If the SEC feels it hit a home run in its $55 million financial-fraud case against Deutsche Bank, the whistleblower who caught the ball has thrown it back. Eric Ben-Artzi, a Deutsche risk assessor who alerted the SEC to the bank's inflated credit derivatives portfolio, wrote in a Financial Times op-ed that he will reject his $8.25 million whistleblower award. The piece directly attacks the SEC's close relationship with large private firms and indirectly turns the whistleblower program on its head.
Did SEC connections shield Deutsche executives? Ben-Artzi, who worked in Deutsche's market-risk department, is one of three whistleblowers who alerted the SEC that the reported value of Deutsche's credit derivatives portfolio had been inflated. In his view, however, the SEC penalized the victims of the fraud—Deutsche and its shareholders and employees—by imposing a fine, rather than clawing back the bonuses paid to executives on the basis of inflated balance sheets.
Ben-Artzi maintains that close ties between top Deutsche lawyers—particularly former SEC counsel Robert Rice and former Director of Enforcement Robert Khuzami—and current SEC officials insulated the executives responsible for the fraud from prosecution. "Top SEC lawyers had held senior posts at the bank, moving in and out of top positions at the regulator even as the investigations into malfeasance at Deutsche were ongoing," he writes. "This goes beyond the typical revolving door story." He holds Chair White ultimately responsible for the $55 million fine, noting that she has known Rice and Khuzami for 20 years.
In rejecting the award, Ben-Artzi writes that he "will not join the looting of the very people [he] was hired to protect." Instead, he requests that his award "be given to Deutsche and its stakeholders, and the award money clawed back from the bonuses paid to the Deutsche executives, especially the former top SEC attorneys."
Clawbacks, not fines, should fund any award. Beyond disagreement with the imposition of a fine in these circumstances, Ben-Artzi's position reflects some tension with the way the whistleblower program is structured. Although it does not sit well with him that he can profit while the victims of fraud are penalized, neither Deutsche's fine nor any theoretical clawbacks have any relationship to the whistleblower award he was offered.
Whistleblower awards are not paid from the sanctions recovered in the corresponding enforcement action, but out of the Investor Protection Fund established under Dodd-Frank. Non-disgorgement sanctions from all SEC enforcement actions are pooled together in the fund until the balance reaches $300 million. The fund's balance exceeded $300 million throughout the SEC's fiscal year 2015, when Deutsche was fined. Therefore, no deposits were made into the account, and Deutsche's fine did not even partially fund awards for those who blew the whistle on fraud at the bank.
Both SOX and Dodd-Frank do provide for clawbacks of executive compensation in the event of financial misconduct or noncompliance with SEC reporting requirements, respectively. However, if the SEC were to pursue a successful clawback claim, the excess compensation would be repaid directly to Deutsche. The Commission simply has no authority to do what Ben-Artzi suggests—pay non-whistleblower victims out of the Investor Protection Fund or, conversely, pay whistleblowers clawed-back compensation.
Selective enforcement. Ben-Artzi contrasts this case with an SEC enforcement action against executives of a smaller, less connected firm, Trinity Capital (and Los Alamos National Bank, its subsidiary). Although the similar violations there were "orders of magnitude smaller," five executives were charged. Ben-Artzi quotes Enforcement Director Andrew Ceresney's statement in that press release that the agency "will hold senior executives liable when they misstate the company's performance and fail to come clean with shareholders."
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