Bill Black: The Whistleblowers’ Third Lemon Award is to Fannie and FHFA

By Bill Black, the author of The Best Way to Rob a Bank is to Own One and an associate professor of economics and law at the University of Missouri-Kansas City. Originally published at New Economic Perspectives

The Bank Whistleblowers United’s third weekly lemons award is made jointly to the Federal Housing Finance Agency (FHFA) and Fannie Mae (with a dishonorable mention to the federal judiciary). The award goes for these entities’ indifference and even hostility to whistleblowers. On September 6, 2008, the FHFA placed Fannie and Freddie into conservatorship in conjunction with the largest public bailout in global history. Fannie and Freddie failed in an orgy of fraudulent mortgage loans.

Fannie had suffered enormous losses in the early 2000s from a variant of “accounting control fraud.” Those frauds were brought to the attention of the public and the FHFA’s predecessor agency (OFHEO) by a Fannie Mae whistleblower, Roger L. Barnes. The Washington Post reported:

Two exhaustive investigations have backed up Roger L. Barnes’s allegations that Fannie Mae’s financial statements could not be trusted and that accounting managers manipulated numbers to meet rising earnings targets.

Naturally, Barnes experienced retaliation that destroyed his career at Fannie Mae, though he was the person doing everything right according to the law and Fannie’s own policies. Fannie’s regulators forced out its CEO and CFO in response to the securities fraud. Paragraph 2 of the SEC complaint against Fannie Mae for securities fraud explicitly charged that the purpose of the fraud was to produce hundreds of millions of dollars in bonuses to Fannie’s officials.

At the end of 1998, senior management manipulated the Company’s earnings in order to obtain bonuses they would otherwise not have received….

Fannie’s early forms of accounting control fraud that were addressed by the SEC’s complaint led to regulatory restrictions on growth that shifted Fannie’s new senior managers towards a new form of accounting control fraud using liar’s loans that caused losses so large that Fannie failed. (Freddie was also sued by the SEC for accounting control fraud at the same time as Fannie and its new managers reacted in the same fashion as Fannie’s new managers and produced the same kind of failure.)

In these circumstances, one might have thought that Fannie and FHFA would do everything possible to encourage whistleblowers by rewarding them rather than retaliating against them. One might even be tempted to board a flight of fantasy and believe that the courts would act zealously to protect whistleblowers at Fannie. Alas, given that this a Whistleblowers’ lemon award, the perceptive reader has already guessed that a mere $189.5 billion pubic bailout of Fannie and Freddie would not cause a fundamental change in their senior managers or the FHFA’s senior managers.

Fannie is continuing to retaliate against whistleblowers during the conservatorship. Fannie’s managers are continuing to prevent whistleblowers from even going to court to secure relief when they are the victims of retaliation. The courts are allowing these abuses, designed to intimidate whistleblowers, and barring whistleblowers at Fannie who are retaliated against from being able to have their day in court. This is occurring even though the Dodd-Frank Act sought specifically to bar this abuse of arbitration clauses that Fannie’s managers used for the purpose of intimidating whistleblowers.

In Taylor v. Fannie Mae, the court acknowledged that Dodd-Frank had deliberately amended the prior whistleblower protection provisions of the Sarbanes-Oxley Act, which had allowed employers to force whistleblowers to give up their normal rights to have their claims of retaliation heard in court.

While Sarbanes–Oxley claims were arbitrable at the time the law was originally enacted, the recent Dodd–Frank Act, enacted in July 2010, amended Section 1514A to prohibit arbitration of Sarbanes–Oxley claims. 18 U.S.C. § 1514A(e)(2) (“No predispute arbitration agreement shall be valid or enforceable, if [it] requires arbitration of a dispute arising under this section.”). As the defendants are attempting to enforce a dispute resolution policy over a Sarbanes–Oxley claim, the question before the Court is whether the Dodd–Frank Act applies retroactively to arbitration agreements that existed prior to July 2010.

Note that the Congress and the President in signing the Dodd-Frank Act had the benefit of years of experience with Sarbanes-Oxley’s effort to protect whistleblowers from retaliation. They realized, correctly, that corporate frauds were using arbitration clauses to aid their ability to silence whistleblowers through intimidation. They determined that this was terrible public policy that caused horrific losses to our Nation.

Fannie should not have to be ordered by Congress not to deny its whistleblowers the right to go to court to vindicate their legal right when Fannie executives unlawfully retaliate against the employees. But even if Fannie’s leadership failed to do so, the federal government (FHFA) is the conservator of Fannie and Freddie. The federal government as conservator has all management powers over Fannie and Freddie. It is outrageous that the FHFA has stood by while Fannie’s managers have (1) continued to violate the law, (2) illegally retaliated against the whistleblowers who have tried to warn their superiors and the public of Fannie’s continuing crimes, (3) and invoking the arbitration clauses to deny the whistleblowers’ their right to protect their rights in the courts – the very arbitration clauses that Congress declared unlawful because they were used to intimidate whistleblowers and put our Nation at risk. We have seen the catastrophic harm that the frauds led by Fannie and Freddie’s senior managers caused and how critical a service Fannie’s whistleblowers have provided to us.

The Bank Whistleblowers United is a strong supporter of the WARN Act to protect whistleblowers from retaliation that was introduced last week by Representative Cummings. We urge the public to support the adoption of that Act.