There are more effective ways to protest lax enforcement of financial fraud
Last week, it was widely reported that Eric Ben-Artzi, a Deutsche Bank whistleblower stated he will refuse a portion of his whistleblower award from the U.S. Securities and Exchange Commission’s whistleblower program. Mr. Ben-Artzi had worked at the bank as a vice president and he tells an all too-familiar story of a loyal corporate insider reporting serious fraud internally only to be betrayed by corporate compliance officials and then getting fired by management.
Mr. Ben-Artzi next reported the wrongdoing to the SEC and later formally asked the SEC in 2015 to grant him a monetary award for helping the SEC to fine Deutsche Bank. After being awarded more than $8 million he says he will refuse to accept a portion of that whistleblower award (but allow his ex-wife and attorney to collect a portion of his share) as a form of protest to the SEC’s collusion with Wall Street.
However, refusing the award makes little sense, because there are more effective ways the whistleblower can protest lax enforcement and corporate fraud.
Mr. Ben-Artzi was one of the whistleblowers who reported to U.S. regulators that Deutsche Bank had misstated the value of the bank’s $120 billion derivative portfolio of Leveraged Super Senior (LSS) trades during the 2008-2009 financial crisis. These whistleblowers later filed whistleblower tips with the SEC as part of the SEC’s whistleblower program that was enacted as part of the Dodd-Frank Act.
On May 26, 2015, the SEC entered an enforcement action validating the whistleblowers’ allegations that Deutsche Bank’s “LSS trades increased in value as markets deteriorated during the global financial crisis.” The SEC found that Deutsche Bank’s deficient internal accounting controls and its decision to change the methods for measuring risk in the LSS trades “resulted in the misstatement of its financial statements” to shareholders and the public by $1.5 to $3.3 billion.
Pursuant to the SEC’s whistleblower rules, the SEC granted a whistleblower award to Mr. Ben-Artzi and another whistleblower, ordering them to split $16.5 million.
Several of Mr. Ben-Artzi’s arguments raised to explain his return of the award do not stand up to scrutiny, however, and he should reconsider his decision to decline a portion of his award.
First, he argues that Deutsche Bank “did not commit this wrongdoing” and that the bank and its shareholders are the “victim.” That’s nonsense. Deutsche Bank and its shareholders profited greatly from the windfall resulting from the bank misstating the risk and value of the LSS assets, which as financial derivatives rose dramatically while other people lost their shirts in the 2007-2009 financial crisis.
While it is true that top executives escaped with “multimillion-dollar bonuses” resulting from these financial frauds, and they have not been prosecuted, Deutsche Bank and its shareholders profited from this financial fraud too and the SEC’s fine correctly places blame on the bank itself even if other wrongdoers escaped.
Second, he argues that the money to pay the fine should be “clawed back from the bonuses paid to the Deutsche Bank executives, especially the former top SEC lawyers” who he claims had a conflict of interest and went lax on enforcement. That ignores that Deutsche Bank also had certain duties under the law to comply with internal controls and accounting principals, and it misstated its assets and risk to investors.
Third, the whistleblower asks that his “share of the award be given to Deutsche and its stakeholders.” However, the SEC whistleblower award is not paid from the $55 million fine that the SEC has collected from Deutsche Bank. SEC whistleblower awards are paid from a separate SEC fund to incentivize whistleblowers for reporting securities violations. While the percentage of the award is calculated based on the amount of fines collected by the SEC, Congress required the SEC to pay whistleblowers from an independent fund, which is a separate pool of money, to avoid pitting whistleblowers against victims of securities fraud.
Nor is the SEC fine against Deutsche Bank a “looting” of the bank’s shareholders. Deutsche Bank can certainly afford to pay a $55 million fine without harming stockholders, especially when the financial fraud at issue is manipulation of the value of assets in the billions of dollars, and the sanction was based solely on the bank’s misconduct.
If the bank and its shareholders are really “victims” they, too, could apply for compensation from the SEC’s victims fund. But they won’t because that would be a fraud in itself. The bank and its shareholders don’t qualify as victims. They benefitted from this financial fraud at others’ expense.
Mr. Ben-Artzi’s concerns are understandable, but his refusal of the award is misplaced.
When Congress enacted the SEC whistleblower program under the Dodd Frank Act it recommended that an independent right of action for whistleblowers to pursue wrongdoers in securities cases be studied. Unlike the False Claims Act, where whistleblowers can exercise their rights under that qui tam statute to prosecute fraudsters when the government declines to do so, the Dodd Frank Act lacks an independent qui tam right of action for whistleblowers who disagree with the SEC’s determinations. Congress needs to independently bring actions against companies or individuals in court to collect larger fines or damages against those who commit securities violations to address the weakness pointed out by Mr. Ben-Artzi’s concerns.
Whistleblowers like Mr. Ben-Artzi risk their careers and well-being when they step forward to report corporate fraud. They face enormous odds in a rigged system that protects powerful financial interests on Wall Street. But giving in to the rigged system is not a solution. There are several other ways to fight back without forfeiting a monetary award that is well deserved and came after much retaliation.
To effectively protest Wall Street fraud and collusion Mr. Ben-Artzi shouldn’t ask that his award be given to the bank and shareholders. After all they profited from this financial fraud too and the bank was complicit in the wrongdoing. As an alternative, he could collect the award and donate a portion of it to fight for the right to improve the weaknesses in these whistleblower laws and ask Congress to include the right of whistleblowers to go after corporate fraudsters on Wall Street when the government refuses.