maximize the number of overdraft fees it could assess on her. She would not have known that she was at risk of incurring four overdraft fees on October 10. This is significant, for over and again at trial, bank counsel and bank witnesses waxed eloquent about the virtues of keeping a check register. In reality, the most exacting register would not have told Ms. Gutierrez that she would be hit with four rather than one overdraft fee. 58. Despite being new to banking, Ms. Gutierrez understood the importance of managing her checking account and not spending more than she had. She acknowledged that she made a mistake by overdrafting her account. She did not, however, expect or believe it was fair for Wells Fargo to capitalize upon her mistake by artificially resequencing her debit-card transactions to maximize fee revenue for the bank. 59. Ms. Gutierrez was harmed by this practice. She was deceived by the bank’s obfuscation of its practice regarding high-to-low posting and the risk that one overdraft could be transformed into as many as ten overdrafts. She also relied upon the bank’s misleading marketing materials that reinforced her natural assumption that debit-card transactions would post chronologically. 60. Ms. Gutierrez’s testimony in support of these findings was and remains imminently credible. Class Member Erin Walker 61. Erin Walker, a member of the “resequencing class,” suffered a similar piling-on encounter. Ms. Walker opened a checking account and a savings account in July 2006 at a Wells Fargo branch in Culver City. Like Ms. Gutierrez, she was around eighteen at the time she opened these accounts and this was her first real banking experience. 62. Ms. Walker chose Wells Fargo because she had seen its ATMs throughout the campus of Arizona State University, where she was about to start school. 63. The Wells Fargo CSR who assisted Ms. Walker in opening her accounts provided her with a Wells Fargo “Welcome Jacket” (Tr. 756-57; TX 18, 84). Ms. Walker did not read the Welcome Jacket while at the branch, but read it at home (Tr. 757-58). In particular, Ms. Walker read the same portion of the Welcome Jacket pertaining to debit cards that Ms. Gutierrez read, which stated that “[e]ach purchase is automatically deducted from your primary checking account” (TX 84). 64. Ms. Walker did not recall receiving a Wells Fargo CAA at the time she opened her account. She also did not recall if her Welcome Jacket contained a copy of a CAA (Tr. 758). This order finds, however, that it was Wells Fargo’s customary business practice to provide CAAs to its customers when they opened a new account, and that in all likelihood, Ms. Walker did receive a copy of the CAA (id. at 275). In any event, she did not read through Wells Fargo’s CAA and was unaware of its contents when she opened her accounts. She had no knowledge or understanding of how transactions would be posted against her checking account (id. at 768). No one at the bank had explained it to her. 65. During the account-opening process, Ms. Walker signed up for overdraft protection and to receive a Wells Fargo debit card. The debit card arrived in the mail sometime thereafter. While she was at the Wells Fargo branch, the CSR did not instruct Ms. Walker about how to use her debit card (id. at 759). Nevertheless, Ms. Walker ended up using her debit card more often than checks to make purchases (id. at 759-60). 66. Like Ms. Gutierrez, Ms. Walker also signed up for Wells Fargo’s online banking services after opening her accounts. She used this service periodically to check her available balance online (id. at 760). 67. On Tuesday, May 29, 2007, Ms. Walker made a $9.66 purchase at Jackson Market in Culver City using her Wells Fargo debit card (TX 21). Two days later, on Thursday, May 31, she used the same debit card to purchase $10.92 of merchandise at a store called Essence of Nature in Los Angeles. 68. The following day, Friday, June 1, Ms. Walker purchased $20.27 worth of gasoline from a Shell gas station using her Wells Fargo debit card (ibid.). That same day, Ms. Walker purchased food items at a restaurant called Sandbags and at Jamba Juice, an establishment that serves smoothies. The purchase at Sandbags totaled $7.52 while the Jamba Juice purchase totaled $4.00. Both purchases were made using her Wells Fargo debit card. 69. Finally, on Saturday, June 2, Ms. Walker went to an ARCO gas station and spent $20.61 using her Wells Fargo debit card. That same day, she also went to two coffee shops — Starbucks and The Coffee Bean & Tea Leaf — and spent $5.55 and $4.10, respectively, using her Wells Fargo debit card. These transactions are shown as follows: 70.Ms. Walker completed each of these debit-card purchases without any indication from the bank that she lacked sufficient available funds to cover them. At no time did Wells Fargo warn her that she was overdrawn or that any one of these purchases could trigger an avalanche of overdraft penalties from earlier purchases she had already made. Instead, Wells Fargo allowed each transaction to go through with nary a warning. 71. On Tuesday, June 5, Wells Fargo assessed eight overdraft fees against Ms. Walker’s checking account. The amount of each fee was $34. In total, Ms. Walker was assessed $272 in overdraft fees. 72. The eight debit-card purchases were posted in high-to-low order against her account (TX 21). Commingled with these debit-card purchases was a check Ms. Walker had written in the amount of $8.47. This check was presented for payment on June 4. 73. During the posting of these nine transactions, a transfer of funds from Ms. Walker’s savings account to her checking account was made in the amount of $3.72 (ibid.). This automated transfer was triggered by Wells Fargo’s overdraft-protection service when the first of eight overdraft items was posted. The $3.72 transfer, however, was not large enough to cover the overdraft amount, resulting in an overdraft fee. Since Ms. Walker only had $3.72 in her savings account at the time, that was the most that Wells Fargo could transfer into her checking account. 74. The balance of Ms. Walker’s checking account before any of these transactions were posted was $36.41. Shown below is an illustration of how the eight debit-card purchases, the written check, and the overdraft-protection transfer posted against her checking account after the 75. As shown, by commingling the eight debit-card purchases with the written check and posting them in high-to-low order, Ms. Walker’s available balance was depleted to a negative balance using the least number of transactions possible, allowing the maximum number of overdraft fees to be assessed. 76. Taking into account the availability of $3.72 in overdraft protection funds, if Wells Fargo posted these same transactions in low-to-high order, only three overdraft fees ($101) rather than eight overdraft fees ($274) would have been assessed on Ms. Walker on June 5 — a difference of $173. This again illustrates how a high-to-low ordering dramatically increases the number of overdraft items for exactly the same conduct. close of business day on June 4. As before, items that were debited are represented in parentheses. 77. Similarly, if all debit-card transactions had been posted from low-to-high before the written check, as Wells Fargo used to do in California prior to April 2001, only four overdraft fees would have been assessed (or, alternatively, the check would have been returned, resulting in a $34 non-sufficient funds fee) (TX 353). 78. Finally, if the transactions had been posted in chronological order (or as close to chronological order as possible), Ms. Walker would have been assessed between five and seven overdraft fees, depending upon where the check was posted relative to the debit-card purchases and the time-stamp information for the June 1 purchases. In either scenario, the fees would have been less than under a high-to-low ordering. 79. Ms. Walker did not learn that she had been assessed hundreds of dollars in overdraft fees until a few days after the eight fees had been assessed. She found out by using Wells Fargo’s online banking services, although insufficient funds notices had been mailed to her mother’s address — the address of record on her account — by the bank (Tr. 762-63, 801-02). 80. By that time, a number of additional debit-card purchases had triggered more overdraft fees to be assessed. For example, a $6.60 purchase at The Coffee Bean & Tea Leaf on June 3 was posted after the close of business day on June 5. That transaction triggered an additional $34 overdraft fee to be assessed against Ms. Walker’s checking account on June 6. 81. Three other transactions, including an ATM withdrawal of $20, a $20.78 debit-card purchase of gasoline made on June 5 at an ARCO gas station, and a $4.69 debit-card purchase made on June 4 at Cold-stone Creamery (an ice cream parlor) posted to Ms. Walker’s checking account after the close of business day on June 6. This caused three more $34 overdraft fees to be assessed on June 7. Additionally, Ms. Walker was assessed five dollars for a so-called “Continuous OD Level 2 Charge” by Wells Fargo on June 7. This charge was imposed due to Ms. Walker’s failure to pay off her negative balance within a certain number of days. 82. By the end of day on June 7, Ms. Walker’s checking account had reached a negative balance of -$516.36. Of this deficit, $413 were Wells Fargo overdraft fees (including continuous overdraft fees). In other words, despite overdrafting her account by one hundred dollars, thanks to high-to-low, resequencing and the shadow-line program, Ms. Walker was required to pay Wells Fargo nearly five times that amount to return her checking account to a zero balance. 83. That same day, Ms. Walker made a purchase at a Starbucks coffee shop in the amount of $5.60. She used her Wells Fargo debit card to complete the purchase. Despite being overdrafted by hundreds of dollars at this point, Wells Fargo nevertheless approved the purchase at the point-of-sale under its shadow line. Ms. Walker was assessed an additional $34 overdraft fee for this purchase on June 11. 84. Finally, for a $10.34 debit-card purchase made by Ms. Walker on June 5 at Jackson Market, she was assessed an additional $34 overdraft fee on June 12, again due to the shadow line of credit. 85. By June 14, Ms. Walker had been assessed six five-dollar continuous overdraft fees and fourteen $34 overdraft fees by Wells Fargo. This amounted to $506 in penalties for overdrafting her checking account by approximately $120. 86. While only a portion of these penalties can be directly tied to the bank’s high-to-low posting (since posting order will not change the number of overdrafts assessed once the account is already overdrafted), high-to-low bookkeeping made it much more difficult for Ms. Walker to return her account to a positive balance. Stated differently, by enabling Wells Fargo to assess the maximum number of overdraft fees on June 5, high-to-low ordering and the shadow line made it much more likely that Ms. Walker’s account would remain overdrafted for a longer time period. 87. Ms. Walker was able to convince Wells Fargo — after calling the bank, meeting in-person with a Wells Fargo representative, and complaining about these fees— to reverse four overdraft fees and four continuous overdraft fees. She was still hable for $350 in penalties (TX 22). After repaying these fees, she closed her Wells Fargo checking and savings accounts (Tr. 784). 88. Like Ms. Gutierrez, Ms. Walker understood the importance of not spending more than she had in her checking account (id. at 788-89). Nevertheless, she acknowledged that she made a mistake and forgot to check her balance prior to making the above purchases (id. at 779). She neither understood nor expected, however, that her purchases would be deducted from her account in a way that would maximize her exposure to overdraft fees. She had no idea that all of her smallest purchases made at a Starbucks or The Coffee Bean would be posted last so as to allow Wells Fargo to charge her a $34 overdraft fee for each cup of coffee purchased. 89. Ms. Walker also did not understand how she could be assessed over $500 in overdraft-related fees for purchases that were “approved” at the point-of-sale, the majority of which were less than ten dollars in value. 90. Ms. Walker was harmed by Wells Fargo’s unfair and deceptive business practices. Like Ms. Gutierrez, she was deceived by the bank’s non-disclosures regarding high-to-low posting and the risk that one overdraft could be transformed into as many as ten overdrafts. She also reasonably relied upon the bank’s misleading marketing materials reinforcing a customer’s natural assumption that debit-card transactions would post chronologically. 91. Ms. Walker’s testimony in support of these findings was and remains imminently credible. The Batch Posting Process 92. All banks post transactions after the close of every business day. This occurs in the wee hours after midnight. During this process, transactions that were presented for settlement during the day are posted against the customer’s checking account (Tr. 593-94). In recent years, this has become a computerized process. 93. Wells Fargo calls its automated system HOGAN. The HOGAN deposit system does not exercise individualized discretion based upon the nature of a customer’s transactions. Unlike only a few years ago when individualized discretion was sometimes exercised in a manual sort, Wells Fargo does not prioritize payments, for example, to the Internal Revenue Service versus payments to a wine shop. Rather, HOGAN is designed to sequence and post transactions in a pre-programmed order selected by the bank. 94. When a credit transaction is “posted” during batch posting, the amount of the credit is added to the ledger (i.e., actual) balance of the customer’s checking account. Examples of credit transactions include a deposited check, a return of a debit-card purchase, a transfer of funds into a checking account from another source (e.g., a savings account), and the direct deposit of payroll. This increases the balance, although a temporary hold is sometimes placed on deposited checks. 95. When a debit transaction is “posted,” the amount of the debit is deducted from the ledger balance of the customer’s checking account. If the customer has sufficient funds in his or her checking account to cover a debit, it is simply posted to the customer’s checking account and paid. No overdraft fee is assessed. 96. All possible types of debit transactions are posted during batch processing, including debit-card transactions, traditional written checks, ACH transactions, cash withdrawals or transfers, cashiers-check purchases, and cashed checks (Tr. 604). As stated, debit-card purchases, checks, and ACH transactions are commingled together and posted in high-to-low order by Wells Fargo. Most banks, by contrast, still use the opposite low-to-high sequencing. 97. Once the funds in an account are consumed, further debits will be overdrafts. When the HOGAN deposit system at Wells Fargo is presented with a debit transaction for posting, two steps are performed: First, the system determines whether the transaction is a “must pay” item. A “must pay” item means exactly that — the bank is obligated to pay it and cannot reject it, even if the customer lacks sufficient funds to cover it. This is because the bank has already authorized the purchase and the merchant has relied on the authorization by letting the customer leave the store with merchandise. Significantly, the vast majority of debit-card purchases are “must pay” items. This is significant because it undercuts the bank’s rationale presented at trial for high-to-low posting, as will soon be seen. 98. Second, if the transaction is not a “must pay” item, the HOGAN system determines whether to pay the item or return it unpaid. To make this decision, the HOGAN system first looks at the customer’s balance. If there are insufficient funds to cover the transaction, the HOGAN system then looks for overdraft-protection sources — e.g., savings or credit-card accounts that are linked to the customer’s primary checking account. 99. If the customer has sufficient funds available through overdraft protection, Wells Fargo automatically transfers funds from the customer’s savings account (or charges the customer’s credit card) to cover the overdraft amount (Tr. 612-14). A fee, however, is charged every time an overdraft-protection transfer is made (id. at 1147; TX 6, 347, 353, 355). These overdraft-protection fees — though lower than overdraft fees — are also a profit center for the bank (Tr. 1368). 100. Finally, if there are still not enough funds to cover the transaction, the HOGAN system looks to a hidden source of funds that the bank internally calls the “shadow line.” The bank computer performs a secret “risk assessment” — akin to a credit analysis — to determine whether the customer would be likely to repay the overdraft amount and corresponding fee if the item is honored (id. at 1564-65). As stated, this hidden amount that the bank is willing to “spot the customer” is the customer’s “shadow line” — as in shadow “line of credit.” If the bank decides, based upon the shadow line, to pay the item into overdraft, an overdraft fee is then assessed. If, however, the bank elects to return the item unpaid, a non-sufficient funds (“NSF”) fee is assessed. During the class period, NSF fees were lower than overdraft fees. 101. Importantly, during the class period, the same shadow line was employed before the posting process to authorize debit-card transactions in the first place. Put differently, rather than declining debit-card purchases when the customer lacked sufficient funds (as the bank did prior to May 2002), the bank approved such transactions with the shadow line without any warning to the customer at the checkout counter that an overdraft was in the making. Then, when the debit-card purchase came in for settlement soon thereafter, one or more overdraft fees were assessed. Wells Fargo’s Actual Motive and Purpose: Profiteering 102. The trial record is most telling about the true reasons Wells Fargo adopted high-to-low bookkeeping and the two allied practices — commingling and the shadow line — described herein. Internal bank memos and emails leave no doubt that, overdraft revenue being a big profit center, the bank’s dominant, indeed sole, motive was to maximize the number of overdrafts and squeeze as much as possible out of what it called its “ODRI customers” (overdraft/returned item) and particularly out of the four percent of ODRI customers it recognized supplied a whopping 40 percent of its total overdraft and returned-item revenue. This internal history — which is laid bare in the bank’s internal memos — is so at odds with the bank’s theme of “open and honest” communication and that “overdrafts must be discouraged” that the details will be spread herein. 103. Internal bank memos were presented at trial pertaining to a bank-wide strategic plan called “Balance Sheet Engineering” — or “BSE” for short (see, e.g., TX 36, 61). The documents and testimony surrounding the BSE plan provided clear evidence that the challenged practices were implemented for no other purpose than to increase overdrafts and overdraft fee revenue (Tr. 134-35, 237). 104. Both the commingling of debit-card transactions with checks and ACH transactions and the extension of the shadow line to debit-card purchases were part of Wells Fargo’s BSE plan. The commingling change was deemed “BSE Phase 1” while the extension of the shadow line to point-of-sale (POS) debit-card purchases was deemed “BSE Phase 2a” (ibid.; TX 36, 61). 105. The internal BSE memos show that both the commingling change and the adoption of the shadow-line program were intended to capitalize on the overdraft-multiplying effect of high-to-low ordering, which had been recently implemented in California in April 2001, a few months before. 106. A graphical timeline of Wells Fargo’s BSE initiatives, taken straight out of a Wells Fargo internal memo from February 2002, is shown below (TX 36). As the internal timeline illustrates, both BSE Phase 1 and BSE Phase 2a were part of a larger suite of OD/NSF (overdraft/non-sufficient funds) initiatives being deployed by the bank. The internal timeline also shows that these initiatives were implemented by Wells Fargo specifically to increase revenue. Here is the internal bank graphical timeline dated February 2002: 107. Again, this internal timeline picked up just after high-to-low sequencing was deployed in California. As shown in the timeline, Wells Fargo expected the commingling change in combination with the high-to-low change — labeled as BSE Phase 1 — to generate an additional $40 million annually in overdraft fees nationwide (TX 36; Tr. 73). This was over and above the millions that the high-to-low change alone was already going to add. These financial projections were echoed in a number of internal spreadsheets pertaining to these initiatives {see, e.g., TX 61). 108. The commingling change was implemented in December 2001. Prior to this date, the bank posted all debit-card transactions from highest-to-lowest dollar amount, then all cheeks from highest-to-lowest dollar amount, and then all ACH transactions from highest-to-lowest dollar amount. In other words, the different transaction types were posted separately. In December 2001, however, the bank began commingling debit-card transactions with checks and ACH transactions and posting the entire group from highest-to-lowest dollar amount. Since checks and ACH transactions tended to be the larger items, commingling assured that balances would be consumed more rapidly so as to increase the number of overdrafts under a high-to-low ordering. This was the meaning of the $40 million revenue boost predicted by the memo. 109.Consistent with the $40 million projection in the February 2002 document, Wells Fargo Executive Vice-President Ken Zimmerman, who personally took part in the decision-making process for the commingling change, admitted at trial that the bank was well aware that commingling was expected to produce a “significant increase in overdraft income” (Tr. 1422). According to Mr. Zimmerman, the increase in overdraft income was “one of the significant factors in the decision-making” process for the commingling change. Indeed, the trial record shows that it was the only significant factor. 110. The undeniable connection between commingling and high-to-low resequencing was also clearly evidenced by internal bank memos. In the February 2002 BSE memo, the bank explained that the December 2001 commingling change was designed “to more-closely mirror true High-to-Low sort order” (TX 36). This is significant because Wells Fargo knew— and its own expert witness, Professor Christopher James, confirmed at trial— that high-to-low posting would “mechanically ... lead to more overdrafts” than other posting order (Tr. 613, 1863-64). It is a mathematical certainty. Indeed, Mr. Zimmerman, who was personally involved in the bank’s decision, admitted that he recommended against a high-to-low posting order due to the adverse impact it would have on customers (id. at 113, 160-61, 340). His objection was overruled. Thus, the additional revenue expected from commingling was premised upon the adverse impact of high-to-low posting. 111. In this connection, the February 2002 memo went on to cheer that “[t]he two most important OD/NSF [revenue] drivers [we]re up significantly” following the December 2001 commingling change (TX 36). These “two most important OD/ NSF drivers” were: (1) the percentage of Wells Fargo checking accounts incurring overdraft fees and (2) the number of overdraft items per overdrafted account. This is also clearly shown in another bank slide from the February 2002 memo: 112. Based upon Wells Fargo s own analysis of its California customers, the percentage of checking accounts incurring overdraft fees rose 7.8 percent after the commingling change. As telling, the number of overdraft items per overdrafted account rose 10.1 percent over that same time period (ibid.). The commingling of transactions to more closely mirror a “true High-to-Low sort order” was working as planned. 113. A separate internal bank memo dated April 2002 provided additional analysis and commentary on the effect of commingling (TX 37). After crunching the numbers over the prior year, the April 2002 analysis stated that the number of overdraft items per occurrence was up strongly due to the fact that debit-card transactions were “now commingled with checks in the processing stream.” Yet again we see that Wells Fargo knew and expected that commingling would further amplify the overdraft-multiplying effect of high-to-low posting. 114. In sum, this order finds that Wells Fargo intended to boost its overdraft revenue by $40 million via the December 2001 commingling change, relying upon the overdraft-multiplying effect of high-to-low resequencing to generate this additional revenue. 115. Turning to the shadow line, the BSE timeline in the February 2002 memo also showed the May 2002 extension of the shadow line to debit-card purchases, labeled in the document as “BSE Phase 2a.” This was expected by Wells Fargo to generate yet another $40 million annually in overdraft fees nationwide (on top of the $40 million boost expected from commingling) (TX 36). 116. As with the commingling change, extracting more overdraft penalties was the motivation behind the extension of the shadow line to the authorization of debit-card purchases in May 2002. The additional $40 million in overdraft revenue that the bank expected from this change was predicated upon the overdraft-multiplying effect of high-to-low posting. 117. At all relevant times, including now, the vast majority of debit-card purchases followed a two-step process during the class period: authorization and settlement. When a Wells Fargo debit-card holder used his or her card to complete a purchase at a store or restaurant, an authorization request was almost always submitted to the bank then and there. Within a matter of seconds, the authorization request was approved or declined by the bank. An occasional exception to this rule occurred if the purchase was made from a merchant who lacked the capability to submit an electronic authorization request at the time of purchase- — -a rare event. For these merchants, there was no authorization step, only a settlement step. 118. Whether the authorization request was approved or declined by Wells Fargo, the merchant was notified within a matter of seconds at the point of sale. As stated, approval of an authorization request constituted a promise by Wells Fargo to pay the merchant the authorized amount — ie., the debit-card purchase became a “must pay” item. 119. If the debit-card transaction was approved, the merchant would obtain payment from the bank via a separate process called “settlement.” Once the merchant submitted the debit-card transaction to the bank for settlement, the transaction would be posted during the bank’s posting process in the wee hours after midnight, as described above. 120. The time period between authorization and settlement was very short. Wells Fargo’s own expert, Dr. Alan Cox, provided direct testimony at trial that for the vast majority of debit-card purchases, the merchant presented the transaction for settlement within two business days. Indeed, according to Dr. Cox, around 90 percent of debit-card purchases were presented within two business days of authorization, and over half actually cleared on the same day they were authorized (Tr. 1782). For PIN-based debit-card purchases (where the user provided her PIN number at the point of sale rather than her signature), settlement was even faster — it almost always occurred on the same day as the authorization (id. at 640-41, 1023-24). 121. As stated, prior to May 2002, an authorization request for a debit-card purchase would be declined if the customer’s checking account lacked sufficient available funds and the customer did not have enough overdraft-protection funds to cover the purchase amount. No fees were charged for a declination. Given the extremely short time frame between authorization and settlement, this meant that any debit-card purchase that was approved by the bank prior to May 2002 was unlikely to be assessed an overdraft fee when posted. 122. After deployment of the shadow line in May 2002, however, Wells Fargo began authorizing previously declined purchases as prospective overdrafts, assessing an overdraft fee for each overdraft. This initiative was called “overdraft via POS” within the bank, meaning the bank had now found a way to rack up overdraft fees for point-of-sale purchases that previously were protected from overdrafts. 123. From the customer’s perspective — standing at the checkout counter— the shadow line was completely invisible. The bank would approve the purchase without any warning that an overdraft was in the making. 124. Given the extremely short time frame between authorization and settlement, by approving these debit-card purchases when the customer lacked sufficient funds, Wells Fargo expected a marked uptick in overdraft fees. An increase in the number of overdrafted accounts — upon which the high-to-low resequencing could work its magic to the tune of $40 million in additional revenue — was the intended result. Exactly this occurred. 125. It is true, as Wells Fargo says, that when any specific shadow-line authorization is made, Wells Fargo does not know for sure that an overdraft will occur by the time the item is presented for settlement. It is theoretically possible that an intervening deposit may be made to save the day in the short interval between authorization and settlement. While this may occasionally occur, the bank specifically expected when it deployed the shadow line for debit-card purchases that it would generate $40 million annually in additional overdraft revenue. 126. Yet another powerful item of evidence illustrating the bank’s motive with respect to high-to-low posting, the commingling change, and the extension of the shadow line to debit-card purchases was an April/May 2002 email exchange between Mr. Zimmerman and his boss, Les Biller (TX 38, 57). The email exchange was also forwarded to Karen Moore, Senior Vice-President of Wells Fargo’s Consumer Deposits group, and other executives at the bank. These emails (and the PowerPoint presentation appended to them) were written by Mr. Zimmerman in the midst of an unexpected shortfall in overdraft fee revenue in early 2002. The exchange concerned the reasons for the decline, including whether the manipulations in question were driving a