Whistleblowing

Don't blame the squealer

Whistleblowers are not generally liked, but more of them are needed to break the code of silence in the finance industry that allows illegality to prevail. The Tour de France teaches some lessons.
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Professional cycling and investment banking could both do with more whistleblowers
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<div style="text-align: left;"> Professional cycling and investment banking could both do with more whistleblowers </div>

As the Tour de France enters its final stages, it is impossible not to marvel at the spectacle of the world’s greatest annual sporting event. The cyclists are superb athletes, and this year Bradley Wiggins is leading Team Sky into the Pyrenees with the prospect of overall victory and celebration for Britain and Rupert Murdoch.

Investment banking and professional road cycling have a lot in common. There are huge financial rewards for a few star performers who are supported by a vast but far less well-paid chorus. The prima donnas call the shots; setting the standards of behaviour, forging the culture and imposing their interpretation of tradition.

Ambitious young riders, like junior bankers, might aim for centre stage, while the rest are content simply to earn a living. Yet, for both categories there is pressure to conform, submit to dominant forces and not examine dubious practices too deeply. Of course, some people will just assume that the behaviour of their superiors must be the way things are normally done, and others are innocently oblivious.

Unfortunately, it’s also hard to ignore the squalid side of cycling. The Tour, especially, has a long history tainted by cheating from the beginning by over-reaching mavericks boarding trains or hanging on to cars, and during the past few decades by so many professionals pumped up with performance enhancing drugs that it is easy to believe they’re all at it.

And a collective acceptance of unethical and illegal practices, according to many sceptical cycling writers, is maintained by a mafia-style code of silence.

Anyone who breaks ranks and denounces the activities of their colleagues to outsiders risks opprobrium and isolation. Squealers are blamed for destroying livelihoods and undermining integrity. Self-referencing activities can easily become delusional. Christophe Bassons was bullied out of the sport and Lance Armstrong’s nemesis, Filippo Simeoni, was regularly washed by a shower of phlegm from his peers in the peloton.

People who grass on their mates can expect to make enemies; they will also encounter suspicion even from those who first patted them on the back for doing the right thing. No one likes a snitch.

In the wake of the global financial crisis, the US authorities acknowledged the problem. A key provision of the Dodd-Frank Wall Street Reform and Consumer Protection Act required the US SEC to set up a whistleblower programme that offered anonymous reporting, employment protections and monetary awards to individuals who report violations of the federal securities laws. 

The Act recognised that financial regulators and enforcement officers cannot police the marketplace without the help of private individuals. The whistleblower programme was implemented in August 2011 and has broad extraterritorial reach.

“Our long-term goal is to try to see if we can change the perception of the whistleblower,” Sean McKessy, chief of the whistleblower unit, told CFA Institute Magazine (May/June issue).

So far, the whistleblower line has received more than 1,800 calls, although no awards — which could amount to 20% of any monetary sanction assessed — have been paid out yet, he said.

This might suggest the phone line has created an opportunity for mischief-making or score-settling rather than for genuine revelations of dishonesty or malpractice. However, McKessy insisted that “assertions that our programme is causing people to sneak behind their bosses’ backs, based upon my experience, simply haven’t rung true”.

There are genuine concerns, and the current Libor scandal certainly indicates an endemic cultural problem rather than isolated instances of illegality. Too often, individuals — usually junior — have been made scapegoats as senior mangers escape while shaking their heads in simulated disappointment and disbelief.

A recent survey of 500 financial professionals in the US and UK by Labaton Sucharow, a law firm that focuses on protecting and advocating for SEC whistleblowers, reveals the temptations in a ruthless culture diffused from the top and an atmosphere of ethical ambiguity that is allowed to prevail.

Nearly a quarter of respondents said that financial professionals may need to engage in unethical or illegal conduct in order to be successful, and 16% admitted they would actually commit a crime — insider trading — if they could get away with it. Almost a third said they feel pressured by bonus or pay plans to behave this way.

And their comments were not just about intentions or enticement. As many as 26% indicated that they had observed or had firsthand knowledge of wrongdoing in the workplace, and only 41% were confident that colleagues had “definitely not” engaged in unethical or illegal conduct to gain success.

“The results were alarming and, in some cases, encouraging,” said the authors of the report, Corporate Integrity at a Crossroads.

The encouraging part was that 94% indicated a willingness to report wrongdoing given the protections and incentives provided by the SEC whistleblower programme — though less than half were actually aware of it.

The Festina scandal in 1998 and Operacion Puerto in 2006 revealed how widespread doping was in cycling, and whistleblowers then dished the dirt on their fellow riders. Many champions have been exposed.

Fortuitous exposures of wrongdoing, such as the Festina team’s doctor being stopped in a car packed with drugs, can lead to the identification of culpability. Massive trading losses at a bank or a sudden collapse of a financial institution can produce the same result.

But, it’s tougher to bring people to book when things seem to be going well; strong profits, happy shareholders, big bonuses, cowed regulators and a fawning press induce complacency. Whistleblowers are likely to get short shrift in that environment.

A decade ago, when employed as a fund manager, I was described as a whistleblower for expressing concerns to the Financial Times about the Ponzi-type features of split-capital investment trusts. Front-page coverage caught me a bit by surprise, but it was splashed because so many of these funds, which relied on the income from other funds to pay out dividends to each other, were in trouble. Declining stock markets after the bursting of the dot.com bubble were destroying the value of different classes of shares that were largely owned by private individuals and families.

For several years, collusive behaviour among fund managers and the investment bankers who arranged the deals went unchecked, despite warnings. Arguably, many more than the few people subsequently penalised by the Financial Services Authority should have been shamed, at the very least. Trust directors and fund management bosses successfully claimed ignorance.

My comments were not made anonymously — I was allowed to speak to the media, though not explicitly about that topic — and nor were they aimed directly at my employer. For those reasons, or perhaps more likely due to the sympathetic press I received, after being fired for gross misconduct I won an appeal, although to take up a more junior role at the firm. Resignation was the best result for both of us.

However, it wasn’t easy to find a job at another fund manager — clearly. Whatever the reason, it seemed pretty obvious that a further career in the business was stymied. A whistleblower hotline might have maintained anonymity for a while, preserved my job for a time and even given me some cash.

More important, the corrupt behaviour might have attracted attention from the regulator earlier, who might have stopped it from becoming institutionalised and hence prevented the destruction of people’s savings. Livelihoods might have been damaged, but not the wrong ones.

¬ Haymarket Media Limited. All rights reserved.

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