SEC and Revolving Doors: Q&A with Eric Ben-Artzi, the Deutsche Bank Whistleblower Who Rejected a Multimillion Dollar Award

ProMarket interviews Eric Ben-Artzi, the former Deutsche Bank risk officer turned whistleblower who rejected an $8.25 million award from the SEC. 

This post was originally published on promarket.org – the blog of the Stigler Center at the University of Chicago Booth School of Business.

In May 2015, Deutsche Bank agreed to pay a $55 million fine to the Securities and Exchange Commission to settle charges that it inflated the value of its complex derivatives portfolio during the height of the financial crisis. The settlement was the conclusion of a five-year investigation, which was largely spurred by revelations made by three former Deutsche employees turned whistleblowers that the bank had overvalued its derivatives portfolio in order to hide potential trading losses. Last week, whistleblower and former Deutsche Bank risk officer Eric Ben-Artzi caused a media sensation when he publicly rejected an $8.25 million award from the SEC due to the agency’s failure to punish Deutsche’s executives.

“Revolving Doors,” the habit of executives and regulators going back and forth between government jobs and regulated industries, has attracted increasing attention since the financial crisis. The incestuous relationship between regulators and the industry they are tasked with supervising is considered by many as one of the main reasons for “regulatory capture”–the failure of regulation in addressing market failures, and, in many cases, the designing of regulation that benefits incumbents and subverts competition.

Eric Ben-Artzi, a whistleblower who exposed a major case of accounting fraud by one of the biggest financial institutions in the world, chose a very unique way bring attention to the revolving door. Last week he announced, in the pages of the Financial Times, that he is renouncing his share of a $16.5 million SEC whistleblower award because of what he describes as corrupt behavior by the SEC’s senior leadership in deciding not to go after the executives, but rather charge only the bank itself.

In 2011, Ben-Artzi (along with two other former Deutsche Bank employees) revealed that Deutsche Bank had overvalued its derivatives portfolio in order to hide billions in potential trading losses. (In 2012, the Deutsche Bank whistleblowers estimated that the bank hid up to $12 billion in paper losses during the financial crisis, while the SEC estimated the sum at more than $1.5 billion when Deutsche settled the charges in 2015.)

By rejecting what he saw as an unjust penalty for Deutsche Bank’s shareholders, Ben-Artzi made a moral choice. Though his rejection of a multimillion dollar payout is remarkable, he is not the first whistleblower to be motivated by moral concerns. Indeed, as Northwestern University’s Adam Waytz notes in his ProMarket piece, studies consistently show that whistleblowers are more motivated by moral reasons than they are by financial gains. Waytz’s own research into the motivations of whistleblowers shows that whistleblowers are primarily motivated by fairness and justice1), which makes sense considering that they are more often punished for their actions than rewarded for them.

Ben-Artzi estimates his share of the settlement at $3.5 million (after fees and payments to lawyers, experts and his ex-wife). Ben-Artzi has a PhD in mathematics and is not a rich man. He has not amassed a significant fortune in his Wall Street career, and he believes that his odds of getting a job on Wall Street after whistleblowing on his bosses at Deutsche Bank are very low. After his experience on Wall Street and the process of whistleblowing to the SEC, getting to know his motives and perspective on bankers’ behavior, regulators, and finance may offer support to people who view revolving doors as a key culprit in regulatory capture.

Guy Rolnik: What is it that you uncovered in your whistleblowing?

Eric Ben-Artzi: I discovered–and independently of me, at least one, probably two, other whistleblowers also discovered–that the bank was inflating its credit derivatives portfolio, which was by far the largest such portfolio on Wall Street. Gradually, as I became familiar with this portfolio, I realized that the losses that were being hidden were, or conversely, the value that was being inflated, were in the billions, to the extent that it actually made the difference between the bank being solvent or not. I should say potentially solvent or not.

GR: Blowing the whistle usually gets you blackballed in the industry. What was the motive in fiercely going after your bosses in the bank?

EBA: Essentially this was my job. I would ask the question in the opposite direction. Why are all these other people not doing their job? The answer is fear. I think I didn’t want to be motivated by fear. I don’t want to live my life in fear.

GR: OK, but there were hundreds, if not thousands of people before you and after you that are in the same situation in many big institutions and in most cases this fear of being blackballed in the industry, losing their job, or even many times of people looking into skeletons in their closet is very rational. What made you act differently?

EBA: I think the answer is that in Wall Street especially, but I think for people in general, there are two motivating factors: greed and fear. I think fear is the more powerful of those. That’s my experience on Wall Street. Most of my colleagues who saw these things, and quite a few of them witnessed it, other risk managers, for example, would complain about these issues privately, which gave me more confidence that I was right. These people operated under fear. They probably still do. I think their fear is not baseless. Obviously, as you say, you get blackballed, you can lose your career, there are skeletons in your closet, all those things. You’re up against people who are far more powerful than you are. I can’t really fault them for acting out of fear and for choosing their career over doing the right thing. In my case, it’s not how I’m wired. Maybe it’s the problem that I have. I certainly have paid the price for that. Ultimately, it’s not the smart thing to do, maybe, but it’s the right thing to do.

GR: Your whistleblowing was conducted under the program for incentivizing whistleblowers that was introduced in the Dodd-Frank act. Would you have done it without Dodd‑Frank?

EBA: I believe that I would have done it without Dodd‑Frank, but I believe that I would not have been successful in making my case and pushing the SEC to pursue it. I think the fact that ultimately there was some enforcement action and an acknowledgment that we were correct was certainly a direct result of Dodd‑Frank.

GR: This is because the Dodd‑Frank whistleblower program allowed you to hire a lot of expensive experts?

EBA: Yes, experts, lawyers, etc.

GR: When was the point in time that you were notified by the SEC, or by the Congress, or the DOJ, whatever it is, that you are entitled to get $8.5 million?

EBA: This was just a few weeks ago.

GR: And when did you decide that you are not going to take the money?

EBA: The decision was brewing since the fine was announced in May of 2015, a little over a year ago.

GR: And you didn’t like the settlement.

EBA: The total fine is $55 million, which is a relatively small fraction of the value that was inflated, but I actually think that the size of the award is absolutely appropriate for this type of infraction. I actually believe that the size of the fine is OK. It’s just who is supposed to pay it that is the problem.

GR: And you believe that it’s the executives at the bank that should have paid the fine.

EBA: Yes, because the victims were the shareholders. This case most resembles Enron, to the best of my knowledge. I’m not intimately familiar with the Enron case, but I know in general that it was a case where the executives misrepresented the company’s finances ultimately at a great cost both to the shareholders and to the employees. I think in that respect, this is a similar case, the difference being that there’s also implicit and explicit government support for the bank, which, as far as I know, did not exist at Enron.

GR: Executives rarely pay the price.

EBA: First of all, to some extent, this is a common belief which in reality it’s not always the case. In Enron, for example, people went to jail. In the example that I brought up in the op‑ed in the Financial Times, which was about the same time as the Deutsche Bank case that I brought, there was a small bank that the SEC found had misrepresented its finances, and the executives did pay a price.

GR: They paid money or faced criminal charges?

EBA: They just paid money. I’m not arguing here that criminal charges should have been brought, because I’m not a lawyer, and because the burden of proof is very high for a criminal case. While maybe personally I believe that there might have been sufficient evidence, based on my own experience, I would have been willing to cut the prosecutors, the Department of Justice slack and say that maybe this is not a case where they could actually bring criminal charges. The SEC itself admitted that there was enough evidence to bring a civil enforcement action, which they did, except they brought it against the bank.

GR: Do you think you must bring civil charges or criminal charges against the executives to create deterrence–change norms and behavior? 

EBA: I absolutely believe that it would change everything, because even a civil action where the executives aren’t charged criminally would make sure that they don’t get another job afterwards. For example in the Deutsche Bank case we know that the CFO just a few months ago got a job at a private equity firm. The former CEO was, I believe, the head of Cypriot Bank, etc. The executives at Deutsche Bank were able to get other jobs. That would change. I think if the monetary penalty were sufficient, I think it’s as big a deterrent as going to jail, because if executives know that they’re not going to hold onto the bonuses that they got, behavior is going to be different. In fact I think that bringing civil charges against the executives would be a higher deterrent than the criminal deterrent because it’s so hard to bring criminal cases against these executives apparently.

GR: In your op-ed you speculate that the reason the SEC did not bring civil enforcement against the executives is the extensive revolving door between the Bank, the law firm representing Deutsche Bank, and the SEC.

EBA: Yes, admittedly I expressed it as a concern rather than as a fact that I know, because I don’t know it for a fact. I don’t have direct proof, but there is so much smoke there. The financial motivation is clear. The former Deutsche Bank [counsel] that went to work for the SEC received large bonuses throughout the years based on this fraudulent financial accounting, so it’s clear they had a financial interest in allowing this to happen. It’s clear that they also had a financial interest to not fine themselves. If a fine had been levied against the executives, they were potentially some of the executives who may have been forced to pay that fine. I would say [this] specifically about Robert Rice, who was the chief counsel of the SEC, and was also in charge of the investigation inside of Deutsche Bank as a lead counsel for the bank. You have to understand that once there were whistleblower complaints about that portfolio of derivatives being inflated, there was no executive, no accountant, no finance professional, no risk manager, no one did anything without an approval, as far as I know, from the legal team. Essentially Robert Rice was effectively in charge of this entire issue. To me this is a smoking gun.

GR: And he moved from the Bank to the SEC?

EBA: He was at Deutsche at 2011 and before that for several years when the investigation was ongoing he was the head of regulatory affairs and compliance. He ran the investigation inside of Deutsche Bank into these allegations, and that investigation had already been ongoing before I complained. He then joined the SEC in 2013 as chief counsel, and at that point the investigation was ongoing at its height, really.

GR: Didn’t he recuse himself from dealing with this investigation?

EBA: I’m sure he did, but I don’t see how these recusals are accepted. It’s clear that when your boss’ boss’ boss is potentially one of the people who are being accused, I don’t see how you could really make reasonable… how you could be considered to be a prosecutor who’s really trying to bring a case.

GR: So, your experience left you with a feeling that more than anything the revolving the door is the main culprit for fraud on Wall Street?

EBA: Yeah, and I think it’s a larger issue of conflicts of interest in the legal system. I think there’s been a lot of focus on the executive branch, conflicts of interest, and the influence of money in politics. I think to some extent money in the legal system’s a bigger problem. I don’t think this is unique to the SEC.

GR: Money in the legal system in the executive branch or also with elected judges?

EBA: Both. There’s a very famous Supreme Court decision, Caperton v. Massey. I think there are serious problems of money in the legal and judicial systems; the revolving door exists in many parts of the legal system. Obviously the SEC is the most famous one and maybe the one where there’s the most money, but it exists elsewhere as well. I think the damage to society goes far beyond just securities cases.

GR: What was the reaction of your friends and colleagues?

EBA: You mean when I blew the whistle or after?

GR: Both.

EBA: During, I got some quiet support from a few people, but as soon as it became clear that I lost my job, that there was a big fight going on, obviously nobody would get involved with this, and for good reason. I didn’t want to involve them either. I did get support from other people, but from outside of the bank, outside of the industry, where people were less afraid or maybe because they were angrier at what the big banks had done. There’s a big world outside of Wall Street so for people who are in Wall Street considering the implications of becoming whistleblowers you have to remember it’s a big world outside of Wall Street, and people will support you outside of that world.

GR: What was the reaction after you said that you’re not going to take the money from SEC?

EBA: It’s a little bit too early, I think. There were positive responses, a lot of encouragement. Some people don’t understand why I would turn down this money. It could solve all of my financial problems, or at least most of them. To some people this is a very strange decision, but I think quite a few people think that it’s the right decision and are very encouraging. I think the division is between people who have been following it and care about the corruption that I think we’ve been noticing in the past decade. It existed before that, but I think the financial crisis brought it into focus. People who have been following that I think are very encouraging, and people who haven’t I think just may not get it.

GR: You have left the United States and in the last 2 years you are working in a fintech startup in Israel. Did you have enough of public exposure and this kind of advocacy?

EBA: No, I don’t think you can stop once you’ve started. I’ve been a very tiny part of the movement against the allocation of gas licenses to the monopoly here in Israel, which I think again there was a revolving door element there which is very worrisome. Once I’m done with this case I really hope to become involved both in Israel and globally in fighting such injustices. I don’t think corruption has borders. I think this Deutsche Bank case proves that, and so I think the struggle has to be global as well.

Guy Rolnik is Clinical Associate Professor of Strategic Management at the University of Chicago Booth School of Business.