Former securities attorney turned whistleblower Alayne Fleischmann has for eight years kept quiet about what she says is solid evidence of “massive criminal securities fraud” at JPMorgan Chase. She has spoken with and provided her evidence to government investigators on numerous occasions over the years and she paid close attention when — based partially on her allegations — the DOJ fined JPMorgan $13 billion last year for mortgage-backed securities fraud. But when she realized that the DOJ was not pursuing criminal charges in what she called one of the “easiest white-collar crime cases that you’re ever going to see,” she broke her silence and went public last week with her allegations in Rolling Stone magazine.
The article chronicles Ms. Fleischmann’s story beginning when she first realized the bank was engaging in activity that lead to mortgage fraud. She was hired in 2006 as a transaction manager at Chase, reviewing and clearing loans to make sure the bank did not buy bad mortgages. A few months in, a new diligence manager came on board and, apparently wary of creating evidence that may have implicated the bank in any misconduct, immediately told her and other employees to stop putting anything in writing. Ms. Fleischmann said “if you sent him an e-mail, he would actually come out and yell at you” but “the whole point of having a compliance and diligence group is to have policies that are set out clearly in writing. So to have exactly the opposite of that – that was very worrisome.”
Shortly thereafter, Ms. Fleischmann and other diligence managers noticed serious problems with a particular package of loans they were asked to review. The loans – worth $900 million – were several months old, which strongly indicated that no other bank wanted them. And her team’s review showed that 40 percent of the loans were based on overstated income. A report showing the serious problems with these loans was passed up to the bank’s top executives and several meetings were held in which she says diligence managers were essentially bullied into clearing the loans. In the end, Chase bought the high-risk loans and sold them to investors as low-risk securities.
Ms. Fleischmann drafted a long letter to another managing director warning him of the consequences of reselling these bad loans as securities and gave detailed descriptions of breakdowns in Chase’s diligence process. She said “it used to be if you wrote a memo, [the bank] had to stop, because now there’s proof that they knew what they were doing.” But all that changes when the bank knows the DOJ will not criminally prosecute them.
Ms. Fleischmann was dismissed in a round of layoffs in 2008. In the years that followed, she had several conversations with the government and even discovered that the threat of her testimony was being used against the bank as leverage in the civil settlement. But despite her concrete evidence implicating specific individuals at the bank in the massive fraud, the DOJ opted for a $13 billion civil settlement with the bank – much of which is a tax write-off – and failed to pursue criminal charges. The individuals who orchestrated the fraud got away with no more than a slap-on-the-wrist and, in the case of JPMorgan’s CEO Jamie Dimon, the board awarded him a 74 percent raise.
In an interview this week, Ms. Fleischmann explained why she broke her silence. She said in most cases “a fine gets paid, and then all of the facts and who did what gets washed away…there’s no deterrent to all of these fines. It’s just happening over and over again. And if there aren’t any individuals held accountable, there’s no reason for any of them to actually stop doing these very serious crimes.” She said with her case, the government made it look like it was a hard case, but “there are emails. There are reports that were ignored. There are vendor reports that were ignored. There are emails from diligence managers, from myself. There’s a letter that sets out exactly who did what and what’s wrong in our diligence process and how that’s going to cause problems in the security.”
So Ms. Fleischmann wants to hold the government accountable to pursuing criminal charges where serious crimes exist. She said “the concern I have is that what we’ve seen is that even when they’re really strong cases – you look at the JPMorgan-Madoff case, HSBC – they still, no matter how strong it is, they just get hushed away.” She came forward, in part, to change the game: “After watching all of these cases over and over again, at some stage I’m in the position where if I keep silent and the statute of limitation runs, or they do one of these agreements where they whitewash everything, then it’s too late, which is what’s happened over and over again so far. So, I’m trying to change the pattern and come out first, so that [the government has] to either follow these properly, the way they would for any other criminal defendant, or explain why they’re not doing it.”
As these types of cases continue to make headlines – the CFTC FX fines earlier this week, the Puerto Rico junk bond fines, and others — it appears that the DOJ’s consistent failure to pursue criminal charges is the missing piece in putting an end to rampant fraud. Ms. Fleischmann put it best when she said companies “know they can bring in their lawyers and their PR and their lobbyists and make it go away. So as long as they know they can do that, why would they stop?”
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