“Oh, and one more thing: Try to use Skilling Securities for trades. Not all the time, but whenever it makes sense. They’re good.”
Huh. OK. Overall, your six-month review went pretty well. Boss seems happy; numbers are good; and the culture—it’s so refreshing that people actually hang out with each other here. Even if Friday mornings are kind of rough after team-drink Thursdays. Most of all, the money’s great.
But the broker-dealer thing. What was that about? So you ask your new buddy, who’s also on the equities desk but has been here for ages.
“Skilling, yeah, I use them about a third of the time. Don’t be weird about it, but it keeps the boss happy. They’re good.”
Fast-forward six
months. The one-year review, weirdly not so good. It isn’t your numbers—those
have been top-tier—but your manager kept mentioning “cultural fit” and the “the
way we do things here.” Later, your friend pulls you aside. “Look, just use
Skilling sometimes. Every place has its quirks, and here… Just think of it as
the cost of doing business.”
So What Do You Do?
First off, know that this situation—and myriad ones like it—happens all the time.
Roughly one in five people reading this article has personally witnessed illegal or unethical activity while at work, according to the most robust industry ethics survey conducted of late. And those are just the people willing to admit it. Nearly one in four said transgressions are sometimes necessary in order to succeed in financial services. More still (32%) felt compensation structures pressure them to violate ethical and legal standards.
Art by Jonathan Bartlett
More than 1,200 industry professionals responded to the email survey, suggesting that financial professionals do want to say something about illicit behavior. That said, 25% of the high earners ($500,000-plus per year) have signed contracts prohibiting them from doing so to the authorities. The survey, conducted last winter by Notre Dame University and law firm Labaton Sucharow, attracted major coverage, including from the New York Times, Washington Post, and NPR.
But for all the
media attention and personal experiences, experts say that few investors
actually know their options and exposures in the event they witness serious
misconduct. And figuring them out after the fact is like waiting for a
devastating market crash to determine your investment beliefs. The crossroads
of what everyone interviewed calls “one of the most important decisions of your
life” is when you most want a cool head, sound logic, and a plan. Here’s a
start.
Option A: Suck It Up and Play Along.
You like the job and paychecks. Using some random service provider now and again is not a big deal. Everyone on the desk does it. It’s not like you even know why you’re sending a bit of business to Skilling, so how could you get in trouble? Plus, you’ll start looking for a new job eventually.
You’re in good company—or at least, lots of company. Despite what organizations say after they get in trouble—an isolated incident, one bad apple, etc.—financial malpractice is a team sport. For every instigator, a gang of bystanders chooses to play along and execute the operation. The larger it gets, the more ‘normal’ such behavior becomes, until those involved no longer have to even justify it to themselves.
“Within the public and private sectors, some types of misconduct are so deeply ingrained in institutional or professional culture that they have legitimacy,” says attorney Tom Devine, who has worked with more than 6,000 whistleblowers as legal director of the Government Accountability Project (GAP). “That is despite the fact that the behavior may technically be indefensible. Employees are much less likely to challenge an ingrained way of life than the shenanigans of one or a few corrupt individuals.”
“Within the public and private sectors, some types of misconduct are so deeply ingrained in institutional or professional culture that they have legitimacy.”Take SAC Capital. When Manhattan US Attorney Preet Bharara finally busted the hedge fund empire, he described it as “riddled with criminal conduct” amid a culture that “fostered pervasive insider trading.” SAC didn’t get there by recruiting insider traders, according to the Department of Justice (DoJ). It created them. “Hiring practices heavily focused on recruiting employees with networks of public company insiders.”
Normal people
end up doing bad things. The longer you spend in this category, the more you’re
liable to forget you’re in it at all, and the riskier any of the other options
become. In other words, check yourself before you wreck yourself. Failing that,
head directly to Option D.
Option B: Quit.
For the hypothetical case, quitting is simple, clean, and pretty safe. Even if you arrive here after a pit stop in Option A, the chances of being held culpable if regulators did eventually find out would be slim-to-none—provided you’re the one who told them.
Low-level participants in financial misconduct who later come forward have a “remote” risk of liability after leaving the scene of the crime, says Jordan Thomas, a former US Securities and Exchange Commission (SEC) assistant director who worked on Enron, Fannie Mae, UBS, and Citigroup cases. Thomas led development of the SEC’s whistleblower program while also helping to write the relevant section of Dodd-Frank.
After 16 years as a public sector attorney—SEC, DoJ, US Navy—he left in 2011 for Labaton Sucharow, co-creator of the cited ethics survey. Thomas is to financial whistleblowing what Johnnie Cochran was to celebrity criminal defense: If you have the choice, he’s the guy you want on your side.
Quit now, and
you can still tell regulators down the road (See: Option E). Thomas meets with
people at this juncture, and often gives them very un-lawyerly advice: You
don’t want to pursue this. “People come to me with crazy big violations—huge
cases—but blowing the whistle isn’t consistent with their goals. Or, say, three
people on the planet truly know about it, and you’re the only one who doesn’t
work there anymore. I know about securities frauds that are going on right now
undetected, because the people I advised chose not to come forward.”
Option C: Report Internally.
In an ideal world, choosing this option would be so obvious that the article looks dumb for existing. E.g., the investing equivalent of, “If You Get in a Fender Bender, What Should You Do? A) Throw ’er in reverse to spread responsibility. B) RUN. C) Safely pull over, inspect for any damage, and exchange insurance details with the other driver.”
In that world, your superiors would thank you, deal with the matter swiftly and in full, perhaps reward you, and then everyone would go back to investing at a healthier organization. If this sounds plausible, do it.
“Whistleblowers are the test of an institution’s capacity for deferred gratification,” says GAP’s Devine. “They’re like the bitter pill than can keep a company out of the hospital.” Insiders uncover more serious corporate fraud than auditors, compliance departments, and law enforcement combined, PricewaterhouseCoopers research shows. They’re an organization’s best line of defense against misconduct—which makes the “one bad apple” excuse hard to swallow. If the overall culture prized ethics and compliance, why was the SEC the first to notice division x was stealing from clients?
Almost certainly, it wasn’t the first. The majority of workers who see something on the job say something at the job, according to the Ethics Research Center. If the message fails to get out or through, it’s probably due to internal retaliation or fear of it. This is getting worse. Between 2007 and 2011 (the most recent available year), in-house reporting rates increased 12% while retaliation against those who report climbed 82%.
“Institutions tend to act on animal instinct,” Devine explains. “If somebody slugs me, my reaction is to hit back and try to flatten that son of a gun. Why risk getting hit again? And it hurt me. I’m angry. The leaders of some organizations still behave with that animal instinct to kill the messenger.”
Devine nevertheless recommends the internal chain of command in cases where internal support likely exists. For those unsure or planning to report to regulators, he recommends casually raising concerns at a relevant moment. “‘What are we risking? I’m concerned that this will backfire.’ See how the institution reacts. That’s necessary so the institution doesn’t later have plausible deniability. Maybe it was just a mistake, and they’ll be happy to nip it in the bud. Or maybe it will confirm your worst suspicions.”
More and more,
snitches get stitches.
Option D: Lawyer Up.
Every case is different, as any attorney will tell you, but potential clients’ motivations follow familiar ‘types.’ “I see people looking for retribution—ex-spouses trying to jam the other one over, for example—or the Boy Scout types, taking a stand for justice,” Thomas says. “Or people loyal to a company, saying, ‘I won’t see the place I love be turned into this’; and the mercenaries, who see a reward as their ticket to a private island.” He’s judgment-free about those who seek his counsel. Most come through his office doors, though some prefer cloak-and-dagger encounters in empty churches and other public places.
“Whistleblowers are the test of an institution’s capacity for deferred gratification. They’re like the bitter pill than can keep a company out of the hospital.”Regulators take on a tiny number of new cases each year. The attorney’s job is figuring out who has the best shot. In turn, he or she demands a fully open kimono from aspiring clients—the most invasive probing happens before regulators even know you exist.
“The first thing we do is a background check,” Thomas explains, noting that Labaton Sucharow’s staff includes former FBI agents. Next, the misconduct has to be a violation, one significant enough to interest the SEC, and likely to result in monetary sanctions in excess of $1 million—the hurdle rate for whistleblowers to earn a cut. After that comes a deep dive into the informant’s motivation, goals, and fears. “By far, the number one concern is retaliation and industry blacklisting.” Is that reasonable? “Yes.” But Thomas stresses that anonymous reporting—another Dodd-Frank feature—has created whistleblowers from people he would have otherwise advised to drop out. With anonymous reports, an attorney acts as a liaison/avatar for the client, whose identity (in theory) remains totally secret. Only now do the lawyers and in-house investigators build their case and fill in evidence gaps.
But it gets harder. Option A folks have perhaps
enjoyed an advantage thus far—if your goal is SEC treasure, not career peace—by
learning more dirt than the higher-minded Option B cohort. Your attorney,
expert in the art of cross-examination, now turns those skills on you. “People
have a tendency to minimize their involvement,” Thomas says. “So you press. I
was a Navy Judge Advocate General and learned that at a certain point, you get
one-on-one with your client and say, ‘You need to tell me everything.’ This is
the most significant decision people will ever make in their professional
career. They are paying me to ensure they don’t have regrets.”
Option E: Report to Regulators.
“I can’t say that it’s a bet that has paid off.” A former policy advisor at a federal financial regulator, this man blew the whistle three years ago on a multi-billion dollar cover-up. He lost his job, his earning power, his faith in law enforcement, and has yet to secure justice or compensation. An ongoing investigation prohibits Chief Investment Officer from identifying him by name.
“I remember how—before this all happened—I would hear whistleblower stories, and they were like people whose homes are flattened by tornados,” the ex-Wall Streeter says. “You feel for them, but you don’t know what you would do. You haven’t thought about it.” After uncovering damning evidence of missing billions, he followed best practices and alerted his superiors. They took no action, except to shut him out of meetings and decision-making. Eventually, he faced a choice: “You either go along with it and incur enormous potential legal liability. Or you blow the whistle, and there goes your career. I certainly did not expect to be put in such moral danger.”
Many people who choose to speak out pay with their family lives in addition to careers. “We see marriages break up all the time,” says GAP attorney Chris Leo. “We see a lot of people who become incredibly distraught, and it changes them, sometimes permanently.” As attorneys for GAP, a nonprofit, Leo and Devine often work with those who need them: People with fewer options, diminished resources, and higher stakes than some of the population seeking out private-sector representation.
The unnamed financial whistleblower saw no real choice in speaking out—he couldn’t not. “When my son is older and it’s time to send him off into the world, I can talk to him about courage and not hang my head,” he continues. “That means a lot.”
Even for those who approach Thomas, options may appear more numerous than they really are. He estimates taking on one full client for every 85 initial meetings with potentials. So where does that leave the other 84? “They can report directly, and I’ll make introductions if I think the SEC or DoJ might be interested. Also, other firms do this work, and I’ll refer cases elsewhere that aren’t right for us.”
He pauses. “For those whose goal is that the truth comes out, there’s another excellent option.”
Go on…
Option F: Bring It to a Reporter.