Case 6
Take CitiMortgage to the Feds?
“Upper senior management just told me and one of my peers that our asses are on the line if these defects didn’t come down. I take that as a threat. This is the final act pushing me to go a different way.”1
SHERRY A. HUNT, A VICE PRESIDENT in CitiMortgage’s (Citi) large O’Fallon, Missouri office, was a Quality Assurance (QA) officer. Her job was to spot credit and documentation problems with new mortgages. She was good at her job. Increasingly however, it seemed that CitiMortgage’s management didn’t want to hear about the problems her group discovered.
It was mid-2011. Hunt had been trying to get the attention of Citi management for over a year. In Hunt’s view, Citi’s quality assurance process was broken. The problem did not lay in her group’s ability to spot problems. Rather it lay in management’s determination to ignore its findings. Instead of avoiding flawed mortgages, management simply wanted to limit reported defects to 5% or less. To accomplish this, management established incentives for employees to “successfully resist” QA’s reported defects. Hunt especially recalled a January 2011 “Star Players” award ceremony. There, in front of over 1000 employees, individuals were congratulated for successfully resisting QA’s findings.2
It was amazing that such stonewalling was going on within Citigroup in 2011. Few institutions had paid a bigger price for flawed quality control. The bank lost almost $28 billion in 2008 alone. Much of that loss was due to subprime mortgage securities that Citi purchased without adequate due diligence. The staggering loss brought Citi to the cusp of bankruptcy. The country’s #2 bank was only saved by a $45 billion federal bailout. Senior management was forced out, and Morgan Stanley’s Vikram Pandit took over as CEO. Gradually normal operations resumed. In 2010 Pandit promised “a new Citi that practiced responsible finance.”3 Investors remained skeptical. There had been too many past promises to fix problems. Attachment 1 provides lists of Citigroup major claims, litigation and settlements that occurred after the financial crisis. As of 2011 Citi’s stock was down 34% over the preceding 12 months and 94% versus its 2006 peak.4 Hunt’s problems were not dissimilar to those which characterized Citi’s operations before the crisis. Essentially they amounted to Citi ignoring its own policies. These were found to be inconvenient by a management focused on short-term objectives. In the process, Citi had exposed itself to major liabilities. When this was pointed out, operating management chose to suppress the information. This was done first by bureaucratic maneuvering and later by intimidation. Hunt had learned this the hard way. She had issued verbal and written warnings to management. Later she went to Human Resources, laying out all the business, legal and ethical issues.5 HR did a cursory investigation and matters died there. When Hunt refused to let the issues drop, the result was a threat to fire her.6
Convinced that internal channels were blocked, Hunt resolved to take action outside the firm. This amounted to becoming a whistleblower, and she knew that to be a dangerous course. Before making her next move, she decided to talk to a lawyer. A meeting with a local attorney, Finley Gibbs, was scheduled for tomorrow. In preparation for the meeting, Hunt decided to review notes she had prepared to brief Gibbs on her situation.
CitiMortgage Ignores FHA Procedures
Quality Assurance was a central part of how CitiMortgage originated and sold mortgages. Many of the mortgages it underwrote were later insured by the Federal Housing Administration (FHA). Once insured, the loans carried the full faith and credit of the U.S. government. As such, they could be easily marketed. Citi sold many insured loans to Ginnie Mae, the government sponsored entity charged with making a secondary market in federally insured mortgages.
Before Citi could obtain this insurance, it had to comply with several FHA rules. One requirement is an annual certification that Citi is in compliance with FHA regulations. Among these rules is the need to maintain a quality control program that meets FHA standards. Citi was also required to certify that it had conducted appropriate due diligence on each insured mortgage. Such certifications are important, as FHA does not perform its own due diligence.7
Several FHA rules were of special concern to Hunt. She was worried about the requirement for Citi to perform due diligence on every loan submitted for FHA insurance. Hunt knew this was happening on only about half of Citi’s originations. Second, the FHA requires that quality defect data be used as a basis for upgrading underwriting procedures.8 Not only was this not happening, if anything the opposite was occurring. CitiMortgage management was spending its energy rebutting QA’s findings. Next to no effort was going into improving underwriting.
Finally, there was the most serious matter—fraudulent lending. FHA rules require an approved fiduciary like Citi to self-report mortgage fraud. Hunt knew that QA had identified numerous cases of fraud. FHA rules require that such findings be reported within 60 days of discovery. Yet, from 2005–2010 Citi had not reported a single fraud finding to the FHA.9 For a time QA’s fraud reports had simply piled up into a giant backlog within Citi’s fraud unit. As of 2009, the fraud unit had a backlog of almost 1000 referrals, most of which involved fraud discovered on loans which had quickly defaulted. Unable to perform its basic function, the fraud unit dealt with this backlog by erasing it electronically. The backlog quickly reappeared. By April 2011, Citi’s fraud unit had a new backlog of 400 unprocessed referrals.10
These quality issues created serious potential liabilities for Citi. The bank’s poor quality performance was now reflected in losses at FHA. At some point, the government would become interested in why it was experiencing unprecedented losses on mortgages purchased from Citi.
Since 2004 CitiMortgage had insured 30,000 mortgages with the FHA. By 2011 over 30% were in default; non-performing mortgages now totaled almost 50% on loans issued in 2006–07. Another dimension of FHA’s losses involved Early Payment Defaults (EPDs). EPDs refer to mortgages whose debtor fails to make payments in the loan’s first year of life. Typically, this indicates that something major was missed during the loan underwriting process. By 2011, EPDs had occurred on over 10% of the 2007 mortgages Citi insured with FHA. This record had already cost FHA almost $200 million in claims payments, and more payments were almost certain to be required.11
Hunt considered it very likely that the FHA would eventually seek reimbursement from Citi. This was so because Citi’s quality assurance problems were already well known within the FHA.
Citi Fails to Fix its FHA Noncompliance Issues
The FHA knew something of Citi’s practices because it had audited CitiMortgage in 2008. FHA’s audit turned up numerous instances of Citi noncompliance. The audit report concluded that Citi lacked the internal controls needed to follow FHA requirements. The audit cited examples such as failure to examine all EPD files and inadequate verification that mortgage files contained required documentation, e.g., of income level, employment, etc. Though the findings could have disqualified Citi as a FHA fiduciary, this did not occur. Instead Citi represented to the FHA that it would fix its problems.
Hunt knew that this fix had not happened. Some steps to remedy specific audit findings occurred, but the effort soon sputtered out. Thereafter, CitiMortgage’s operating management maneuvered bureaucratically to marginalize QA’s activities.
This began with the fraud unit becoming hopelessly inept at processing QA’s referrals. The business lines then appointed gatekeepers to review all of QA’s defective mortgage findings. These gatekeepers were charged with reducing the actual number of reported problems. This practice alone violated FHA rules.12 Next the business units established escalation committees. Effectively an appeals committee, this group was comprised entirely of non-controls personnel appointed by business management. Their task was to dispute QA’s findings and make final judgments as to what was officially reported to management. This review system undermined the independence of QA’s findings. Hunt’s boss, Michael Watts, wrote to his business counterparts, protesting this process:
“[We] are getting more than a reasonable amount of pressure to dispute QC findings that are clearly not disputable … The gatekeepers are being pressured to prepare reporting on the number of rebuttals and the percent of those that are successful—essentially a performance goal or measurement of success rate on the rebuttals. Instead of reviewing and analyzing results and then teaching their channels what is needed to improve, they’re being encouraged to rebut legitimate variances in an effort to drive down the rate. It appears that is how their worth is being measured.”13
Watts went on to note that this practice: “is sustainable only until such time as an outside authority discovers and reports the variance rate.” He demanded that the business focus on the root causes of the defects.14
Business management responded by determining that only Tier 1 mortgage defects should be reported as defective. Tier 1 referred to those defects QA judged to be material. This approach marginalized the controls principle that the volume of less serious defects is often an indicator of more serious flaws. Business management then gave incentives for its gatekeepers and escalation committees to limit the number of Tier 1 reported defects. They responded by fiercely contesting QA’s Tier 1 findings. Their perspective was articulated by Ross Leckie, a senior director in Citi’s retail mortgage bank operation, who wrote in November 2010:
“please take [these] in the spirit they are offered, which is to drive down this [variance] rate by brute force … we currently have 10 loans with Tier 1 defects out of 138, or 7.25% … we need for 3 loans to be removed to get to 5.07% …”15
The Star Players award ceremony, where gatekeepers were celebrated for contesting QA’s findings, followed on the heels of Leckie’s note. The cumulative effect on QA was demoralizing. Watts and Hunt reluctantly concluded that management’s principal, and perhaps sole, concern was to reduce defect reports to levels that didn’t impact their compensation.16
Then Watts informed Hunt that her employment status had been threatened. Hunt thought ruefully that nothing seemed to motivate management to focus on real quality control—not Citi’s losses, embarrassing levels of mortgage defaults, a damning FHA audit, Citi’s promises to improve, major levels of fraud findings, or QA’s direct warnings and protests.
Sherry Hunt concluded that CitiMortgage’s internal channels were fundamentally broken. She resolved to take the matter to outside authorities next.
Hunt Meets Her Attorney
Hunt met with Finley Gibbs because she was not sure about her options. Generally she knew that ways existed to contact regulators in this type of case. She also knew that doing so involved grave risks. She could lose her job, her career and her family’s financial well-being—and also could end up seeing nothing happen to correct problems at Citi. Was there a way through this minefield? She briefed Gibbs on the situation. She also indicated that she understood there were risks in becoming a whistleblower, but couldn’t stand by and do nothing.
Gibbs advised that legal protections for whistleblowers had improved over the past ten years. For example, the new Dodd-Frank legislation expressly provided for whistleblowers to share in cash fines paid by violators to the SEC. Still, the risks for whistleblowers were formidable. Many whistleblowers in the past decade had lost their jobs, and then discovered no one else would hire them. Others had reported violations and supported them with documentation, only to see the regulator ignore their findings. Hunt would have to weigh these risks soberly before deciding to proceed. Gibbs promised to give her a letter spelling out the risks and giving examples (Attachment 2).
As for the potential paths forward, Gibbs advised that there were more than one. He indicated that Hunt could take advantage of the Dodd-Frank law and take her issues to the SEC. However, Gibbs was also aware of an alternative, suing CitiMortgage under the False Claims Act (FCA). Gibbs described the FCA as an older law with a more established “bounty” process. He promised to provide Hunt with a second letter analyzing the pros and cons for pursuing her claims under Dodd-Frank vs. the FCA (Attachment 3).
Finally, Gibbs told Hunt that if she did decide to pursue her claims, there were substantial benefits for retaining a lawyer. He promised to include these in the second letter. Gibbs was quick to add that he was not an expert in all the fields where Hunt might need help. For example, he was a specialist neither in defamation nor in securities law. Gibbs did, however, assure Hunt that if she chose to retain him, he would be committed to her cause for however long the process might last.
Three days later Gibb’s promised letters arrived at her home. Hunt slit open the envelopes and began to read. Once finished, she would talk to her husband and then make a decision—pursue action, hunker down and make the best of it, or resign from CitiMortgage.
Attachment 1
Citicorp/Citigroup Complaints & Settlements, 2008–2011
Citigroup to pay $18 mln over credit card practice
By Jonathan Stempel
NEW YORK | Tue Aug 26, 2008 6:01pm EDT
(Reuters) – Citigroup Inc (C.N) agreed to pay nearly $18 million in refunds and fines to settle accusations by California Attorney General Jerry Brown that it wrongly took funds from the accounts of credit card customers.
The settlement calls for the largest U.S. bank by assets to pay more than $14 million of restitution to roughly 53,000 people nationwide, and to pay interest at a 10 percent rate to affected California customers, Brown said. Citigroup will also pay California $3.5 million of damages and civil fines.
Source: http://www.reuters.com/article/2008/08/26/sppage012-n26369737-oisbn-idUSN2636973720080826
Japan Slaps Sanctions on Citibank
By Chris Nicholson
June 26, 2009, 7:18 AM
Japanese regulators ordered Citibank on Friday to suspend all sales operations in its retail banking division for a month starting July 15 because the lender had failed to set up a working system “to make notification of suspicious transactions, including money laundering.”
The Financial Services Authority, referring in a statement to Citibank Japan Ltd. by its initials, cited “fundamental problems with C.J.L.’s compliance and governance system.”
“C.J.L. has not accurately identified a series of problems that were recently found,” the agency added, “and the effectiveness of the internal audit has not been ensured.”
The suspension means that the bank will be prohibited from advertising, soliciting customers or using publicity in relation to its retail banking products.
Source: http://dealbook.nytimes.com/2009/06/26/japanese-regulators-suspend-citibank-retail-ads/
Citibank fraud: Sebi, RBI coordinating efforts
By BS Reporter
Sat, Jan 08, 2011
The Securities and Exchange Board of India (Sebi) and the Reserve Bank of India (RBI) are working in close association in investigating the Rs 300-crore Citibank fraud. The capital markets regulator is already probing the role of brokerages in the matter.
“The co-ordination has been happening between RBI and Sebi and the regulators are working jointly to understand what went wrong,” said Dr K M Abraham, a whole time member at Sebi, on the sidelines of a conference here.
Citigroup to Pay $285 Million to Settle SEC Charges for Misleading Investors About CDO Tied to Housing Market
Former Citigroup Employee Separately Charged for His Role in Structuring Transaction
FOR IMMEDIATE RELEASE
2011–214
Washington, D.C., Oct. 19, 2011 — The Securities and Exchange Commission today charged Citigroup’s principal U.S. broker-dealer subsidiary with misleading investors about a $1 billion collateralized debt obligation (CDO) tied to the U.S. housing market in which Citigroup bet against investors as the housing market showed signs of distress. The CDO defaulted within months, leaving investors with losses while Citigroup made $160 million in fees and trading profits.
Attachment 2—Historical Recreation (HRC)
Finley Gibbs Esq.
Dear Mrs. Hunt;
With reference to our conversation in my office of June 10, below please find a discussion of the risks involved in becoming an external whistleblower. Towards the end of the document, I also discuss ways to mitigate these risks.
There is little to be gained by minimizing the risks to whistleblowers. Anyone undertaking such a path needs to know they will face threats to their career, family, financial security and reputation. There are also the possibilities of being involved in years of acrimonious and expensive litigation. Finally, there is no guarantee that the whistleblower will accomplish the goals he or she sets out to achieve. Therefore, I would advise you to consider going down this path only if you hold a strong conviction in the rightness of your purpose and a willingness to bear these costs should things not work out.
To be more specific about the risks, external whistleblowers are largely regarded as traitors by the corporations that employ them. Whistleblowers are profoundly threatening to corporate top management. Typically whistleblowers only resort to outside disclosure when internal channels have been blocked. This means that top management must respond BOTH to the substance of the whistleblower’s allegations and to an implied failure of internal governance. Often the whistleblower’s charges open the door for civil litigation and even criminal charges. Management faces not only embarrassment but the possibility of losing their jobs and even going to jail. It should come as little surprise that most spare no effort to discredit, defeat and even destroy the whistleblower.
There have been a good number of whistleblower cases during the last decade. These give a reasonable idea of the target corporation’s “defense playbook.” If the whistleblower is still employed, Step 1 is to isolate that person within the firm. This has several purposes. One is to cut the whistle-blower off from other employees who might offer support or further damaging information. The second is to begin preparing the ground to discredit the employee. Later charges of instability, bad performance or disgruntlement don’t stick well when the employee is still on the job, performing competently. Isolation also positions the employee to leave on his/her own. The employee typically is placed in a remote office with no duties and minimal human contact. This may be presented as a “transition” phase, but typically there are no future plans. Most eventually figure this out and depart. The firm avoids any “wrongful dismissal” suits while launching the now-former employee down a path towards financial difficulties.
Step 2 involves discrediting the whistleblower. This again is done for several reasons. One is to hurt the employee by making him/her unemployable. This reduces the whistleblower’s staying power, rendering him/her more susceptible to dropping the complaint or settlement. The second, more important motive is to provide an alternative narrative explaining the employee’s complaint. The firm can be expected to scour its employee records and use private investigators to unearth anything that can be used to damage the whistleblower’s credibility. The gloves typically come off at this point. The firm is now getting ready for a possible day in court. Damaging the potential witness’ testimony is a high priority.
Step 3 will be prolonged legal action. The firm will test the whistleblower’s convictions and financial staying power. It can be expected to file many motions, argue procedure and ask for repeated postponements. The legal process can thus stretch out over several years. Some whistleblowers will tire and accept a quiet settlement.
Step 3 above is specific to cases where the whistleblower files suit against the firm. Many whistleblower cases follow a different course. In these the whistleblower complains to regulators who then pursue the case. In such situations the target firm can be expected to use all it lobbying power and other forms of influence to deter the regulator from taking the complaint seriously. Damaging the whistleblower’s credibility is very helpful to getting a complaint dismissed. If the target firm cannot kill the complaint outright, it will try to prolong the regulatory process. This, however, is more difficult than extending the legal process, as regulatory processes offer fewer delay opportunities than the courts.
Several conclusions should be drawn from the above. One is that a whistleblower will likely not keep his/her job. Second, they are unlikely to find new employment in the same industry. Firms have shown almost universal aversion to hiring the source of public complaints against a competitor. Third, if the complaint goes to court it will take years to resolve. If it goes to a regulator, the whistleblower will be relying on the interest and attention span of that body to pursue the matter. There are no guarantees of a successful regulatory outcome. The record of regulators during the last decade has been disappointing at best—and some would describe it as woeful. The SEC’s performance in such matters has been especially disappointing. Harry Markopolos, the Madoff Ponzi scheme whistleblower who took his information to the SEC, would later entitle his book No One Would Listen: A True Financial Thriller. Of late, the SEC has been more active.
While whistleblowers face obvious risks, means exist to mitigate them. Legal protections for whistleblowers have improved dramatically in the past decade. This process began with Sarbanes-Oxley (2002) and was extended by the Dodd-Frank legislation (2010). My second letter will discuss these protections in more detail. One aspect, however, deserves comment here. Dodd-Frank and other laws provide that whistleblowers whose information leads to successful actions against a firm can share in the financial penalties paid by the firm. These penalties can be sizeable and the whistleblower’s share can reach up to 30%. Such “bounties” can insulate the whistleblower from the financial consequences of having sacrificed job and career. The prospect of sharing in fines or settlements also provides a strong incentive to endure the prolonged process involved.
The other principal means of risk mitigation is to hire an attorney before disclosing any information internally or publicly. In doing so the whistle-blower greatly expands his/her tactical options. For example, the attorney can do the contacting of the firm or regulators; meanwhile the prospective whistleblower remains anonymous. The attorney can contact control and audit executives within the firm. He can also approach independent board members with the information if he senses management will try to contain the disclosures. An attorney can remind various managers and directors of their potential legal liability for failing to respond to valid complaints. The attorney can also test the waters with regulators, gauging their level of interest. Hiring an attorney often lends credibility to the complaint, as the attorney is presumed to have performed some due diligence before pursing the matter. Finally, the attorney can advise the whistleblower regarding such matters as filing suit versus working with regulators, and when to allow one’s identity to be known.
In combination, bounties and the use of an attorney can substantially mitigate many of the whistleblower risks. Bounties can mitigate financial and career issues, while a motivated, committed attorney can help shield the employee from defamation. The attorney’s advice should also sharpen the whistleblower’s tactical game.
Ultimately, the whistleblower’s decision is a personal one. Hopefully the above information provides a realistic depiction of the risks and also the available means to hedge them.
I look forward to possibly being of service if you decide to pursue this matter further.
Attachment 3—Historical Recreation (HRC)
Finley Gibbs Esq.
Dear Mrs. Hunt;
As promised, this letter deals with the significant legal protections now provided for whistleblowers. It also discusses the opportunity for cash rewards (bounties) available if a whistleblower provides “original information” that results in a successful enforcement action. Finally, the letter discusses alternative routes by which you may bring your concerns to the attention of regulators.
Legal Protections for Whistleblowers
Whistleblowers gained significant legal protection with the passage of Sarbanes-Oxley (SOX) in 2002. That law made it a federal felony to retaliate against a whistleblower that provides information about a violation of federal laws. This means retaliating against a whistleblower who reports such matters as securities law violations and price fixing will be treated as a felony. Companies and individuals are subject to both criminal and civil liability for engaging in retaliation. The definition of retaliation is broad and includes such items as harassment, threats, suspension and demotion along with firing.
Despite these robust provisions, SOX has an uneven record of protecting whistleblowers. Part of this is the law’s orientation. SOX is designed to encourage “up the line” reporting of issues. Said differently, it seeks to encourage internal whistleblowing. Consequently, its protections are focused on protecting the employee’s status within the firm. It is less concerned with promoting enforcement actions by regulators.
Another problem with SOX is procedural. Whistleblowers must first report their grievance to the Department of Labor (DOL), and must do so within 90 days of the events which constitute their complaint. Only if DOL fails to make a decision within 180 days is the whistleblower allowed to file suit in Federal Court. This procedure resulted in many frustrated whistle-blower claims during the Bush administration. Secretary of Labor Elaine Chao chose to interpret these SOX provisions as applying only to publicly registered holding companies and not to their subsidiaries. Despite being advised by congressional leaders that this was not the legislative intent, Chao’s DOL ruled in favor of the whistleblower only 17 times in over 2000 cases. In the process, these negative decisions also enjoined the whistleblowers from later filing suit.
Another SOX problem concerned its provision for damages. SOX made employers liable for back pay, compensatory and special damages and legal fees. As complete as that may sound, it proved underwhelming to many potential whistleblowers. SOX’ labor law focus meant that these provisions were adjudicated within an “earnings & salary” compensatory context. There were no provisions for multiples of lost compensation or sharing in punitive damages. At best a whistleblower would be “kept whole” after being out of pocket for years. It also didn’t address employability going forward. Consequently, SOX failed to protect whistleblowers against the great risk that their future earning power would be irrevocably damaged. This proved to be a special factor for high-earning Wall Street employees. Remarkably few of these came forward during the period leading up to the financial crisis.
Congress passed Dodd-Frank (DF) in 2010 in part to remedy these defects. DF clarifies the protections for whistleblowers who take information to the SEC and other agencies. It also moves beyond SOX’ focus on internal reporting, and encourages bringing “original information” to regulators. Most important, whistleblowers no longer must seek administrative relief (i.e., a DOL decision) before filing a law suit. Such suits may be filed straight away, or may be brought up to six years after the alleged retaliatory action. Compensation for damages now includes twice back pay. Enforcement action on these provisions is lodged in the SEC.
Dodd-Frank’s other key addition is its bounty provisions. These are discussed below.
DF’s Bounty Provisions
DF’s bounty provisions attempt to provide whistleblowers with financial incentives commensurate with the risks typically faced. In doing so, it seeks to encourage many more individuals to bring information to regulators. These provisions are having an effect. One indication of this is the appearance of law firms advertising their ability to assist whistleblowers interested in capturing such bounties.
DF provides that a whistleblower may be eligible to receive a bounty of 10–30% of aggregate monetary sanctions obtained by the SEC and other federal entities in related actions. The aggregate sanctions are computed from penalties, civil and criminal fines, disgorgement and interest. The SEC enjoys wide discretion to set awards within this range based on the significance of the information, risk incurred by the whistleblower, and programmatic interest of the Commission, among other factors.
To put this in perspective, if an SEC action achieves fines of $100 M, a relevant whistleblower will be eligible for a bounty of $10–30 million for providing useful “original information.”
The SEC recently published rules governing how it will administer such cases. The minimum aggregate monetary sanction for paying a bounty is $1 million. Original information cannot be public information. Certain persons are excluded from being whistleblowers, e.g., directors, auditors and compliance officers. This latter provision would seem to apply to you. However, there is an exception for information bearing on the potential for “substantial injury to the financial interest or property of the entity or investors.” In such cases the “excluded person” may report to the SEC 120 days after having reported the information through appropriate internal channels. This exception fits your situation, and I do not believe the statute’s language disqualifies your case.
Other relevant provisions include the fact that bounties are only paid in cases where successful enforcement action results in monetary sanctions. This means there will be no bounties if the SEC or other agencies don’t act, are unsuccessful, or fail to secure monetary sanctions. There is also no guarantee that the whistleblower can remain anonymous. Initial reports to the Commission can, however, be made anonymously through an attorney. Once the SEC has obtained monetary sanctions, whistleblowers must file a claim to be eligible for a bounty award. SEC enforcement actions typically take 2–8 years from opening an investigation until sanctions are obtained.
DF’s bounty provisions provide for cash rewards that truly compensate whistleblowers for risking their careers. This development plus the enhanced legal protections improve the chances for a whistleblower to obtain a reasonable outcome. The whistleblower’s greatest risk today is that of inaction by the regulator that receives its information. That could change in the future if probusiness forces succeed in passing legislation curtailing DF’s bounty provisions. There is, for example, draft legislation in the House of Representatives that would require whistleblowers to “report upward internally” before taking their information to outside authorities.17
Possible Legal Paths Forward
As noted above, your circumstances fit into the DF exception for a compliance officer taking disclosures to the SEC. This path is open to you. You would be eligible for bounties if the SEC successfully secures monetary sanctions via an enforcement action.
An alternative path is available. You could approach the Justice Department to pursue a suit under the False Claims Act (FCA).
The FCA, also known as the “Lincoln Law,” is an old law passed during the Civil War to curtail war profiteering (hence the name). It was significantly amended in 1986 to clarify that it applied to defrauding government programs, e.g., Medicare. In its current form the law allows private parties to file actions on behalf of the government against parties who are defrauding the government.
The law’s qui tam provisions allow the private filer to recover 15–25% of any damages recovered by the government. Since 1986 the federal government has recovered over $22 billion using this law.
Your circumstances are eligible for a FCA suit because CitiMortgage’s failure to comply with FHA rules potentially defrauds that government entity; to say it differently, FHA is paying insurance claims that would not have arisen if CitiMortgage had adhered to the FHA’s rules.
There may be several advantages to considering an FCA suit. For one thing, you can take action. You would not be hostage to an SEC decision whether or not to act on your information. You can file an FCA suit and let the government decide whether to join you. Once a suit is filed, there is little downside to the government for joining it so long as the information supporting the suit is credible.
Second, you will be relying on established case law rather than the judgment of bureaucrats. This could favorably influence both the disposition of the case and the damages awarded, i.e., a court looking at case law may be both more predictable and less lenient than the SEC looking to add a notch to its belt via a quick settlement.
Third, the bounty payment process is well established for the FCA. For DF, the bounty process is still unchartered waters. The SEC’s new rules set up a claims committee to consider possible awards once: a) monetary sanctions have been received, and b) the whistleblower files a claim. How this process will perform in actuality is yet to be determined.
Of course, DF does provide for awards up to 30%. Your information is both relevant and very credible. On the merits you should be eligible for the highest possible award. The SEC also has taken many actions against Citigroup. It may feel that the institution has failed to respond to prior actions, and thus may press aggressively for the most punitive sanctions possible.
As with many legal strategies, there are pros/cons to both approaches. The important thing for you to consider is that you do have options. Both routes look viable.
I would be happy to meet with you to discuss these options further.
Author’s Note
This case study is something of a capstone case on the circumstances whistleblowers must face. It builds on the earlier cases involving Sherron Watkins and Eric Kolchinsky. Ms. Watkins’ case depicted the whistleblower’s plight pre-SOX. Kolchinsky’s cases consider circumstances post-SOX. These treat both the added protections SOX provided but also the gaps in that protection—gaps especially relevant to people working in the financial industry. This CitiMortgage case is intended to depict a whistleblower’s current options. It outlines their legal situation after Dodd-Frank; it goes on to describe the law’s encouragement for whistleblowers to go directly to regulators, and alternative routes for obtaining bounty awards.
The CitiMortgage case also recounts the risks and unfortunate treatment handed out to many whistleblowers during the past decade. Especially sobering is the behavior of President Bush’s Department of Labor in dismissing all but a handful of whistleblower complaints. The SEC’s performance in responding to whistleblower reports of corruption was hardly better.
Students studying this case are asked to weigh the risks of becoming a whistle-blower against Hunt’s desire to do the right thing—and then decide if the new, post-DF landscape provides sufficient mitigation of whistleblower risks. This case does not involve any choice between pursuing internal versus external channels. The internal routes are deemed effectively closed. If a decision is made to pursue the whistleblower path, a second decision involves doing so under DF versus the False Claims Act. Attachments 2 and 3 are key documents which frame the arguments for and against becoming a whistleblower, and the legal options available to Hunt. The alternatives to whistleblowing would be to remain at CitiMortgage or leave the company.
This case is based upon the Justice Department’s suit against CitiMortgage, to which Ms. Hunt was also a party. The suit was settled and the case reflects the facts as reported in the Justice Department’s settlement announcement. That information is supplemented by press reports and interviews given subsequently by Ms. Hunt and her attorney, Finley Gibbs. The case has been read by Richard Bowen, who worked with Ms. Hunt at CitiMortgage. His comments confirm the description provided of Citi’s behavior. The case has also been read by Sherron Watkins and Eric Kolchinsky, who commented on its depiction of whistleblower risks.
Attachments 2 and 3 are Historical Recreations. The specific advice given Hunt by Gibbs is not a matter of public record and is subject to attorney-client privilege. The attachments do not purport to replicate Gibbs’ actual advice. Rather, they intend to provide an accurate depiction of the legal landscape facing whistleblowers at the time Hunt was considering what to do. In this they reflect public information on DF and the FCA, most specifically information provided by the law firm, Cadwalader, Wickersham & Taft, in a “Clients and Friends” memo dated May 26, 2011. Students should use these two attachments as they weigh the pros/cons of the alternative legal routes.