Company
officials, she alleged in a lawsuit, berated her for reporting that
sales staffers were pushing through mortgage deals based on made-up
borrower incomes and other distortions, telling her that she didn’t “see
the big picture” and that “it is not your job to fix Wells Fargo.”
Management, she claimed, ordered her to stop contacting the company’s
ethics hotline.
In the end, she said, Wells Fargo forced her out of her job.
Parmer isn’t alone in claiming she was punished for objecting to fraud in the midst of the nation’s home-loan boom. iWatch News has
identified 63 former employees at 20 financial institutions who say
they were fired or demoted for reporting fraud or refusing to commit
fraud. Their stories were disclosed in whistleblower claims with the
U.S. Department of Labor, court documents or interviews with iWatch News.
“We
did our jobs. We had integrity,” said Ed Parker, former fraud
investigations manager at now-defunct Ameriquest Mortgage Co., a leading
subprime lender. “But we were not welcome because we affected the
bottom line.”
These ex-employees’ accounts provide evidence that
the muzzling of whistleblowers played an important role in allowing
corruption to flourish as mortgage lenders and their patrons on Wall
Street pumped up loan volume and profits. Codes of silence at many
lenders, former employees claim, helped discourage media, regulators and
policymakers from taking a hard look at illegal practices that
ultimately harmed borrowers, investors and the economy.
Whistleblower
advocates say weak federal and state laws also helped prevent finance
industry workers from being heard. Congress passed tougher laws in the
wake of the financial crisis, but whistleblowers and their advocates say
labor-law enforcers, securities-law cops and banking regulators need to
do more to ensure that banking workers can safely report fraud and
other abuses.
For their part, banking industry representatives reject the idea that employees were punished for reporting problems.
In
court documents, Wells Fargo denied Parmer’s charges that management
interfered with in-house fraud watchdogs. The bank said Parmer was never
prohibited from calling the ethics line and that its internal
investigation showed that no one retaliated against her and that “no
fraudulent activity occurred.”
A Wells Fargo spokeswoman told iWatch News
that the bank has extensive protections for internal whistleblowers and
that it is the responsibility of all employees to raise concerns about
ethics breaches or law violations.
“We have a strict code of
ethics and a no-retaliation policy,” Wells Fargo spokeswoman Vickee
Adams said. “We take responsibility for our actions, and when there’s
evidence of a mistake and there’s something that’s needs to be
corrected, we take action.”
‘Zero tolerance’
iWatch News has reported on former employees of Countrywide Financial Corp.
who claimed the company retaliated against them for objecting to
falsified mortgage documents and other fraud. In September the Labor
Department ruled
that Bank of America Corp., which bought Countrywide in 2008, had fired
Eileen Foster, the mortgage lender’s fraud investigations chief, as
punishment for finding widespread fraud and for trying to protect other
whistleblowers within the company.
Further investigation reveals that concerns about the abuse of whistleblowers weren’t limited to Countrywide.
Most
of the workers who claimed they were punished for trying to fight fraud
worked at giant firms such as Wells Fargo or Washington Mutual (WaMu).
Others worked at smaller lenders that joined the rush to sell home loans
during the boom years.
Wherever they worked, their accounts are
similar. Many claim that commission-hungry workers falsified loan
applicants’ incomes and bank statements, pushed appraisers to exaggerate
property values and, in some instances, forged consumers’ signatures on
documents.
In many cases, the former employees say, management encouraged the fraud and protected the fraudsters.
Parker,
the former Ameriquest fraud investigations chief, claims that he had
few problems when he did “ones” and “twos” — investigating cases that
involved an employee or two who could cause only limited damage, he
said. But things changed, he said, when he tried to fight systemic fraud
by focusing on branches or regions where fraud was so prevalent,
workers joked that bogus documents were being produced in the “art
department.”
Management instructed his unit to limit its
investigations by reducing the number of loan files it pulled when it
went into a branch, Parker said. He was left out of meetings and key
decisions and, eventually, squeezed out of his job, he claimed.
Ameriquest
later agreed to pay $325 million to settle loan-fraud allegations by
authorities in 49 states and the District of Columbia. It stopped making
loans in 2007.
The company said previously in a written statement
that Parker was a “disgruntled former employee” who lost his wrongful
dismissal claim against the company before an arbitrator. In a 2007
opinion, the arbitrator ruled Parker hadn’t been able to prove that the
company’s treatment of him was connected to his reports about fraud,
adding that it “stretches the imagination” to think a company would
retaliate against a fraud investigator for “doing his job.”
More
generally, Ameriquest said it “had a policy of zero tolerance for fraud.
When problems were discovered, the company addressed them, including
immediately terminating the employee or vendor and pursuing civil and
criminal action against them.”
‘Fraud is fraud’
At
a White House press conference in October, ABC News correspondent Jake
Tapper asked President Obama why his administration hadn’t pursued
criminal cases more aggressively in the aftermath of disasters at Lehman
Brothers and other banks.
“I don’t think any Wall Street
executives have gone to jail, despite the rampant corruption and
malfeasance that did take place,” Tapper said.
Obama replied that
in many instances the government might have trouble making criminal
charges stick, because “a lot of that stuff wasn’t necessarily illegal.
It was just immoral or inappropriate or reckless.”
Obama isn’t
alone in suggesting that criminal fraud by banks wasn’t the main cause
of the nation’s financial disaster. Bankers have cited unpredictable
market conditions, the federal government and borrowers as being among
the chief culprits.
In congressional testimony, former Washington
Mutual chief executive Kerry Killinger blamed borrowers for misleading
WaMu about their incomes and other details in their loan applications.
“I’m
certainly very disappointed to think about my customers lying to me,
because that’s fraud and it shouldn’t happen,” Killinger said. “But I
think an objective look at things is that there must have been
situations where people did not tell the truth on their applications."
Many
whistleblowers who worked inside major banks counter that it was fraud
by lenders — not borrowers — that was the driving force in the growth of
toxic loans that caused the mortgage meltdown.
“Fraud is fraud,”
Parker said. “It’s fraud if someone changes information in a loan file
without the borrower’s knowledge or does anything deceptive to get a
loan approved and passed through. How can you say those are not criminal
acts?”
Parker and other former mortgage workers say some
borrowers did take part in the fraud, but they usually did so with
coaching from sales representatives who knew how to work the system to
get deals done. And in many cases, Parker and others say, borrowers
weren’t aware of the deception and were fooled by bait-and-switch
salesmanship and other tactics used by the mortgage professionals who
controlled the process.
A two-year U.S. Senate investigation found
that senior management at Washington Mutual ignored clear evidence that
bank employees were engaging in fraud.
In a report
released in April, Senate investigators noted that an internal WaMu
review of a high-volume loan center in Southern California found that as
many as 83 percent of the loans it booked contained fraud. Despite
in-house gatekeepers’ warnings about fraud at that location and other
loan centers, WaMu executives took “no discernable actions” to deal with
problem, the Senate report said.
Top sales managers suspected of
fraud, the report said, were allowed to continue to produce huge volumes
of loans and win trips to Hawaii as members of WaMu’s “President’s
Club.”
WaMu collapsed in September 2008, a $300 billion
institution buried in bad loans. It was the largest bank failure in
American history — and one of the biggest casualties of risky practices
and missed warning signs stretching back to the start of the last
decade.
Early warnings
In the spring and summer of 2001, Matthew Lee was a busy man.
A fair-lending activist and blogger on innercitypress.org,
Lee was fielding a growing number of emails and phone messages from
people who worked at Citigroup’s subprime lending unit, CitiFinancial.
The lender, they told Lee, was using slippery methods to trap borrowers
in cycles of overpriced debt.
The more he reported the
whistleblowers’ information on his website, the more whistleblowers
contacted him. “I can’t count the number of times people called me and
said: ‘It’s actually worse than you described. Let me tell you about
it,’” Lee recalled.
In all, Lee estimates, he talked with three dozen current and former CitiFinancial employees.
One
continued helping Lee even after he lost his job at Citi, digging
through trash bins outside CitiFinancial branches around Tennessee and
rescuing internal memos and other documents that, in Lee’s view,
provided evidence of the lender’s “pervasive lawlessness.” The documents
would arrive via overnight mail, often damp and smelling of used coffee
grounds.
One former CitiFinancial employee, Steve Toomey, agreed
to go on the record, signing a statement that said managers pushed
workers to mislead borrowers about the costs of their loans and to
falsify information in borrowers’ files. Lee filed Toomey’s affidavit
and other documents with banking regulators at the Federal Reserve.
CitiFinancial
immediately denied the allegations against the company, asserting, for
example, that Toomey had only raised questions after “he concluded that
the company would not pay him monies that he demanded to resolve an
employment dispute.”
With the pressure building, Citigroup went
out of its way to warn other current and former employees to keep quiet
about what went on at CitiFinancial, according to Reuters news service.
Citigroup, Reuters said,
hired a famed litigator “to help fight allegations of illegal lending
practices and prevent former employees from bad-mouthing the financial
services giant.” Mitchell Ettinger, one of Bill Clinton’s lawyers in the
Paula Jones case, met with at least 15 current or former employees,
reminding the ex-employees that Citigroup would enforce the
“non-disparagement clauses” in their severance agreements with the
company, Reuters said.
Lee charged that this was an attempt to
paper over evidence of misconduct inside CitiFinancial. Why, he argued,
would Citigroup dispatch a partner from Skadden Arps, described by
Forbes magazine as “Wall Street’s most powerful law firm,” to talk with
low-level employees?
Citigroup told Reuters the bank had acted
properly. It added that the standard non-disparagement clause in the
bank’s severance agreements wouldn’t prevent ex-employees from reporting
illegalities.
Ettinger did not respond to requests for comment from iWatch News. A Citigroup spokesman declined to answer specific questions from iWatch News
about former employees’ complaints. He said “issues from that time
period” were “investigated and responded to appropriately by the
company.”
The Federal Reserve eventually fined CitiFinancial $70 million
for regulatory violations. Lee said that the Fed focused mainly on
technical issues, however, and did nothing to protect whistleblowers
from intimidation by the bank.
That, Lee said, made it less likely
that more employees would come forward in the future with information
about misconduct at Citi — or at other financial institutions that
wanted to keep misbehavior secret.
“When people do step forward
and put themselves at risk, you need to aggressively say to them, ‘If
you’ve received any threats from the company, let us know,’” Lee said.
A spokeswoman said the Federal Reserve couldn’t comment on issues involving individual banks.
‘Their integrity … failed’
As
whistleblowers were drawing scrutiny to Citigroup, then the nation’s
largest commercial bank, others were raising questions about Washington
Mutual, the nation’s largest savings and loan.
One of them was
Theresa Hagman, a vice president in WaMu’s custom home-construction
lending division. In 2003, Hagman spotted an increase in the number of
construction loans going into default. She believed this was happening
because loans were being pushed through without proper documentation, in
violation of federal lending laws.
But when she pressed the issue
with a high-level sales manager, Hagman later testified in a Labor
Department hearing, he jumped out of his chair and charged her,
screaming at her as his face purpled and veins popped in his neck. (In
his testimony, the manager conceded he’d had disagreements with Hagman
but denied they’d had heated confrontations.)
As an internal
investigation proceeded, a senior vice president wrote: “If this wasn’t a
good example of a need for a Fraud team, then I can’t find one. This
poor individual is feeling like she is getting no support from her
management.”
The senior executive’s concerns weren’t enough to protect her from more retaliation, Hagman said.
“I
was being brutalized, and they knew it,” Hagman testified. “I was
sharing the emails with everybody, pleading for protection. … We had
borrowers that were being damaged and employees that were scared and
crying.”
In March 2004, WaMu fired her.
Hagman filed a claim
for federal whistleblower protection under the Sarbanes-Oxley Act, the
corporate reform law passed in response to accounting frauds at Enron
Corp. and other big companies.
Hagman told an administrative law
judge that there were “senior-level people in this organization who are
still there today who did not tell the truth. Their integrity and their
honor … without question failed.”
WaMu maintained that there was
no retaliation, only miscommunication between Hagman and her bosses. It
said she hadn’t been fired, she’d simply been let go as part of a
restructuring.
The judge sided with Hagman. He ordered that WaMu pay her more than $1 million.
‘Silent treatment’
The
whistleblower affairs at Citigroup and WaMu came as the mortgage market
was beginning to gain steam, recovering from a late 1990s credit crisis
that had put dozens of subprime lenders out of business.
By 2004,
mortgage industry production and profits were exploding. As the push to
book loans grew to a near frenzy, industry insiders recall, the
atmosphere at many mortgage-sales operations devolved into a cross
between a “boiler room” operation and a frat-house blowout.
At
Citizens Financial Mortgage Inc., a small Pennsylvania-headquartered
lender, the out-of-control behavior included an ugly mix of sexual
harassment and fraud, a lawsuit filed by a former loan processor at the
company charged.
Gina La Vitola claimed one manager at her branch
in Essex County, N.J., ranted and cursed and gambled on sports during
office hours, even getting a visit from a bookie delivering a wad of
cash. On several occasions, she said in her lawsuit, the manager picked
her up, threw her over his shoulder and then used her “as a weight bar
to see how many squats he could do.”
Supervisors’ behavior
degenerated from vulgar to threatening, she claimed, when she started
complaining about inflated property appraisals and other misconduct.
Managers often forged borrowers’ signatures on loan documents and made
up fake verification of employment forms, her lawsuit said. One manager,
the suit said, had an arrangement with a friendly business owner who
was willing to falsely claim that the manager’s loan customers were on
his payroll.
After she reported the problems to Citizens’
president, she claimed, she got “the silent treatment” from coworkers
and her bosses drastically changed her work hours and duties.
Finally,
she said, a manager telephoned her and explained that, since her
complaint, the “vibe is not there” in the office. That was a problem, he
said, because he was “big about vibe, energy.”
He told her the company was letting her go, she claimed.
The company strongly denied her allegations. The case was settled on undisclosed terms. A former company official confirmed to iWatch News that Citizens was no longer in business, but said he couldn’t comment on the lawsuit.
Fraud sleuths
As
mortgage salespeople embraced creative methods for pushing mortgages
through the system, they were being stalked by a band of internal
watchdogs.
Financial institutions keep fraud investigators and
other gatekeepers on staff in part because they need to show regulators
and investors that they have solid controls in place.
Many of these watchdogs took their jobs seriously.
In the spring of 2005, Darcy Parmer joined a team at Wells Fargo that was working on a plan to create a fraud detection report.
By
doing queries within the bank’s computerized mortgage-application
system, Parmer said, she and other fraud sleuths found a large number of
duplicate credit applications submitted to various branch offices and
divisions within Wells Fargo. It appeared to Parmer that loan officers
were helping borrowers who’d been turned down for loans resubmit their
applications elsewhere within the bank, inflating their incomes from one
application to the next by as much as 100 percent.
The report,
Parmer believed, was a great tool for sniffing out fraud. In 2006,
however, management terminated use of the fraud detection report, Parmer
said.Nothing was put in place to replace it, she said.
It wasn’t
the only time that higher ups interfered with internal watchdogs’
ability to do their jobs, according to Parmer’s lawsuit in federal court
in Colorado. Her court filings described many instances in which she
claimed sales people and executives circumvented fraud controls or
turned a blind eye to “acts of criminal fraud.”
One case involved a
borrower Parmer referred to in court papers as Ms. A. According to
Parmer, a loan officer had claimed in the loan-underwriting system that
Ms. A earned roughly $140,000 per year, but federal tax records
indicated she earned less than half that much — barely $60,000 a year.
When
she tried to stop the loan from going through, Parmer said, a manager
chastised her: “This is what you do every time.” He ordered her to close
her investigation, she said.
After months of harassment, she said
in an affidavit, she was “mentally and emotionally unable to continue
working” and had to take disability leave to get treatment for distress
and depression. After a time, she said, the bank informed her that her
job had been filled.
Wells Fargo said in court documents that it had never fired her and that she was simply “on an unapproved leave of absence.”
The
bank’s attorneys also said that Wells Fargo had refused to fund “nearly
ever loan” that Parmer had complained about, and those that had funded
had been handled “consistent with Wells Fargo protocol.”
Parmer and the bank settled the case in 2009. The terms were confidential.
‘In the dark’
When
Congress passed Sarbanes-Oxley in 2002, it raised hopes that more
workers would be emboldened to come forward with information that would
help prevent future corporate scandals. One legal scholar hailed the act
— which gave federal labor officials the power to order companies to
swiftly reinstate whistleblowers with back pay — as “the most important
whistleblower protection law in the world.”
Things haven’t worked
out as whistleblower advocates had hoped. Critics claim the Labor
Department hasn’t done enough to protect financial whistleblowers.
In roughly the first nine years of the law — from 2002 through May 20 of this year — the agency issued merit findings in 21 whistleblower complaints and dismissed 1,211 others.
That
record is just one example, whistleblower advocates say, of the trials
that corporate whistleblowers go through when they try to do the right
thing.
When whistleblowers seek help from government agencies or
state and federal courts, they often face long delays and find
themselves outgunned by their employers’ legal teams.
At the same
time, employers are often successful at preventing whistleblowers from
getting the word out to the wider world. When companies and employees
negotiate severance contracts and legal settlements, confidentiality
clauses often permanently silence whistleblowers. Companies also
frequently force ex-employees with whistleblower claims into private
arbitration, ensuring that many details of their cases will remain
secret.
Judges in Los Angeles, for example, have booted three
former WaMu employees out of court and ordered them to go before
arbitrators to press their claims that the company pushed them out of
their jobs in early 2008 because they refused to participate in fraud.
Some former mortgage-industry workers contacted by iWatch News
declined to talk in more detail about their legal claims because
they’re gagged by secrecy agreements. Others said they couldn’t talk on
the record because they still work in banking and don’t want to get in
trouble with their current employers, or because they’re looking for
jobs and don’t want to be blacklisted.
“Hell, we want to work,”
one mortgage fraud investigator said, explaining why he and many of his
colleagues haven’t gone public with what they know.
Matthew Lee,
the fair lending activist who clashed with Citigroup a decade ago,
believes getting whistleblowers to come forward is crucial to preventing
the next financial meltdown.
Fraud thrives in secret. If
regulators are serious about holding banks accountable, Lee said, they
should cultivate and protect whistleblowers and serve as a counterweight
to the power of big banks and their armies of lawyers.
“They need
to think through how they’re going to protect people in the industry
who come forward with information,” Lee said. “If you don’t, you’re
going to be in the dark.”
