bloomberg markets magazine -- citifraud july 2012

7/27/2019 Bloomberg Markets Magazine -- Citifraud July 2012

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By BoB Ivry

Citi

Whistle

photographs by wesley mann

The

COVER STORY

Blowing

On

Sherry hunt, a country

muSIclovIng manager

at the BankS maSSIve

mortgage unIt, expoSed

eIght yearS of mISdeedS

rIght up Into 2012and won $31 mIllIon

for herSelf.


3/10

Ju ly 20 11 BloomBerg marketS 27


4/10

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28 BloomBerg marketS Ju ly 20 12

Michigan by a dad who taught her to

fish and a mom who showed her how

to find wild mushrooms. She listened to

Marty Robbins and Buck Owens on the

radio and came to believe that God has

a bigger plan, that everything happens

for a reason. She got married at 16 and

didnt go to college. After she had her

first child at 17, she needed a job. A

friend helped her find one in 1975, pro-

cessing home loans at a small bank

in Alaska.

Over the next 30 years, Hunt moved

up the ladder to mortgage-banking po-sitions in Indiana, Minnesota and Mis-

souri. On her days off, when she wasnt

fishing with her husband, Jonathan,

she rode her horse, Cody, in Wild West

shows. She sometimes dressed up as

the legendary cowgirl Annie Oakley,

firing blanks from a vintage rifle to en-

tertain an audience. She liked the mort-

gage business, liked that she was

helping people buy houses.

In November 2004, Hunt, now 55,

joined Citigroup Inc. as a vice presidentin the mortgage unit. It looked like a

great career move. The housing market

was booming, and the New Yorkbased

bank, the sixth-largest lender in the

U.S. at the time, was responsible for

3.5 percent of all home loans. Hunt su-

pervised 65 mortgage underwriters at

CitiMortgage Inc.s sprawling head-

quarters in OFallon, Missouri, 45 min-

utes west of St. Louis.

Hunts team was responsible for pro-

tecting Citigroup from fraud and badinvestments. She and her colleagues in-

spected loans Citi wanted to buy from

outside brokers and lenders to see

whether they met the banks standards.

The mortgages had to have properly

signed paperwork, verifiable borrower

income and realistic appraisals. Citi

would vouch for the quality of these

loans when it sold them to investors or

approved them for government mort-

gage insurance.

Investor demand was so strong formortgages packaged into securities

that Citigroup couldnt process them

fast enough. The Citi stamp of approval

told investors that the bank would

stand behind the mortgages if borrow-

ers quit paying.

At the mor tga ge- pro cessin g fac -

tory in OFallon, Hunt was working on

an assembly line that helped inflate

a housing bubble whose implosion

would shake the world. The OFallon

Sherry Hunt never expectedto be a senior manager at a

Wall Street bank. She was acountry girl, raised in rural

ric bwn, fly hn, w f ling

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5/10

illustrationbyandreamanzati

mortgage machinery was moving too

fast to check every loan, Hunt says. By

2006, the bank was buying mortgages

from outside lenders with doctored tax

forms, phony appraisals and missing

signatures, she says. It was Hunts job

to identify these defects, and she did, in

regular reports to her bosses.

Executives buried her findings, Hunt

says, before, during and after the finan-

cial crisis, and even into 2012. In March

2011, more than two years after Citi-

group took $45 billion in bailouts from

the U.S. government and billions more

from the Federal Reservemore in

total than any other U.S. bankJeffery

Polkinghorne, an OFallon executive in

charge of loan quality, asked Hunt and

a colleague to stay in a conference room

after a meeting.

The encounter with Polkinghorne

was brief and tense, Hunt says. The

number of loans classified as defective

would have to fall, he told them, or it

would be your asses on the line.

Hunt says it was clear what Polking-

horne was askingand she wanted no

part of it. All a dishonest person had to

do was change the reports to make

things look better than they were,

Hunt says. I wouldnt play along.

Instead, she took her employer to

courtand won. In August 2011, five

Sour ces: U.S. Just ice D epart ment ,Citigroup, Sherry Hunt and

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months after the meeting with Polking-

horne, Hunt sued Citigroup in Manhat-

tan federal court, accusing its

home-loan division of systematically

violating U.S. mortgage regulations.

The U.S. Justice Department decided tojoin her suit in January. Citigroup

didnt dispute any of Hunts facts; it

didnt mount a defense in public or in

court. On Feb. 15, 2012, the bank agreed

to pay $158.3 million to the U.S. govern-

ment to settle the case. Citigroup ad-

mitted approving loans for government

insurance that didnt qualify under

Federal Housing Administration rules.

Prosecutors kept open the possibility

of bringing criminal charges, without

specifying targets.Citigroup behaving badly as late as

2012 shows how a big bank hasnt yet

absorbed the lessons of the credit crisis

despite billions of dollars in bailouts,

says Neil Barofsky, former special in-

spector general of the Troubled Asset

Relief Program. This case demon-

strates that the notion that the bailed-

out banks have somehow found God

and have reformed their ways in the af-

termath of the financial crisis is pure

myth, he says.As a reward for blowing the whistle

on her employer, Hunt, the country girl

turned banker, got $31 million out of

the settlement paid by Citigroup.

Hunt still remembers her first im-pressions of CitiMortgages OFallon

headquarters, a complex of three con-

crete-and-glass buildings surrounded

by manicured lawns and vast parking

lots. Inside are endless rows of cubicles

where 3,800 employees trade e-mails

and conduct conference calls. Hunt

says at first she felt like a mouse in a

maze. You only see peoples faces

when someone brings in doughnuts

and the smell gets them peeking over

the tops of their cubicles, she says.

Over time, she came to appreciate

the camaraderie. Every month, work-

ers conducted the so-called Jean Char-

ities. Employees contributed $20 forthe privilege of wearing jeans every day,

with the money going to local nonprofit

organizations. With so many workers,

it added up to $25,000 a month. Citi is

full of wonderful people, conscientiouspeople, Hunt says.

Those people worked on different

teams to process mortgages, all of them

focused on keeping home loans moving

through the system. One team bought

loans from brokers and other lenders.

Another team , called underwriter s,

made sure loan paperwork was com-

plete and the mortgages met the banks

and the governments guidelines. Yet

another group did spot-checks on loans

already purchased. It was such a high-

volume business that one groups as-

signment was simply to keep loans

moving on the assembly line. Still an-

other unit sold loans to Fannie Mae,

Freddie Mac and Ginnie Mae, the

government-controlled companies

that bundled them into securities forsale to investors. Those were the types

of securities that blew up in 2007, ignit-

ing a global financial crisis.

Workers had a powerful incentive to

push mortgages through the process

even if flaws were found: compensa-

tion. The pay of CitiMortgage employ-

ees all the way up to the divisions chief

executive officer depended on a high

percentage of approved loans, the gov-

ernments complaint says.

By 2006, Hunts team was pro-cessing $50 billion in loans that Citi-

Mortgage bought from hundreds of

mortgage companies. Because her

unit couldnt possibly review them

all, they checked a sample. When a

mortgage wasnt up to federal stan-

dardswhich could be any error rang-

ing from an unsigned document to a

false income statement or a hyped-

up appraisalher team labeled the

loan as defective. In late 2007, Hunts

Ciimgg qin oFlln, mii, iw hn wk wi3,800 nk ly.

All a dishonest person had to do was changethe reports to make things look better,Sherry Hunt says. I wouldnt play along.



7/10

cItIgroupS Share prIceS have dropped By 92 percent

SInce vIkram pandIt waS named ceo.

cItIgroupS SlIdeassets: $1.94 illin rank aMong u.s. banks: 3 total nuMber of eMployees worldwide: 263,000

pandits pay paCkage for 2011*

$14.9 million

BaIlout detaIlS

$4 5 billion + $301 billion in asset guarantees

tarp

ciTi Took morE monEy From ThE

govErnmEnT Than any oThEr u.s. bank. iT

has paiD back all oF iT, wiTh inTErEsT.

* Citigroup shareholders on April 16 voted down

Pandits compensation package by a vote of

about 55 to 45 percent. The final decision

rests with the board of directors, which says it

will consider the shareholders opinions.

2009 20112008 2010 2012

Sour ces: Citi grou p, U.S. Trea sury Depar tment , U.S. Justi ce Dep artm ent, Mortg age Ba nkers Assoc iati on, B loom berg

group estimated that about 60 per-

cent of the mortgages Citigroup was

buying and selling were missing some

form of documentation. Hunt says she

took her concerns to her boss, Richard

Bowen III.Bowen, 64, is a religious man, a for-

mer Air Force Reserve Officer Training

Corps cadet at Texas Tech University

in Lubbock with an attention to de-

tail that befits his background as a cer-

tified public accountant. When he saw

the magnitude of the mortgage de-

fects, Bowen says he prayed for guid-

ance. In a Nov. 3, 2007, e-mail, he

alerted Citigroup executives, includ-

ing Robert Rubin, then chairman of

Citigroups executive committee and aformer Treasury secretary; Chief Finan-

cial Officer Gary Crittenden; the banks

senior risk officer; and its chief auditor.

Bowen put the words URGENTREAD

IMMEDIATELYFINANCIAL IS-

SUES in the subject line.

The reason for this urgent e-mail

concerns breakdowns of internal con-

trols and resulting significant but pos-

sibly unrecognized financial lossesexisting within our organization,

Bowen wrote. We continue to be sig-

nificantly out of compliance.

There were no noticeable changes in

the mortgage machinery as a result of

Bowens warning, Hunt says.

Just a week after Bowen sent his e-

mail, Sherry and Jonathan were driv-

ing their Toyota Camry about 55 miles

(89 kilometers) per hour on four-lane

Providence Road in Columbia, Mis-

souri, when a driver in a Honda Civichit them head-on. Sherry broke a foot

and her sternum. Jonathan broke an

arm and his sternum. Doctors used

four bones harvested from a cadaver

and titanium screws to stabilize his

neck. You come out of an experience

like that with a commitment to mak-

ing the most of the time you have and

making the world a better place,

Sherry says.Three months after the accident, at-

torneys from Paul, Weiss, Rifkind,

Wharton & Garrison LLP, a New York

law firm representing Citigroup, inter-

viewed Hunt. She had no idea at the

time that it was related to Bowens

complaint, she says. The lawyers ques-

tions made her search her memory for

details of loans and conversations with

colleagues, she says. She decided to

take notes from that time forward on a

spreadsheet she kept on her homecomputer.

Bowens e-mail is now part of the ar-

chive of the Financial Crisis Inquiry

Commission, a panel created by Con-

gress in 2009. Citigroups response to

the commission, FCIC records show,

came from Brad Karp, chairman of Paul

Weiss. He said Citigroup had reviewed

Bowens issues, fired a supervisor and

changed its underwriting system, with-

out providing specifics.

One change resulting from Bowense-mail affected Bowen himself. He

went from mana ging 220 people to

overseeing two, according to the FCIC

report. By January 2009, Bowen no

longer worked for Citigroup, he told

the FCIC.

More people havent come forward

because they saw what happened to

me, says Bowen, whos now an ac-

counting and finance professor at the

University of Texas at Dallas. He says

Hunt is the exception. Sherry is an ab-solutely fantastic lady who knows what

shes doing. She has a conscience. I have

the highest regard for her.

Bowen declined to comment on the

circumstances of his departure from

Citigroup. The bank denies any retalia-

tion against him.

After Bowen left, Hunt had only one

person she could confide in: her hus-

band. She and Jonathan, 51, met in

1998 at a Minnesota casino. He trained


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search-and-rescue dogs for a living.

They share a love of animals, especially

horses. She says she was attracted to his

sense of humor. He would quote coun-

try songs to make her laugh. They were

married in 1999.When Sherry worked for U.S. Ban-

corp in Missouri, she and Jonathan

bred and raised horses. As members of

the Old West Society of Minnesota, the

couple performed in re-enactments of

19th-century events, such as the shoot-

out at the O.K. Corral. Sometimes she

dressed up as a society woman, wearing

a bustle. When she played Annie Oak-

ley, she wore a buckskin outfit with a

bullwhip coiled around her shoulder.

She galloped into the arena on herhorsebut never too fast, her husband

says. Sherry and speed on a horse

dont get along, he says with a grin.

Every workday for eight years before

winning her lawsuit, Sherry Hunt left

their house on its 10-acre (4-hectare)

lot and drove along a dirt road where

cows and horses grazed in pastures. She

turned onto a two-lane county highway

that passed over a river bridge barely

wide enough for two cars. About 45

minutes later, shed arrive at the office.After Bowen went public with her

findings, Hunt says she was transferred

to the quality-control group on April 1,

2008. She went from supervising 65people to managing none. What I saw

there was 10 times worse, she says.

Every time I turned over a rock, I

found a snake.

One place where she uncovered

flaws was in the fraud prevention and

investigation group. Thats where

Hunts team shipped questionable

loans, with issues such as obviously

forged signatures, whited-out income

lines on tax forms or misspelled bank

names on borrower bank statements.

The group was supposed to investigate

the mortgages for fraud and notify the

FHA within a month when it found it.In November 2009, Hunt says, she

came across a list of about 1,000 loans

that the quality-control team had iden-

tified for possible fraud. The fraud pre-vention and investigation group had

left some of the mortgages in the queue

for more than two years without check-

ing them, Hunt says. Not one notifica-

tion went to the FHA before July 2011,

when the U.S. Attorneys Office in Man-

hattan issued a subpoena to the

OFallon office, the governments com-

plaint says.

In 2009, different teams began feud-

ing, internal e-mails made public in the

Justice Department case show. Thats

when CitiMortgage created yet another

team whose mission was to challenge

the findings of Hunts quality-control

group and persuade her and her col-

leagues to change their decisions on

the suitability of loans.In November 2010, Ross Leckie, a se-

nior director of CitiMortgages retail

bank mortgage unit, sent an e-mail or-

dering his staff to meet its goal of a

maximum 5 percent defect rate on

home loans. Quality-control employees

had identified 10 loans with severe

flaws from a pool of 138, Leckie said, for

a rate of 7.25 percent. Drive this rate

down by brute force, he wrote. We

need three loans to be removed to get

to 5.07 percent.CitiMortgage defect rates did plum-

met, according to notes Hunt kept. It

wasnt because there were fewer bad

mortgages, she says. Its because they

were beating us up over the quality-

control reports, she says.

In late 2010, Hunt began studying

the new federal whistle-blower rules

that Congress had just enacted in July

as part of the Dodd-Frank Wall Street

Reform and Consumer Protection Act.

This urgent e-mail concerns breakdowns ofinternal controls, CitiMortgage executiveRichard Bowen wrote in November 2007. Wecontinue to be significantly out of compliance.



9/10

FredrConrad/thenewyorktimes/redux


The stress had been mounting for

Sherry and Jon. Conflicts at the office,

the physical pain that lingered from the

car wreck and growing anxiety over

Citis bad mortgages were taking a toll.

The Hunts say the laughter they oftenshared had faded.

Sherry says she drew inspiration

from a country song by Rascal Flatts

called Stand. Decide youve had

enough, it goes. You get mad. You get

strong. Wipe your hands, shake it off,

then you stand.

Hunt says she pinned the lyrics to

her cubicle wall. It made me stronger,

she says.

Hunt needed the strength on March

22, 2011. Thats the day Polkinghorne,who was three levels above her in the

chain of command, called her and a col-

league aside and told them their asses

were on the line if the defec t rates

didnt fall. Polkinghorne couldnt be

reached for comment, and Citigroup

declined to make him available for an

interview. That night, she and Jon

agreed the time had come for her to

take a stand. So Hunt decided to follow

the first step prescribed by Dodd-

Frank: formally complaining to thecompany. The prospect kept her awake

at night. I was ready to give up my

career and my life savings to get this

done, she says.

On March 29, 2011, Hunt walked intoCitiMortgages human resources de-

partment in OFallon and told them

everything: how the bank had been rou-

tinely buying and selling bad mortgages

for years, how the fraud unit wasnt do-

ing its job and how the quality-control

people were being pressured to change

their ratings.

Wh is tl e- bl ow er ru le s ma nd at e

that Hunt had to notify the Securi-

ties and Exchange Commission, the

government regulator that oversees

Citigroups mortgage business, within

90 days of reporting her concerns in-

ternally. I am afraid of what I know,

she wrote the SEC on May 24, 2011.

I do not want to know what I know. I

have nothing to gain from coming for-

ward and have no hidden agenda.Hunt hired a lawyer, Finley Gibbs of

Rotts & Gibbs LLC in Columbia, Mis-

souri. He had represented the Hunts

after their car accident. Starting on

June 27, 2011, Hunt and Gibbs shareddetails from her spreadsheet in four

conference calls with Justice Depart-

ment investigators. The officials made

no promises about whether they would

take action against Citigroup.

For two months, Sherry and Jon

sweated over what could happen if she

sued Citigroup without help from the

government. They concluded she had

to do it, Hunt says. On Aug. 5, 2011,

Hunt filed a false-claims complaint in

U.S. District Court in Manhattan.

I still had to go into work, Hunt

says. Because the complaint was sealed,

no one in her office knew about it. She

pinned a postcard of Leonardo da Vin-

cisMona Lisa next to the Rascal Flattslyrics. Like Mona Lisa, Sherry Hunt

had a secret.

She knew her chances of winning

were slim because she couldnt match

the resources of a big bank. Just 20 per-

cent of whistle-blowers get help from

government prosecutors, and without

that, success is rare, according to the

National Whistleblowers Center in

Washington.

After filing the lawsuit, Hunt says,

she felt like a ghost navigating the cubi-cles of CitiMortgage. Nobody knew, she

says, yet she felt vulnerable, as if she

could lose her job at any moment.

Sherry and Jon were elated on Jan.

3, 2012, when she got a call from her

lawyer: U.S. Attorney Preet Bharara in

Manhattan had decided to join her on

behalf of the Justice Department in

the case.

There was no testimony and no trial.

Citigroup admitted wrongdoing on

Feb. 15 and paid the $158.3 million tosettle. In a press release the same day,

Citi said it was pleased to resolve the

matter. We take our quality-assurance

processes seriously and have proac-

tively undertaken process improve-

ments to ensure that they are as robust

as possible, the bank wrote. The state-

ment didnt mention Hunt.

Citigroup isnt the only bank thats

been held accountable for processing

bad mortgages. In February, Char-

lotte, North Carolinabased Bank ofAmerica Corp. settled a false-cla ims

case with the government for $1 bil-

lion, without admitting wrongdoing.

In May, Frankfurt-based Deutsche

Bank AG agreed to pay $202.3 million

for endorsing unqualified mortgages

for FHA insurance, and admitted

wro ngdoing. What cont inues to set

Citigroup apart is that the bank ap-

proved flawed loans well past the 2008

financial crisis. A battleground over

u.s. any p b in mnn inhn lwi n wn n iin f Cii.


Citi created a team to rebut Hunts groupsfindings of flawed loans. They were beating usup over the quality-control reports, she says.


10/10


Parsons says. Getting our arms around

the problem and getting it fixed has

been a top priority.

Hunt says she hopes her victory in-

spires others to take a stand. I want

people to know they can come for-

ward, she says. If I can do it, they cando it. We need to change whats wrong

in our own backyards, and thats how

we end up changing the big things.

After they received their share of the

settlement, the Hunts decided to do-

nate their house in Missouri to the

Troy First Baptist Church and move to

a warmer climate. Sitting at the kitchen

counter, Jon calls Sherry over to watch

a video on his tablet. Its the Zac Brown

Band doing a song called Knee Deep,

which is about the dream of a perma-nent vacation.

Listen, Jon tells his wife, pointing

to the video. Then he sings along: Only

worry in the world is the tide gonna

reach my chair.

Sherry Hunt tips her head back and

hoots.

BoB Ivry Is a projeCts anD InvestIgatIonsreporter at bloomberg news In new [email protected]

t wi l i, n n -il [email protected] y mag .

in compensation for 2011. The pay

was tied to Pandits push for ethical

conduct, the bank said in a March 8

regulatory filing. The filing specifi-

cally cited Pandits success in improv-ing Citigroups U.S. mortgage unit. On

April 16, in an unprecedented move,

Citi shareholders voted to r eject Pan-

dits compensation by about 55 to 45

percent. The vote was nonbinding, and

the banks board of directors has final

say on pay.

We gave this guy a pretty substan-

tial incentive award, and theres a basis

for it, says Richard Parsons, who was

Citigroups chairman and a member of

its compensation committee until heretired in April. Our view was, under

Vikrams leader ship, we did a pretty

good job of moving Citigroup forward

in the year 2011, but there was still

progress to be made.

The amount Citigroup paid in the

settlement amounts to 1.4 percent of its

2011 net income of $11.2 billion.

Its about more than dollars; its

about the reputational risk of the en-

terprise and how we do business,

loan quality persisted at CitiMortgage

even as the settlement was signed in

February, the complaint says.

Just months after Citigroup settled

with the Justice Department, another

big financial institution, JPMorganChase & Co., announced a multibillion-

dollar trading losshelping to rekindle

the debate over regulation of so-called

too-big-to-fail banks. President Barack

Obama invoked the JPMorgan loss as

more evidence of the need for tighter

regulation of Wall Street. Mitt Romney,

the presumptive Republican presiden-

tial nominee, has meanwhile continued

to call for the repeal of Dodd-Frank, the

law Sherry Hunt followed when she

blew the whistle on her employer.If Citigroup has learned anything

from Sherry Hunt, its not clear from

the comments of CitiMortgage CEO

Sanjiv Das, whos based in New York.

He says his division does terrific work.

We are focused on making sure we

manufacture loans the right way, he

says. This is a complex industry. Its a

complex process. It takes time. Were

heading down a trajectory that Im in-

credibly proud of. Is there something

that is systemically wrong? Absolutelynot. Absolutely not.

Citigroup CEO Vikram Pandit de-

clined to comment for this story. In a

video recorded in 2010 and posted by

Citi on the Internet, Pandit pledged that

his bank was turning over a new leaf.

Were going to stand for the financial

services company that practices respon-

sible financemaking sure were trans-

parent, making sure were honest,

making sure we manage our sharehold-

ers money prudently, he says.Citigroup repaid with interest the

$45 billion in government bailout loans

it took in 2008 and reported profits

during each of the nine quarters ended

in March 2012. Yet shareholders re-

main restive. Citis stock fell 92 percent

from Dec. 11, 2007, when Pandit be-

came CEO, to May 18.

Three weeks after Citigroup settled

the Hunt case, the banks board of di-

rectors awarded Pandit $14.9 million

hn n n, jnn, in nig y, y y gniz v ciin Cii.


bloomberg markets magazine -- citifraud july 2012

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