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A Whistle Was Blown, But Who Was Listening?

Posted  May 1, 2017

By the C|C Whistleblower Lawyer Team

Michael J. Lutz is a former employee of mortgage insurer Radian Group who worked as an accounting specialist conducting Sarbanes-Oxley testing. In his job, Mr. Lutz ensured that Radian’s accounting controls were effective. In 2013, Mr. Lutz allegedly discovered that Radian was materially understating the amount of reserves against potential losses on bad loans to make the company’s earnings appear better in a stock offering. Mr. Lutz brought his concerns to his superiors and to the company’s internal compliance hotline but was rebuffed by both. Mr. Lutz eventually filed a submission with the SEC whistleblower office.

As a result of airing his concerns internally, Mr. Lutz was shunned from meetings and eventually his position was outsourced. Mr. Lutz was then given a choice: take a new position auditing the company’s IT systems or resign and receive $75,000 in severance. Within the severance agreement, Radian including wording that precluded Mr. Lutz from receiving any “monetary damages or any other form of personal relief” in connection with an investigation of the company. This wording would prevent Mr. Lutz from recovering a whistleblower reward from the SEC program. Mr. Lutz therefore refused the severance and accepted the new position he was offered. However, he soon discovered that he was reporting to a low level employee at an outside vendor. Unhappy, Mr. Lutz requested to return to financial auditing and was told he would never be allowed to conduct those tasks again.

To date the SEC has not pursued Mr. Lutz’s claims against Radian. Some are questioning why the SEC has not acted in the face of a restrictive severance agreement that the SEC has shown disdain for in the past. In January, BlackRock settled with the SEC for the very same issue of restrictive settlement agreements. Further, Mr. Lutz won a ruling from the Department of Labor stating that Radian punished Mr. Lutz for speaking up and awarded Mr. Lutz $20,000 in damages.

This type of situation creates concern for whistleblowers that already face tremendous risk of job loss, retaliation, and financial trouble as a result of whistleblowing. The SEC whistleblower office here appears to show some inconsistency in its handling of restrictive severance agreements. This type of inconsistency puts whistleblowers in the difficult position of choosing severance or participation in the SEC whistleblower program when whistleblowers already put themselves at great risk. For its part, Radian has said that it has modified its agreements to remove the restriction on monetary recoveries, but believes the agreement it offered Mr. Lutz complied with all laws. However, for Mr. Lutz, the damage is already done and the inaction on the part of the SEC exposed him to more harm.

Tagged in: Accounting Fraud,