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Wells Fargo


Two companies have captured headlines recently but not for their philanthropy or good works.

Instead these major corporations have angered consumers and politicians alike with what many have called displays of pure corporate greed.

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The Offenses

Mylan Inc. (NASDAQ:MYLC) was discovered to have jacked up prices 500% over 9 years on its life-saving EpiPen.

Wells Fargo (NYSE:WFCD) employees, allegedly under direction from superiors bilked customers out of millions of dollars by opening unauthorized accounts in order to meet sales quotas.

Adding insult to injury, Mylan admitted Monday that the $50 per EpiPen profit company CEO Heather Bresch reported to Congress last week was actually 60% higher at $83 per pen.

Profit At Any Price

Walter Isaacson, CEO of Washington-based Aspen Institute think tank said on CNBC recently, "It makes us wonder why corporate America can't keep its mind on the fact that it's not just about seeing how much money they can make for themselves but seeing how they can serve customers."

Isaacson’s remarks were delivered ahead of separate appearances by both company CEOs before Congress. According to Isaacson no excuse is good enough. These companies, he said, “should smelled something was wrong there.”

An Immaterial Fine

As Action Alerts senior analyst Scott Berman noted on Jim Cramer’s TheStreet, the $185 million fine levied against Wells Fargo is immaterial to Well Fargo's bottom line.

"The key,” Berman said, “will be if this impacts Wells' ability to cross-sell in the future.” Berman went on to suggest the fines and revelations levied against Wells Fargo will cause irreparable harm. Berman says as long as the company shows a commitment to making things right moving forward, long term impact should not be hugely negative.

Pricing In The Downside

As for Mylan, CNBC reported that any negative impact on that company due to what many see as price gouging has already been priced in to company shares.

This was the opinion of Elliot Wilbur, senior research analyst at Raymond James, who said, “While it's "certainly clear that there will be negative impact going forward, (the bad news) is largely priced into the equity (at this point).”

Does It Ever Matter?

A 2005 study by the Whitcomb Center for Research in Financial Services examined the involvement of Citigroup Inc. (NYSE:CD) in cases of corporate fraud, trading abuses and conflicts of interest by both Enron and WorldCom.

The goal of the study was to determine what, if any, effect Citigroup’s involvement in these two major scandals had on the price of Citigroup stock.

The study indicated that losses of firm value during litigation were much larger than the settlement amount. The authors also suggested that private litigation is less harmful to a firm’s reputation and bottom line than action taken by the government.

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Investors Take Note

The implication then is that when companies like Mylan or Wells Fargo are subjected to Securities and Exchange Commission or other government action, the impact on P/E ratios may be more harmful than if the companies merely face private litigation by consumers or others.

While these suggestions are far from conclusive, it makes sense to distinguish between companies that simply anger consumers or make a mistake versus those whose actions rise to a level that involves the government.



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