May 2011 Archives

May 26, 2011

New Rewards Approved For SEC Whistleblowers

The Securities and Exchange Commission (SEC) has approved rules that will entitle whistleblowers to receive 10 to 30 percent of the money they help the SEC collect through enforcement actions.

The SEC has rejected requests by business groups to require whistleblowers to notify the companies they are accusing of wrongdoing, prior to going to the SEC, to give them an opportunity to correct the allegations. Business groups and some Republican commissioners felt that by allowing whistleblowers to bypass companies' internal compliance programs, the agency might allow problems to become worse and that the SEC would be flooded with tips not related to securities enforcement.

The SEC commissioners were told by enforcement director Robert Khuzami that he saw no evidence of such problems and that the agency is already seeing an increase in high quality, well documented tips.

The biggest concession to corporations is that the SEC could give whistleblowers credit for taking their allegations to the company's own compliance program when determining the size of the reward.

Source:

SEC approves new rewards for whistleblowers
, The Washington Post, May 25, 2011

May 12, 2011

Plans for Legislation Requiring Whistleblowers to Report Wrongdoing to their Employer

Representative Michael Grimm, R., N.Y. plans to introduce legislation whereby employees would not be eligible for a Securities and Exchange Commission (SEC) bounty program unless they first report the wrongdoing to their company.

If the SEC determines evidence indicating that the employer's top management participated in the fraud or showed bad faith, the requirement for internal reporting to one's employer would not be necessary. Additional factors that would exempt employees from the internal-reporting requirement include the absence of an anonymous internal reporting system or hotline as well as the lack of human resource policies that prohibit retaliation against employees who report abuses and potentially fraudulent activities.

Following the implementation of the 2002 Sarbanes-Oxley law, corporations put into place hotlines and internal reporting channels. The fear is that with the lure of a multimillion-dollar bounty, these internal reporting channels would be ignored. The bounty program that was included in the Dodd-Frank financial reform law provides that employees reporting "original" information regarding possible SEC violations can collect as much as 30% of the sanctions greater that $1 million obtained by the SEC.

Conversely, whistleblower lawyers express concern that the internal-reporting requirement could be an impediment to the communication of tips to the government investigators. Additionally they fear that the requirements could provide companies the opportunity to get rid of any evidence of wrongdoing.

The SEC continues to work to complete the rules for the new regulations imposed by the Dodd-Frank legislation.

Source:
US Lawmaker Wants To Require Whistleblowers To Report Internally, The Wall Street Journal, May 5, 2011

May 5, 2011

Lawsuit Accuses Deutsche Bank of Misrepresenting Quality of Loans Guaranteed by U.S. Government

A civil lawsuit filed Tuesday in Manhattan federal court seeks to recover alleged damages from Deutsche Bank AG related to mortgages that were insured by the Department of Housing and Urban Development. The lawsuit was filed under the False Claims Act and as such, the government may seek three times the damages in addition to possible punitive and other damages. The damages could amount to more than $1 billion. The justice department alleges that Deutsche Bank AG "recklessly" lied about the quality of loans made by a mortgage unit of the German bank.

U.S. Attorney Preet Bharara describes a long history of unreliable underwriting standards and quality control at the mortgage lender, MortgageIT Inc., which was acquired by Deutsche Bank in 2007. This lawsuit against Deutsche Bank is so far the highest-profile case filed by U.S. Attorney, Mr. Bharara's unit that was established last year to uncover complex financial-fraud cases. Mr. Bharara stated at a news conference that it wouldn't be a "fantastical stretch to think we are looking at other financial institutions as well."

A spokeswoman for Deutsche Bank said the "claims against MortgageIT and Deutsche Bank are unreasonable and unfair, and we intend to defend against the action vigorously." Additionally, the spokeswoman claimed that as much as 90% of the activity alleged in the lawsuit occurred prior to Deutsche's acquisition of MortgageIT.

The purchase of lending companies for the purpose of increasing mortgage operations was common among some of the Wall Street firms including Deutsche Bank. Mortgage bonds, made up of pooled loans, were sold to investors, which proved to be profitable at the time, but ultimately added to the financial crisis faced by the nation. Loans that are backed by the FHA insurance program are sold to investors and representated as very safe Ginnie Mae securities. Purchasers of these loans typically include pension funds, insurance companies and central banks. The guarantee on these bonds is "akin to the full faith and backing of the U.S. government."

Of the 39,000 mortgages worth more than $5 billion, for which MortgageIT approved FHA insurance, more than 12,500 of the loans have proven to be uncollectible. Some of these loans went sour as soon as two months after the loan was closed. Consequently, the Department of Housing and Development has sustained $386 million in insurance claims as of February of this year for loans that were underwritten by MortgageIT. The government agency is facing an additional $888 million for defaulted loans for which claims have yet to be paid.

The lawsuit alleges, "While Deutsche Bank and MortgageIT profited from the resale of these government-insured mortgages, thousands of American homeowners have faced default and eviction, and the government has paid hundreds of millions of dollars in insurance claims." Additional allegations include breakdowns in required procedures, citing outside consultants' letters regarding underwriting violations that were ignored by MortgageIT. The suit accuses MortgageIT of not reading the letters at the time and that the letters were placed "unopened and unread" in a "closet" in the company's Manhattan offices.

The potential damages faced by the FHA due to this type of activity are enormous and the agency's projected reserves have fallen to $4.7 billion as of last September, 2010, "down from $21 billion three years earlier." The FHA could ultimately be forced to seek taxpayer support for the first time in its history, should the reserves be completely depleted.

Source:
U.S.Says Deutsche Bank Lied, The Wall Street Journal, May 4, 2011