Whistleblower Richard Bowen hits Citigroup, then federal government

The life of a whistle-blower isn’t easy, especially when nobody takes you seriously. That’s what Richard Bowen endured.

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Richard Bowen testifying

The Dallas-based senior vice president for Citigroup became one of America’s first whistle-blowers on the mortgage crisis. Yet, he says, nobody cared.

He battled not only the forces of his mega-corporation but also the federal government, which he says pretended to investigate his allegations but actually covered some of them up.

As readers of the Fort Worth Star-Telegram Dave Lieber Watchdog column first learned, in a public talk at the University of Texas at Dallas School of Management, where he’s a senior lecturer in accounting, Bowen revealed a new set of allegations. This time, his target wasn’t his former employer. It was the federal government, which he said did its best to protect top leaders of American finance.

Bowen lost his job as senior vice president and senior chief underwriter in Citigroup after he complained to top boss Robert E. Rubin about mortgages bought from other mortgage companies.

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Robert E. Rubin

Bowen told Rubin, who had served as Treasury secretary under President Bill Clinton and has since retired as Citigroup’s chairman, that conditions were right for a big crash because those mortgages were not financially viable.

Bowen and his division supervised the purchases, but he says that even though his underwriters tried to deny purchases of large pools of mortgages from other companies, they were constantly overruled by higher-ups.

That story has been told before, most notably in a December 60 Minutes broadcast that profiled Bowen’s role as a whistle-blower.

But in February 2012, Bowen accused the U.S. Financial Crisis Inquiry Commission of forcing him to edit out his most important allegations before he went public. Watch his testimony here.

He says that his real testimony behind closed doors contains the meat of his allegations but that it remains locked away in the National Archives for five years.

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And what was that meat? Citigroup not only was buying bulk mortgages that were defective but also knew they were harmful to its own investors.

If that sounds familiar, it’s because another division of Citigroup that Bowen did not supervise was in the spotlight in November when a federal judge rejected a $285 million settlement between Citigroup and the Securities and Exchange Commission.

The judge condemned the SEC’s practice, which is common in some federal and state agencies, of allowing a company to pay a fine without acknowledging wrongdoing.

The wording used is that a company neither admits nor denies its involvement in improper activities.

In that case, the SEC accused Citigroup of placing bad mortgages in a $1 billion fund it sold to investors so the fund would fail. The motivation, the SEC charged, was that Citigroup had bet against its customers and made money when the fund declined in value.

The mishandling of mortgages in Bowen’s division has never gone to court in either a civil or a criminal case, and he says that’s part of the problem. No one has been called to account for actions that helped lead to a financial meltdown from which the nation is still trying to recover.

Bowen’s infamous 2007 warning e-mail to Rubin was made public during the inquiry. In it, he warned Rubin and other top officials that most of the mortgages Citigroup bought as part of so-called mortgage pools were defective. He wrote that this happened because of “breakdowns of internal controls” and warned that the consequences would be “material financial losses.”

He calls his e-mail a “Hail Mary pass” that didn’t get caught.

Citigroup has said that after Bowen’s warning e-mail, “Citi took prompt action to address the issues.”

Bowen disputes that. “I sent e-mails. I gave weekly reports. I made presentations. I started yelling. Yet through 2006 and 2007, the volumes [of purchases] increased, and the rate of defective mortgages increased” in his division to as high as 80 percent.

Worse, he says, is that after he gave detailed testimony to the SEC, including what he says was proof that investors were misled, the SEC did not follow up with criminal or civil cases.

When the national financial commission began its investigation, Bowen was called as a witness and told to submit 30 pages of testimony, but “when they got it, it was as if the whole world changed.”

He was told to edit his testimony down by a third, to remove any references to the SEC and violations of the law, to delete “all names and specific incidents” and to not mention that he was removed from his job after the Rubin e-mail. He speculates that the Treasury Department was preparing to sell its Citigroup shares acquired in the bailout.

After Bowen concluded his testimony before the financial commission, Rubin testified, but the commission went easy on the Wall Street titan and never forced him to detail his reaction to Bowen’s warnings, according to Bowen.

Perhaps Bowen’s most serious charge is that the government never prosecuted Citigroup leaders who Bowen says falsely certified to the government that Citi’s financial status was more secure than it was.

In response, Citigroup provided me with a letter it originally sent to 60 Minutes. The company writes that “the issues raised by Mr. Bowen had no impact on the integrity or propriety of Citi’s financial statements or the accuracy of the certifications signed in connection with Citi’s year-end and quarterly public filings.”

Now, two years later, Bowen laments, “no major player has been held accountable.”

“I was accountable in my job, and it cost me,” he said. “There are no regrets. I did what I had to do.”

When he finished his lecture, he got a standing ovation. The U.S. economy remains in shambles. And Richard Bowen, who saw what others wouldn’t see and said what others wouldn’t say, teaches accounting and accountability in a college classroom.

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Rick Perry’s plane trips: An example of Sarah Palin’s crony capitalism?

Update: On Jan. 3, 2012, the Securities and Exchange filed suit against Life Partners accusing it and top three executives of defrauding shareholders by overvaluing the life insurance policies it buys from its customers, AP reported.

The SEC also accused Life Partners president Brian Pardo of insider trading. Pardo and the company quickly denied the charges.

Original story follows:

Commission Sarah Palin blasted “corporate crony capitalism” in an Iowa September 2011 speech to supporters. Many interpreted this as an attack on Gov. Rick Perry’s pay-to-play political machine.

Maybe this is an example of the type of thing Palin is talking about:

As first reported in the Wall Street Journal and then Dave Lieber’s Watchdog column in the Fort Worth Star-Telegram, when Texas Gov. Rick Perry and his family flew to South Carolina in August 2011 to announce his presidential run, he rode on a private jet owned by a contributor facing major troubles from federal and state regulators.

Brian Pardo, chief executive of Life Partners Holdings of Waco, gave $50,000 in 2010 to Texans for Rick Perry, records show. He’s a pioneer in the life-settlement investment industry, where investors buy death bonds. They pay for portions of strangers’ life insurance policies, pay the premiums and collect after a person dies. If the people exceed life-expectancy estimates, the investments go bad.

At the federal level, the Securities and Exchange Commission notified Life Partners this year that it intends to file an enforcement action related to accounting and disclosure practices.

At the state level, the Texas State Securities Board, part of the executive branch, has investigated Life Partners for more than a year. Recently, the board — working with the Texas attorney general’s office — filed a court petition seeking to force the company to honor its state-issued subpoenas for company records. In court papers, the board says the company engaged in fraudulent business practices.

Life Partners refuses to give information to state securities regulators. Company lawyers say the financial products are not securities and shouldn’t be regulated as such.

AP PHOTO

No federal or state charges have been brought against the company, which has denied wrongdoing. But Life Partners also faces a slew of lawsuits from shareholders and disgruntled customers.

The governor’s rides in Pardo’s airplane — one to Iowa in addition to the South Carolina trip — were first reported on the front page of The Wall Street Journal.

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Life Partners didn’t respond to a request for an interview, but in an e-mail to the Journal, Pardo wrote, “I did not discuss the SEC investigation with the governor, to the best of my recollection.”

Perry spokesman Mark Miner told The Life Settlements Report website, “Mr. Pardo was not on the airplane with Governor Perry.” It wasn’t clear which of the two flights he was referring to.

Pardo told the newspaper that the Perry campaign paid for both trips, as required by federal election law.

Neither the governor’s office nor his campaign responded to a request for information from The Watchdog. The state securities board declined to comment, too.

Life Partners describes itself as a purchasing agent that matches people who can no longer afford or don’t want to continue paying their life insurance premiums — or people who bought policies to resell — with investors who buy fractional interests in the policies.

Life Partners’ estimates on when the original policyholders will die have been inaccurate, with many living longer than expected. The Life Settlements Report, an industry newsletter, said that for 262 deaths reported by the company, life expectancy was double the company’s estimates.

The company’s former life-expectancy estimator, a Reno, Nev., doctor, handled up to 200 individual medical reports a week. His job was to guess how long each person would live. By one estimate, he spent nine minutes per case compared with an industry standard of more than an hour reviewing a person’s health history.

Pardo is quoted in the WSJ as saying he supports Perry for president.

Is this the kind of matter that Sarah Palin is talking about?

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Dave Lieber, the author, is The Watchdog columnist at the Fort Worth Star-Telegram in Texas. His new book, Bad Dad, was just released and is getting dynamite reviews. It’s a true-story mystery thriller about what happens when the worst 10 minutes of your life go viral. The columnist is arrested by a police force he investigated. Learn more atwww.BadDadBook.com where you can read Chapter One. The hardcover and e-book are for sale at BadDadBook.com. Immediate shipment!

Texas Legislature won’t deliver needed life insurance reforms

Texas state regulators hoped to tighten rules for one particular investment that has cost Texans hundreds of millions of dollars.

But the Legislature is not going to come through for consumers.

As readers of the Fort Worth Star-Telegram Dave Lieber Watchdog column first learned, not one lawmaker has introduced a bill that would clarify state law on the life settlement industry and determine whether the investments — essentially bets on when a stranger will die — are securities.

Both the Texas Department of Insurance and the Texas State Securities Board requested a law to tighten consumer protections, as other states have done. But the agencies couldn’t find any takers among legislators.

In his pre-session report to lawmakers, outgoing state Insurance Commissioner Mike Geeslin wrote that the life settlement industry “has produced a substantial amount of harm to Texas investors, resulting in at least five receiverships and bankruptcies involving several hundred million dollars in investor funds.”

He asked lawmakers to “consider clarification of authority over the investment side of the life settlement industry,” which he said was a billion-dollar industry in 2008.

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Regulators want to end confusion between the Insurance Department and the Securities Board over regulation. Life settlements are considered insurance-related because the companies that sell them are licensed by insurance regulators. But some life settlement investments are also considered securities.

Texas’ most prominent life settlement company, Life Partners of Waco, faces a U.S. Securities and Exchange Commission investigation into how it estimates life expectancies of insured people.

Ed McMahon did ads for Life Partners.

The publicly traded company also faces a slew of lawsuits from shareholders and disgruntled customers. One shareholder’s lawsuit, filed last month in federal court in Waco, says the company used unrealistic life expectancy data. That information was the basis for reports that were deceptive and fraudulent, the lawsuit alleges. (The company has not publicly responded to the suit.)

State Sen. John Carona, R-Dallas, chairs the Senate’s Business and Commerce Committee, which would have reviewed any bills about life settlements. Through a staffer, he answered my question about the lack of a bill.

“There is currently pending litigation in the field as well as federal SEC activity. At this time, we are monitoring these events but do not feel we have enough information to file and pass legislation. And it is difficult to conduct thorough research at this stage of the session.”

That is somewhat surprising not only to regulators but also to others watching the industry. Scott Skelton, a Lufkin lawyer who is seeking Life Partners customers for a potential class-action lawsuit, said: “If the SEC is investigating it and other states are regulating it, you’d think Texas would want to regulate it as well. But you never know what’s going on in the Legislature. They’ve got a lot of fish to fry this session.”

Life Partners, founded in 1991, claims $2.8 billion in transactions. The company has won two major court rulings in the past 15 years that its products are not securities and not under SEC supervision.

The company matches people who can no longer afford or don’t want to continue paying their life insurance premiums — or people who bought policies to resell them — with investors who pay a fee to buy fractional interests in the insurance and pay the premiums. They receive the benefits when insured people die.

The investments go bad when people live beyond life expectancy estimates.

Analyses completed in recent weeks of Life Partners’ financial records on file with the state show that the company has an abysmal record of predicting life expectancies.

The Wall Street Journal reported that of 297 policyholders, 283 outlived the life expectancy estimate given to investors. The Life Settlement Reports, an industry newsletter, reported that for 262 deaths reported by the company, life expectancy was double the company’s estimates.

The reason, apparently, is that the company’s estimator, a Reno, Nev., doctor, handled up to 200 life expectancy reports a week. He worked only part time.

One estimate was that he spent an average of nine minutes studying a person’s medical history. Others in the industry may take an hour or more.

Life Partners has not been charged with any wrongdoing in Texas. Company spokeswoman Andrea Atwell declined to comment for this column, except to say that at the Waco offices, “It’s business as usual.”

Forrest Roan, an Austin lawyer who represents insurance companies before state regulators, praised lawmakers for not rushing to make changes. “When you’re talking about lawsuits and investigations, you ought to wait because when you enact a law, you need to have all the facts at hand,” he said. “You don’t want to run out and put something on the books just to be doing it.”

State regulators aren’t so patient.

A spokesman for the State Securities Board says that in the last two years, the agency has tried to help 2,200 people who invested about $219 million in life settlements.

“Many are elderly or retired,” spokesman Robert Elder says. “When all is said and done, many of these victims will have lost all or a substantial portion of their money.

“The amount of fraud is staggering, and the need for legislation is clear.”

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Dave Lieber, The Watchdog columnist for The Fort Worth Star-Telegram, is the founder of Watchdog Nation. The new edition of his book, Dave Lieber’s Watchdog Nation: Bite Back When Businesses and Scammers Do You Wrong, is available in hardcover, as a CD audio book, ebook and hey, what else do you need. Visit our store. Now revised and expanded, the book won two national book awards in 2009 for social change. Twitter @DaveLieber

The government protects you; the government hurts you

The deal was too good to be true, and fortunately for Charles Crocker, he realized that.

The brokerage unit of Stanford Group Co. in Dallas wanted to sell him certificates of deposit with a very high rate of return. But the money would have gone to Antiqua. Crocker wanted to keep his money at home. He did agree, however, to put his money in the financial empire of R. Allen Stanford, investing it in various accounts that were considered less risky.

R. Allen Stanford

R. Allen Stanford

He was right. The accounts were not risky, and Crocker is lucky. Unlike tens of thousands of Stanford customers who invested in the CDs, he didn’t lose his money. But that didn’t help much for seven weeks in 2009 when all of his accounts were frozen along with 50,000 other Stanford customers. A federal judge ordered the accounts blocked so the U.S. Securities and Exchange Commission and others could investigate.

As detailed here in the Sunday, July 19, 2009 Watchdog column in the Fort Worth Star-Telegram by Dave Lieber, the government actually ended up hurting Crocker and others more than Stanford ever did.

Nobody would answer his questions about when he could get his money. Even after his $400,000 in life savings was restored, along with access to his Social Security payments, nobody will talk to him about how he can get reimbursed for the nearly $1,000 in penalty fees for checks that bounced when the Stanford accounts were frozen without Crocker’s knowledge.

He also doesn’t know if his credit will be restored.

How horrible to be hurt by your own government, those who have sworn to protect you. Imagine going nearly two months without access to your money because of an investigation. Crocker showed Watchdog Nation a thick binder of letters to government officials of all stripes. Nobody but nobody would help him.

His congresswoman, U.S. Rep. Kay Granger, R-Fort Worth, for example, referred him to the court-appointed receiver, who refused to answer e-mails, phone calls or letters.

The only thing worse is losing all your money, which happened to so many.

Here’s an amazing report that details the perfidy and corruption of the Stanford empire, including how the top regulator in Antiqua was bribed to falsify documents and stave off the SEC.