Typically, when senior bank officials or board members act in their own self interest, shareholders have a right to file a lawsuit for the harm caused to the bank. These suits are called derivative actions. By enriching themselves, these folks hurt the bank and thus the shareholders who own the bank.
Bank officers and board members have a fiduciary duty to the bank and its shareholders. Unless regulators or shareholders get wind of the misconduct, there is little standing in the way of the wrongdoers. Honest bank employees have little to gain by coming forward and sticking out their necks against their bosses.
That’s not quite true.
Bank Whistleblower Awards – FIRREA
An often overlooked banking law from the 1980’s allows anyone with inside information about bank misconduct to come forward and seek an award. Called “FIRREA”, the Financial Institutions Reform, Recovery and Enforcement Act can pay a bank whistleblower an award of up to $1.6 million.
FIRREA was passed by Congress in response to the 1980’s savings and loan crisis. It contains a powerful whistleblower provision, however, that can still pay awards today. To be eligible for an award, one must have inside information about fraud or misconduct that hurts or potentially harms a federally insured bank. Because the FDIC insures most bank deposits, conduct which harms a bank increases the risk that the government (taxpayers) will have to bail out the bank.
To better understand this concept, let’s look at a recent shareholder action against Bank of Internet. Earlier this week shareholders sued the bank. The shareholders say that members of the bank’s board of directors falsely manipulated share prices in order to dump their own shares. They also claim that board members routinely violated federal banking regulations. When the scheme was discovered by a company auditor, the suit says the auditor was fired.
According to media reports and court documents, Bank of Internet’s internal auditor, Matt Erhart, found that bank directors’ were hiding information about questionable loans. If he is correct, it appears the directors wanted the bank to appear more profitable then it really was.
He also says the bank may have been allowing foreigners to park money at the bank without requiring tax identification numbers. Money launderers are always looking for banks that will accept money without any required paperwork. While that may increase the banks profits and deposits in the short term, once the scheme is exposed, the bank is on the hook for massive fines.
As the bank’s profits increased (at least on paper), the directors were able to unload their shares of bank stock. The remaining investors, however, were left owning a bank that was not as profitable as its financials suggested.
Imagine buying a liquor store. The seller tells you the inventory on the shelves is worth $100,000 and the store makes $10,000 per month profits. After a month’s operation, you find the inventory was only worth $50,000 and the business loses money each month. You would feel cheated. Here the shareholders that sued also feel cheated. They say the bank is worth less than they were told and that their shares of stock are therefore worth less. Worse, while the directors were selling off their shares at artificially high prices, the average shareholders were stuck with stock worth much less.
The case is a classic example of a derivative action where shareholders say that directors were enriching themselves and duping investors.
The case was discovered by an alert bank auditor. He can’t sue, however, because he isn’t a shareholder. [Erhart did file a retaliation claim against the bank which denies any wrongdoing.] Under FIRREA, Erhart and anyone else with inside information about the fraud, could have sought an award under FIRREA.
If you are a would be bank whistleblower, don’t delay. Once the information becomes public, its probably too late to seek an award.
The moral of the story is that anyone with information about bank fraud or misconduct should report the fraud. Simply calling bank regulators doesn’t get you an award. Once must follow the filing procedures under FIRREA to be eligible for an award.
If the awards aren’t enough incentive, the Justice Department also does a great job protecting the confidentiality of the whistleblower’s information.
As kids, we were all taught that crime doesn’t pay. Thankfully Congress passed a variety of whistleblowing laws that provide incentives for those who report crime. Crime may not pay but whistleblowing does.
Interested in becoming a bank whistleblower or learning more about FIRREA and other whistleblower award laws? Read our information on FIRREA or give us a call. The author of this post, attorney Brian Mahany, can be reached at or by telephone at (414) 704-6731. All inquiries protected by the attorney – client privilege and kept strictly confidential.