Home / Case Studies / The whistleblower who sued Citibank, and won

The whistleblower who sued Citibank, and won

Just been reading this month’s Bloomberg Markets, with the lead story: “Woman Who Couldn’t Be Intimidated By Citigroup Wins $31 Million”. 

The story proves to be an intriguing in-depth analysis (4,000 words) and is not an indictment of Citigroup per se, but of the corporate mentality of any global business today.

You may disagree with that statement so, if you can’t be bothered reading 4,000 words, here are 1,000 in summary:

Sherry Hunt ran the Quality Control department for Citi's Mortgage Unit for eight years.

She joined the bank in November 2004, as a vice president in the mortgage unit. Her team were responsible for protecting Citigroup from fraud and bad investments by checking prospective loans to see whether they met the bank’s standards, e.g. properly signed paperwork, verifiable borrower income and realistic appraisals.

At the time, investor demand was so strong for mortgages packaged into securities that Citigroup couldn’t process them fast enough.

As a result, it had an army of people working to process them.

Those people worked in different teams.

One team bought loans from brokers and other lenders.

Another team made sure loan paperwork was complete.

Yet another group did spot-checks on loans already purchased.

It was such a high-volume business that one group’s assignment was simply to keep loans moving on the assembly line.

Still another unit sold loans to Fannie Mae, Freddie Mac and Ginnie Mae, the government-controlled companies that bundled them into securities for sale to investors.

Workers had a powerful incentive to push mortgages through the process: compensation.

The pay of CitiMortgage employees all depended on a high percentage of approved loans.

By 2006, the bank was buying mortgages from outside lenders with doctored tax forms, phony appraisals and missing signatures.

Shelley Hunt reported such discrepancies regularly to her bosses who buried her findings before, during and after the financial crisis, and even into 2012.

Hunt’s team was processing $50 billion in loans a year and, because her unit couldn’t possibly review them all, they checked a sample.

When a mortgage wasn’t up to federal standards — an unsigned document, a false income statement or a hyped-up appraisal — her team labelled the loan as defective.

In late 2007, Hunt’s group estimated that about 60 percent of the mortgages Citigroup was buying and selling were missing some form of documentation.

Hunt says she took her concerns to her boss, Richard Bowen III.

Bowen alerted Citigroup executives in an email dated November 3rd 2007. 

Citigroup’s response was to move Bowen from managing 220 people to overseeing two. By January 2009, Bowen no longer worked for Citigroup.

Meanwhile, Hunt was transferred to the quality-control group on April 1, 2008. She went from supervising 65 people to managing none.

She found even worse dealings in her new role.

For example, the Fraud Prevention and Investigation Group were supposed to investigate the mortgages for fraud and notify the Federal Housing Authority (FHA) within a month if it found any.

In November 2009, Hunt came across a list of about 1,000 loans that the quality-control team had identified for possible fraud.

The Fraud Prevention and Investigation Group left some of the mortgages in the queue for more than two years and not one notification went to the FHA before July 2011, when the U.S. Attorney’s Office issued a subpoena.

In November 2010, Ross Leckie, a senior director of CitiMortgage’s retail bank mortgage unit, sent an e-mail ordering his staff to meet its goal of a maximum 5 percent defect rate on home loans (at the time, the level was over 7 percent).

CitiMortgage defect rates did plummet, but not because there were fewer bad mortgages.

The culture led to Hunt studying the new federal whistle-blower rules under Dodd-Frank in late 2010 and followed them after a meeting with Jeffrey Polkinghorne, an executive who was three levels above her in the chain of command, on March 22, 2011.

That’s when Polkinghorne called her and a colleague aside and told them their “asses were on the line” if the mortgage defect rates didn’t fall.

Hunt says it was clear what Polkinghorne was asking – for her to ignore the defective loan book – and she wanted no part of it.

On March 29th 2011, she followed the first step in the Dodd-Frank regulation: formally complaining to the company.

Hunt walked into CitiMortgage’s human resources department and told them everything: how the bank had been routinely buying and selling bad mortgages for years, how the fraud unit wasn’t doing its job and how the quality-control people were being pressured to change their ratings.

She also reported her concerns to the SEC (Dodd-Frank states you must do this within 90 days of filing your complaint internally) and hired a lawyer.

On August 5th 2011, she sued the bank, filing a false-claims complaint in U.S. District Court.

She knew her chances of winning were slim, because she couldn’t match the resources of a big bank, and just hoped the government would join her action (only 20 percent of whistle-blowers get help from government prosecutors and, without that, success is rare).

On January 3rd 2012, the Justice Department decided to join her in the case.

There was no testimony and no trial. Citigroup admitted wrongdoing and, on February 15th, paid the $158.3 million to settle.

In a press release Citi said it was pleased to resolve the matter: “we take our quality-assurance processes seriously and have proactively undertaken process improvements to ensure that they are as robust as possible.”

If Citigroup has learned anything from Sherry Hunt, it’s not clear from the comments of CitiMortgage CEO Sanjiv Das:

“This is a complex industry. It’s a complex process. It takes time. We’re heading down a trajectory that I’m incredibly proud of. Is there something that is systemically wrong? Absolutely not. Absolutely not.”

As a reward for blowing the whistle on her employer, Hunt got a $31 million out of the settlement paid by Citigroup.

 

Postscript: Citigroup isn’t the only bank held accountable for processing bad mortgages in the USA … but what sets them apart is that the bank approved flawed loans well past the 2008 financial crisis.

About Chris M Skinner

Chris M Skinner
Chris Skinner is best known as an independent commentator on the financial markets through his blog, the Finanser.com, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal’s Financial News. To learn more click here...

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One comment

  1. Does everybody understands that 31 million $ is a ridiculously low price to get away from this case? If CITI and other banks had paid attention to QA people and whistleblowers instead of humiliating them, intimidating then and moving them to insignificant positions, the world would have avoided a financial crisis! And what’s the cost of the financial crisis? So closing this case for 31 million $ is a parody of justice

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