Last month, Silicon Valley Bank (SVB) and Signature Bank collapsed — the second and third-largest bank failures, respectively, in U.S. history. The breakneck speed of their downward spirals suggests a cocktail of gross mismanagement blended with a colossal failure of regulatory oversight. Investigations, oversight hearings, and lawsuits will reveal more details in the weeks and months ahead. As whistleblower lawyers, we know from experience that when it comes to crises like these, there are almost always conscientious employees who provided early warnings to managers and regulators but were ignored or silenced. If we are to prevent future bank failures and protect our economy, we need to modernize protections for bank whistleblowers.
History teaches us that institutional or industry-wide failures can be avoided or minimized if whistleblowers are embraced instead of attacked. Sherron Watkins tried to address fraud within Enron. Cynthia Cooper exposed massive accounting fraud at WorldCom. Richard Bowen warned Citigroup about subprime mortgage risks. Eileen Foster reported lending fraud, and Michael Winston refused to lie to rating agencies about Countrywide’s corporate governance and succession structure. These brave whistleblowers and many others helped pave the way for reforms like the Sarbanes-Oxley Act (SOX) and the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank).
In passing Dodd-Frank, Congress tightened regulatory oversight in segments of the financial sector. It also enhanced whistleblower protections and created the Securities and Exchange Commission’s (SEC) and Commodity Futures Trading Commission’s (CFTC) whistleblower reward programs. These programs award tipsters who supply credible information that results in successful enforcement actions with up to 30 percent of monetary penalties paid by securities violators. The programs are generally recognized as successful despite their flaws. Since the creation of these programs in 2010, the agencies reported around $10 billion in enforcement penalties and settlements (combined), made possible thanks to whistleblower provided information. The Department of Justice also reported $2.2 billion in settlements and judgments in 2022 alone under the False Claims Act (FCA) — another whistleblower law with a reward program. Whistleblower-provided information made possible most of the government’s recoveries.It is not surprising that the SEC credits whistleblowers as “among the most powerful weapons in [its] law enforcement arsenal.”
But the SEC and CFTC are not banking regulators — they aren’t responsible for preventing bank failures. That vital job belongs to a patchwork of federal “prudential” regulators — the Office of the Comptroller of the Currency, the Federal Reserve, the Federal Deposit Insurance Corporation, and the National Credit Union Administration. The Federal Housing Finance Agency has prudential responsibility over the Federal Home Loan Bank System and the non-bank-but-systemically-important housing finance giants Fannie Mae and Freddie Mac.
Banks, as depository institutions, are indispensable infrastructure for our economy. And when banks fail, various parts of the financial system may freeze unexpectedly, forcing government interventions and bailouts. When Dodd-Frank gave Wall Street whistleblowers enhanced protections and rewards programs, bank whistleblowers were left behind. The existing bank whistleblower law, a relic from the 1990s, fails to provide best practice whistleblower protections. For example, it does not protect employees who blow the whistle internally, which is critical because most whistleblowers try to correct problems by going to management first. As regulators will discover if they dig deep enough into the many problems plaguing SVB Financial Group’s banking components, conscientious employees were sounding the alarm about a lax and even indifferent risk and compliance culture.
In addition to providing protections for internal reporting, Congress should include all elements recommended by the nonpartisan House Office of the Whistleblower Ombuds. Critical to providing adequate whistleblower protection are elements like broadly defining the activities that are protected and who is protected, providing confidentiality and independent investigations, and ensuring that whistleblowers receive adequate relief, including preliminary relief while a case is pending.
To these recommendations, we would add that the law should provide better financial protections for whistleblowers. Terminated whistleblowers should receive a minimum of five years of salary and benefits to offset the damage and disruption to their careers. This five-year minimum salary and benefits payment should be mandated whether the case is settled or is resolved through an investigation or trial on the merits.
Until a modern and comprehensive bank whistleblower channel is constructed, bank employees concerned about safety and soundness related practices will need to continue to rely creatively on a hodgepodge of existing laws, each with its own procedural idiosyncrasies and limited substantive scope, for retaliation protection and whistleblower awards. Examples of those avenues include whistleblower protections under SOX and Dodd-Frank and award programs administered by the SEC, CFTC, Treasury (for AML and tax fraud whistleblowers), and the Department of Justice (for FCA and FIRREA whistleblowers).
But because these laws are not directly geared towards bank safety and soundness regulations, whistleblowers often need to pigeonhole their disclosures to conform to the narrow constraints of the laws under the respective agency’s jurisdiction and its whistleblower program’s scope. For similar reasons, the scope of the resulting regulatory actions are also limited.
That there were good people within SVB trying to fix risk and compliance problems will not be surprising. But whistleblowers who may lose their jobs and careers for pushing to ensure that necessary corrections are instituted cannot be expected to perform a high wire act, juggling concerns about retaliation with efforts to expose suspected wrongdoing, without a robust safety net. It is long overdue for Congress to modernize banking whistleblower protections and create an award program to bolster prudential regulators’ oversight.
Ezra Bronstein is a Senior Associate at Mehri & Skalet with previous experience directing the Federal Housing Finance Agency Office of Inspector General’s whistleblower operations and working in the financial regulatory space. Richard Condit is a Partner at Mehri & Skalet and co-chairs the firm’s Whistleblower Rights Practice with previous experience at the whistleblower rights organizations Government Accountability Project (GAP) and Public Employees for Environmental Responsibility (PEER).