The CFTC announced enforcement actions against three banks and six individuals for spoofing at the end of January. The three banks, Deutsche Bank, UBS, and HSBC, were charged with spoofing in precious metals futures contracts trading on the Commodity Exchange, Inc. (COMEX).
We are reaching the end of a decade since mortgage fraud hit its peak in 2007. However, the latest settlement by IberiaBank suggests that at least one lender continued aspects of mortgage fraud against the Federal Housing Administration (FHA) well after becoming informed of their wrongdoing.
SEC Chair Jay Clayton declared cyber security one of the top enforcement issues at the securities regulator on Tuesday, according to a Reuters article. In line with this comment, we expect that there will be an uptick in the number of rewards to whistleblowers who report cyber security problems that violate securities laws.
In January, the CFTC settled its first civil enforcement action against a bank for spoofing when Citigroup agreed to pay a $25 million fine for sending orders into the U.S. Treasury futures market with the intent of canceling them. Now, the CFTC has entered into its first non-prosecution agreements ever, making deals with three traders who engaged in wrongful conduct but served as cooperating witnesses in that case.
The $89 million settlement in May between Financial Freedom and the United States regarding claims under the False Claims Act and the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 resulted in a $1.6 million bounty for a FIRREA whistleblower.
A media outlet, Financial Planning, is predicting that a pair of SEC whistleblowers will share an award of approximately $70.6 million out of the $307 million in regulatory fines against JPMorgan in 2015. Another outlet, Advisor Hub, put the number at $61 million instead. Either award amount would be the largest in the history of the SEC whistleblower program to date.
Like much of America, we have been following the story of Wells Fargo’s sales tactics and the government response to it. We haven’t discussed this matter in depth yet here on our blog (just a brief comment about its implications for whistleblower retaliation), so I thought we would discuss it following the media reports that the Feds knew of 700 whistleblower complaints at the bank in 2010 regarding its sales practices.
Our whistleblower attorneys speaks regularly with employees and ex-employees of corporations of all sizes after the individual has internally reported suspected wrongdoing and the business has failed to adequately address their concerns. It is not surprising at all to us that tips would be ignored by a company. If large corporations corrected violations of the law after learning about them from their employees, we would not be in the practice of whistleblower law because there would be no need for us.
We also understand how these tips could be packaged together, explained away by the company and dismissed upon Government review. But we will discuss that more below.
Since we haven’t posted on this topic before, let’s briefly recap what has happened. Wells Fargo was fined $185 million, including a $100 million penalty by the Consumer Financial Protection Bureau, last September for fraudulently opening customer accounts. The practice involved as many as 1.5 million bank accounts and 565,000 credit card applications opened without the customer’s consent over a period dating back to at least 2011. Recently revealed evidence suggests it may have been going on since at least 2004 or 2005. It also agreed to settle a class action by consumers regarding the practices for $110 million.
After the practice became public, several ex-employees came forward to discuss their whistleblowing. Between 2009 and 2014, at least five former Wells Fargo employees notified OSHA that they were fired due to concerns about the opening of unauthorized accounts and credit cards. OSHA has recently ordered Wells Fargo to rehire one former manager and pay $5.4 million for its whistleblower retaliation, the largest award ever issued by the agency for an individual whistleblower.
There have been a great deal of investigations concerning the practices at Wells Fargo, both from government agencies and Wells Fargo. Two reports, one from Wells Fargo and one from the government regarding how to improve its regulatory oversite, have been released recently.
A few weeks ago, the Independent Directors of the Board of Wells Fargo put out a 113 page investigation report on sales practices. It examines in substantial detail the roles of numerous individuals and entities within Wells Fargo.
Unfortunately, there is so much evidence in the report that everyone knew Wells Fargo had a problem (at least as early as the December 2013 Los Angeles Times report), that it doesn’t spend much time on the issue of how it could improve its handling of whistleblower tips. Indeed, the most substantial examination of a whistleblower matter is on page 75 concerning a 2011 letter by a group of terminated bankers and tellers from a California branch to then CEO John Stumpf claiming they were unjustly terminated for practices condoned by branch management and happening across the bank.
The report does announce a few organizational changes which may impact how whistleblower issues are treated. It highlights the creation of a new Office of Ethics, Oversight and Integrity (with oversight by the Board’s Risk Committee). It also notes on page 17 that the Board’s Human Resources Committee will increase its oversight of terminations and the EthicsLine implementation.
This may not be the only report put out by Wells Fargo so it is possible one will follow later about changes to its handling of whistleblower tips. Wells Fargo has undertaken efforts to review non-anonymous calls to its confidential ethics line over the past five years to determine whether the employees were terminated within a year of the call. It is not yet known whether it will release publicly the details of that investigation.
The report that triggered the media focus on 700 whistleblowers was issued by the Office of the Comptroller of the Currency (OCC). The OCC is the primary regulator of banks chartered under the National Bank Act and Wells Fargo falls within its Large Bank Supervision operating unit. The Office of Enterprise Governance and the Ombudsman at the OCC completed its internal report two days ago and provided its lessons learned in the aftermath of the revelations about sales practices at Wells Fargo. Much of that report focused on what went wrong with the handling of tips from whistleblowers. It was a shorter document however (13 pages if memory serves).
The OCC report found Wells Fargo had issues with the handling of both consumer complaints and whistleblower cases. Among other things, Wells Fargo failed to document resolution of whistleblower cases and failed to follow up on significant complaint management and sales practices issues. When asked in 2010 about a high number of complaints by the Government, a Wells Fargo Senior Executive Vice President said that company culture generated a high volume of complaints and then they are investigated and addressed.
The OCC itself received 14 whistleblower tips about sales practices from mid-March 2012 to early September 2016. Just over 50% had no documentation in the regulator’s system. Both whistleblower tips and consumer complaints at the OCC are taken in by the Customer Assistance Group (CAG).
The report made numerous suggestions to improve the OCC and prevent a similar situation from happening again. Among the suggestions were for periodic review and analysis of complaints and whistleblower cases, as well as greater efforts to inform the public how to communicate whistleblower information to the OCC.
After this somewhat long review, we are back at the central issue here: how and why whistleblowers get ignored.
1. They don’t consider it a material issue for the company.
Wells Fargo reported $88.26 billion in revenue in 2016. To resolve the allegations concerning what was a massive multi-year violation of the law cost roughly $300 million. At some point, perhaps it should be said (like at many Wall Street investment banks) that government fines like these are just a cost of doing business. Wells Fargo saw 1% of its staff was being dismissed every year for bad sales practices and thought that number was great because 99% were acting ethically.
2. Lack of focus.
We speak to a great number of people that feel every violation of the law, no matter how small, is a vital national issue. As a result, they lump together both important and unimportant matters when they blow the whistle. When highly speculative matters of minor importance get tossed out in the same breath as serious violations of the law, it makes everything less credible.
3. Poor articulation of the details.
The law is complex. So are the factual scenarios that can arise. When non-lawyers try to explain violations of the law, they often oversimplify the facts and the law. If it is not articulated properly, it can be unconvincing. There may be various shades of grey obscuring a black and white violation of the law.
4. No documentation.
In the electronic age, documents matter. If there is no evidence presented, it is harder to disprove witness statements to the contrary.
5. Aggregation of reports.
It sounds like the government was working from a company summary of the EthicsLine complaints. If there was a detailed accounting and investigation of each incident, it would not have been so easy to dismiss. Aggregation hides the severity and specificity of events where the details matter.
6. Many don’t have lawyers.
Would you take an anonymous call from a random employee as seriously as you would a complaint from a high powered attorney seeking money on behalf of a specific client? There is a reason that the EthicsLine is handled by HR and not the Legal Department. Those that do get lawyers are dismissed as disgruntled employees.
7. The tone at the top is wrong.
When the focus is always on meeting advancing sales targets, compliance takes a back seat. This includes investigations of high performers accused of wrongdoing.
8. There’s no fear of the consequences.
“Everyone is doing it.” This isn’t a big deal.
9. Too many excuses.
The report details how Wells Fargo was overrun by individual wrongdoers to the point where it became a systemic and widespread problem. It failed to change the underlying causes of this behavior or the systems that allowed it to happen. Instead, they ended up firing more than 5,000 bad apples before the Government stepped in to say enough is enough.
A Proposed Solution
There is a way to get rid of the excuses and put more power in the hands of whistleblowers. It is not mentioned by the OCC report. But it is what happened at the SEC. Congress passed the Dodd-Frank Act to reward whistleblowers that come forward. It created a department within the SEC to ensure that whistleblowers had advocates. This program has been a success, paying out more than $100 million in rewards in the first six years.
This was the result of the ponzi scheme by Bernie Madoff. Despite a whistleblower tip, the SEC missed it. So, Congress gave whistleblowers a monetary incentive to come forward. Now, investment banks are well aware of the SEC whistleblower program. If they are not taking internal employee whistleblower tips seriously, they do so at their peril.
There has been much discussion about rewarding bank whistleblowers. Former NY Attorney General Eric Schneiderman even proposed legislation in New York State to protect and reward banking, insurance and financial service whistleblowers in 2015.
FIRREA would be one mechanism for the federal government to do so. FIRREA is the Financial Institutions Reform, Recovery and Enforcement Act. It currently provides rewards of up to $1.6 million for whistleblowers providing information about fraud against federally insured financial institutions. Before leaving office, former Attorney General Eric Holder told an audience at New York University School of Law that lifting the cap would significantly improve the Justice Department’s ability to gather evidence of wrongdoing in complex financial crimes. FIRREA has been getting increasing usage both as a tool against mortgage fraud and even cases of consumer fraud involving auto loans. It makes sense to expand it.
It should come as no surprise that we would support this solution. When Congress wanted to put a stop to delayed product recalls, it gave the Transportation Secretary the power to pay auto whistleblower rewards and increased potential fines from the NHTSA. Doing the same for bank whistleblowers would give the OCC a substantial incentive to take control of its whistleblower process and employees to gather the evidence needed to put a stop to Wells Fargo type practices earlier.
The Justice Department is reportedly investigating efforts by Barclays CEO Jes Staley to unmask a whistleblower who sent two anonymous letters to the bank’s board of directors complaining about the hiring of a mid-level executive. Barclays reportedly asked the U.S. Postal Service for assistance in tracking down the sender of the letters, though it claims that it never learned the identity of the individual. It is now being investigated for possible criminal charges and/or violations of the Dodd-Frank Act. The New York State Department of Financial Services is also investigating.
Hidden costs imposed by banks on trading clients are at issue again today with the Securities and Exchange Commission announcing a $382.4 million settlement with State Street over misleading mutual funds and other custody account clients.
A piece of news about Vincente Martinez leaving the SEC alerted us to the first SEC enforcement action of the Bank Secrecy Act against a broker-dealer solely for failing to file suspicious activity reports (SARs) on time.