SEC is accused of mishandling a whistleblower tip about financial crisis-era misconduct

When a Deutsche Bank whistleblower approached the agency multiple times, giving them plenty of evidence about misconduct, he says the SEC slow-walked its response and then “blamed him” for their blunders.

SEC is accused of mishandling a whistleblower tip about financial crisis-era misconduct
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A decade after the U.S. financial crisis, Wall Street is booming and the economy is back–but nagging questions remain about the failure of government regulators and prosecutors to prevent the collapse, and to hold top Wall Street bankers personally accountable for the catastrophe. A year after the recession ended, the Securities and Exchange Commission (SEC) in 2010 slapped Goldman Sachs with a hefty $550 million fine, but it only charged a single, mid-level Goldman trader. Emails obtained by ProPublica‘s Jesse Eisinger and published by the site in 2016 shed some light on possible reasons why. In them, the senior SEC official who investigated Goldman lamented the “devasting [sic] impact our little ol’ civil actions reap on real people more often than I care to remember. It is the least favorite part of the job. Most of our civil defendants are good people who have done one bad thing.”


A would-be whistleblower is now accusing that official, Reid Muoio, of mishandling a tip he sent in alleging misconduct by Deutsche Bank, Fast Company has learned. In a previously unreported case winding its way through the United States Court of Appeals for the Second Circuit, the plaintiff (an anonymous Deutsche Bank executive identified only as “Doe”) says Muoio, deputy chief of the SEC’s Complex Financial Instruments Unit (CFIU), failed to pass along information he provided about how the bank was misvaluing the types of subprime mortgage products that were at the heart of the global meltdown.

That failure cost him a big-bucks whistleblower financial award, says Doe.

Deutsche Bank eventually paid a $55 million civil fine to settle allegations that it misled investors over its subprime mortgage products. Two other former employees, Matthew Simpson and Eric Ben-Artzi, were awarded $8.25 million each for assisting the SEC.In his appeal, Doe says he didn’t know how his tip was dealt with until after he was denied an award and began appealing the SEC’s decision.

The SEC has said Muoio didn’t find Doe credible, and that his tip was duplicative of what the agency had already received from others, as well as of evidence SEC lawyers collected independently. An SEC spokesperson declined to comment further, and Muoio didn’t respond to emails requesting comment.

Still, the Doe case in New York gives a fascinating peek into how some whistleblowers can be brushed aside, or simply fall through the cracks. The picture of Doe painted by thousands of pages of court documents, including emails and internal documents he gave to investigators, suggests the mid-level exec could have been an asset to the SEC. He claims to have directly witnessed discussions over how to value the bank’s subprime mortgage products. Before contacting the SEC, he worked with investigators at the U.S. Senate’s Permanent Subcommittee on Investigations and the Federal Reserve Bank of New York. These agencies eventually referred Doe to the SEC’s CFIU.


Doe met with Muoio and other SEC lawyers in New York in late 2010. In court documents, Doe says he explained how Deutsche Bank calculated the risk involved with its subprime mortgage products. Crucially, he brought with him an internal Deutsche Bank presentation that suggested the bank was aware of risks associated with these products that weren’t reflected in public financial statements.

That’s exactly the type of evidence that the SEC’s whistleblower program is designed to attract. Since 2012, the agency has paid out more than  $326 million to whistleblowers who have helped bring cases resulting in more than $1.7 billion in penalties. With some blockbuster cases yielding awards of over $30 million, the program has created an environment where companies and executives who violate securities laws have to think twice about who might be watching.

Yet despite the program’s success, Doe’s story mirrors that of Harry Markopolos, whose repeated, futile attempts to alert the SEC to the extravagant Ponzi scheme masterminded by Bernie Madoff was a particularly embarrassing episode for the agency, and served as the basis for the creation of the SEC’s whistleblower program with the passing of the Dodd-Frank Financial Reform Act in 2010.

Slow-walking Doe’s tip

A team of lawyers at the SEC had opened an investigation into Deutsche Bank after receiving an earlier tip from Simpson, but the CFIU wasn’t involved with the case, officials have said. Doe’s info had the potential to push the investigation forward, as a subsequent tip by a third whistleblower, Ben-Artzi, did. But instead of taking the Deutsche Bank exec seriously, Muoio and the CFIU appear to have slow-walked their response to his initial disclosures and failed to send them to the lawyers overseeing the Deutsche Bank investigation, the suit alleges.

After the meeting in 2010, Doe followed up with a detailed three-page email outlining again what was problematic about Deutsche Bank’s handling of its subprime mortgage products. In his email, Doe pointed out how Deutsche Bank’s 2008 annual report made “no mention” of the risk. He ended his email by encouraging Muoio and another CFIU lawyer to contact him with any questions.


It wasn’t until a year later, after Doe followed up with another email, that Muoio forwarded Doe’s latest submission onto the Deutsche Bank investigators, the suit says. By then, the information was no longer useful, the agency says.

Muoio’s defense

Despite taking on the risks associated with whistleblowing, Doe says he found himself brushed off and belittled by his first point of contact: the CFIU. To explain why they didn’t give him an award, the SEC submitted a declaration by Muoio describing his impression of Doe during their meeting in 2010.

Doe had appeared to be “very disjointed and had difficulty articulating credible and coherent information,” according to Muoio. As for the internal Deutsche Bank presentation, Doe apparently brought that and other documents in a “wet brown paper bag,” jumbled and disorganized, he said.

Muoio apparently felt Doe’s flustered disposition was enough to disqualify him. Of course, independently assessing the value of the information Doe offered investigators is difficult this many years later. Even if Muoio had forwarded Doe’s tip, SEC may still have decided that it didn’t justify an award. But Muoio’s declaration does not explain why he felt the specific documents Doe provided weren’t of any use to the SEC’s ongoing investigation at the time

Whistleblower beware?

Doe’s experience serves as a warning to other executives who are thinking of putting their livelihood and professional reputation at stake by turning on their employer and disclosing evidence of financial misdeeds to regulators.


The creation of the SEC’s award program has coincided with the rise of a cottage industry of whistleblower lawyers. One reason Doe may not have been taken seriously by Muoio and the CFIU was that he didn’t immediately hire a lawyer who could package his disclosures and ensure the SEC understood their value. Some of the most prominent whistleblower lawyers have deep contacts at the SEC and can keep tabs on an investigation as it progresses.

Doe did eventually hire a lawyer, but not until 2012. That lawyer, David Kovel, made a series of submissions on his behalf in 2013, and succeeded in arranging a meeting with Amy Friedman, the SEC lawyer overseeing the Deutsche bank investigation. But by then it was too late.

In an email, Kovel strongly criticized the SEC’s decision to deny his client an award. Despite being a “highly credible eyewitness” to Deutsche Bank’s misconduct, the SEC’s CFIU ignored Doe’s claims, then “blamed him for their own blunder,” he said.

Doe isn’t the only one who felt the SEC unjustly denied him an award in relation to the Deutsche Bank case. The appeals court is also reviewing a joint claim by two Canadian investment bankers who were initially hired by the second successful whistleblower, Ben-Artzi, to support his own disclosures. The investment bankers, Colin Kilgour and Daniel Williams, provided a written report to the SEC and flew to Washington, D.C., to give a presentation, according to court records. Friedman later said in a declaration that the assistance they provided was “critical to the investigation and helped form the basis for the charges brought by the commission against Deutsche Bank.”

Per their brief, Kilgour and Williams eventually reached an agreement with Ben-Artzi that the two experts’ contributions had extended beyond what their contingency fee was meant to cover. They filed a separate claim a year before the Deutsche Bank settlement but were denied an award.


The SEC has contended that none of information they submitted after filing as whistleblowers contributed to the settlement, and that Kilgour and Williams aren’t able to retroactively claim that information submitted on behalf of Ben-Artzi was “original,” as required by the SEC’s rules.

A panel of judges is scheduled to hear oral arguments by Doe, Kilgour, and Williams on Tuesday. For both parties, the appeal is an uphill battle. By most accounts, the SEC has fairly broad discretion in deciding who deserves an award. Very few claims have made their way to a federal appeals court. In one case from earlier this year, the D.C. Circuit court ruled in favor of the SEC.

This story has been updated.