In September 2008, Lehman Brothers, one of the largest investment banks in the world, filed for bankruptcy – signaling what is now considered to be the beginning of a financial crisis that developed into a global recession. At the time, it was the worst economic disaster in the U.S. since the Great Depression.
Now dubbed the Great Recession, the crisis arose from multiple complex factors. In the years leading up to the crisis, there had been significant speculative activity in financial markets, focusing particularly on property transactions in the U.S. and western Europe. The financial institutions had made a practice of subprime lending and the securitization of residential mortgages.
However, as the gap between incomes and debt widened, borrowers increasingly became unable to repay mortgages. This led property prices to fall, which in turn led to massive decreases in the value of financial institutions’ assets. The banking sector began to suffer financial distress, with Lehman Brothers the first to go down.
Following the collapse of Lehman Brothers, creditors and investors feared other institutions were also on the verge of bankruptcy and rushed to sell and withdraw their assets, furthering the crisis. It ultimately took a massive government bailout in order to rescue giants like Bear Stearns, AIG, Fannie Mae, and Freddie Mac.
In October 2008, a month after Lehman Brothers declared bankruptcy, then-President George Bush signed into law the Emergency Economic Stabilization Act. Critically, this legislation created the Troubled Asset Relief Program (TARP), designed to strengthen the financial sector by purchasing its toxic assets and equity. Expenditures under TARP were originally authorized for $700 billion. The Dodd-Frank Act, passed in 2010, later reduced the amount authorized to $475 billion.
These massive expenditures created significant opportunities for fraud. In the years following, investigations by the Special Inspector General for the program, SIGTARP, identified a substantial amount of fraud from companies who failed to adequately maintain records. Since 2008, these investigations ultimately led to more than 400 criminal charges, 300 prison sentences, and the recovery of $11 billion. A significant number of further convictions were secured by the Department of Justice under the False Claims Act and other laws. In total, billions were recovered from financial institutions that sold subprime mortgages before the crisis, with whistleblowers playing a key role in many major settlements.
Whistleblowers’ Roles in the Criminal Convictions Following the Crisis
By August 2014, the Department of Justice (DOJ) had recovered nearly $37 billion from financial institutions and banks for their role in the subprime mortgage crisis. Of this, $16.65 billion stemmed from a single historic settlement with Bank of America Corporation – it was the largest civil settlement with a single entity in U.S. history.
This settlement was expansive, covering multiple civil investigations related to residential mortgage backed securities, practices concerning underwriting and origination of mortgage loans, and misrepresentation of quality of loans to multiple government-backed agencies. Critical to this outcome were three whistleblower suits under the False Claims Act that had been filed against Bank of America following the crisis.
According to a ProPublica investigation, one alleged that Countrywide, which was bought by Bank of America in 2008, passed on bad loans on to the Federal Housing Administration. Another alleged that the bank had illegally denied homeowners access to a loan modification program run by the government called HAMP.
The DOJ entered into similarly massive settlements with JP Morgan Chase, Wells Fargo, and Citi. These settlements were made possible thanks to multiple false claims whistleblower complaints. JPMorgan Chase entered a $45 million settlement after two whistleblower employees at a Georgia mortgage broker alleged the bank had scammed a program to make it easier for veterans to qualify for loans and submitted fraudulent claims to the government. The whistleblowers each were awarded $11 million. Wells Fargo later settled for $108 million under the same charges from the whistleblowers.
Another whistleblower revealed massive robosigning at all four of the banks, which were the country’s largest mortgage servicers. Allegedly, the companies had relied on a company called Docx to forge signatures on thousands of mortgage documents. The suit was settled for $95 million, with the whistleblower receiving $18 million for helping expose the fraud.
Whistleblowers also played a key role in investigations by the Special Inspector General for the Troubled Asset Relief Program (SIGTARP). In a January 2014 report, the office credited multiple whistleblower hotline tips for successful investigations, and several major investigations conducted by the SIGTARP and litigated by the DOJ were tied directly to whistleblower claims.
In one case from 2012, Regions Financial Corp. settled under a whistleblower False Claims Act case for undervaluing a promissory note in order to qualify for money under TARP. The bank then allegedly lied to investigators about its need for government assistance. In another case from 2015, Fifth Third Bank paid $85 million to settle claims under the False Claims Act that employees had falsely represented the quality of residential mortgages the bank origination to the U.S. Department of Housing and Urban Development. The settlement resolved a whistleblower lawsuit filed by the former chief appraiser of the bank.
The Importance of Whistleblowers
As the experience following the Great Recession proves, whistleblowers play a key role in keeping companies accountable. The whistleblowers in the cases discussed here assisted the U.S. government in recovering billions of dollars in fines and penalties from some of the many entities responsible for 2008-2009 financial crisis. They helped expose fraudulent activities leading up to the economic crash as well as fraudulent activities in its aftermath as institutions attempted to gain government funding under TARP.
They were able to do so due to powerful suite of whistleblower laws that has been enacted in the United States to enable private sector whistleblowers to report wrongdoing confidentially and to receive financial rewards for contributing to successful prosecutions.
Whistleblowers had several avenues to report following the financial crisis. One of the most important whistleblower laws is the False Claims Act, which regulates fraud in connection with those receiving compensation or other benefits from the government – like in the case of TARP. The Act is extraordinarily successful. In 2019 alone, whistleblowers helped to recover $2.2 billion in monetary sanctions for U.S. taxpayers, with whistleblowers receiving $271 million for their contributions to these successes in 2019.
Critically, the Dodd-Frank Act, passed in 2010 in response to the crisis, also created the Securities and Exchange Commission (SEC) and Commodities Future Trading Commission (CFTC) whistleblower reward programs, both of which emphasize confidentiality and protection against retaliation. The programs incentivize whistleblowers to come forward and provide inside information to the agencies in future cases involving fraud committed against private securities investors.
As the U.S. enters another economic crisis with Covid-19, the example of the Great Recession proves the necessity of incentivizing whistleblowers to come forward. Whistleblowers are among the most powerful weapons against fraud, and at a time with unprecedented government spending, they are needed more than ever.