US government settlements with State Street and Bank of New York Mellon could produce a windfall for three former employees who blew the whistle on the banks’ alleged mistreatment of foreign-currency-trading clients.
Markopolos, who assembled the group and advised them, could reap a slice of any payouts awarded to the whistle-blowers, according to people familiar with the matter.
Those awards could exceed a combined $ 100 million, the largest such awards on record, according to an analysis by The Wall Street Journal.
The currency investigations have changed the way trust banks operate, crimping what had been a profitable corner for the banks as the markups in currency trades have fallen, analysts said. The potential payouts also could encourage more tips to regulators about possible improprieties.
“Whenever there’s a big award…there’s an uptick of filings and submissions,” said Erika Kelton, an attorney who has represented whistle-blowers. “Those large awards show these programs work, and that the risk of stepping forward may be a risk worth taking.”
Last month, State Street agreed to pay $ 530 million to settle civil claims it misled mutual funds and other custody clients with hidden markups to foreign-currency trades. A big chunk of the payout will go to government agencies, including the Securities and Exchange Commission and Justice Department.
The agreement follows a $ 714 million civil settlement BNY Mellon reached last year to resolve accusations it cheated government pension funds and other investors on currency trades for more than a decade. Late last month, the SEC filed a notice opening the 90-day window for whistle-blower claims on the BNY Mellon agreement.
Both banks admitted to wrongdoing in the settlements. Custody banks provide accounting services and administrative functions for other banks, corporations and money managers.
The federal and state investigations stemmed from information provided by a trio of employees – Grant Wilson, Peter Cera and Ryan Gagne – who were recruited or aided by Markopolos.
Though it could take months before payouts are made, Wilson, Cera and Gagne each is in line to receive tens of millions of dollars, thanks to a program the SEC enacted in 2011 as part of the Dodd-Frank financial overhaul law.
Wilson, a trader at BNY Mellon’s Pittsburgh office who remained in his job for two years even after he secretly began to provide information to the government, could receive an award approaching $ 60 million, based on the Journal analysis of the SEC program’s rules and the bank’s 2015 settlement.
Two former State Street employees, Cera and Gagne, could claim more than $ 90 million combined, according to the Journal analysis. The SEC granted its largest award, $ 30 million, in September 2014. The next largest was $ 17 million in June 2016 followed by $ 5 million in May this year.
It is unclear what stake Markopolos might have in these claims. While technically not a whistle-blower himself, he worked to recruit those who came forward and was instrumental in setting in motion the government’s cases.
The SEC’s program allows whistle-blowers to collect between 10% and 30% of penalties the government collects. It has granted a handful of awards, but the agency provides few details on payouts.
The SEC declined to comment on the State Street or BNY Mellon cases or the Journal analysis. Markoplos declined to comment. Wilson declined to comment through his attorney. Cera and Gagne didn’t return calls seeking comment.
For years, the SEC had a limited whistle-blower program that resulted in few useful tips and regulatory actions. Markopolos, who began warning the SEC about Madoff in 2000 after he heard about his remarkable returns and concluded they likely were fictitious, was among those who encouraged the SEC to provide greater incentives for those reporting potential wrongdoing.
A cottage industry has sprung up around the SEC’s program, with eager whistle-blowers and their lawyers contacting the agency regarding potential trading improprieties and other behaviour. In the year that ended in September 2015, the agency said it received about 4,000 tips compared with 3,000 in the first year of the program. Thirty-two whistle-blowers have collected roughly $ 85 million since 2011, according to an SEC report.
The agency issued 150 decisions on claims in fiscal 2015, though only eight resulted in awards. Few tipsters can count on a quick payout. Last year, the Journal reported the agency had an extensive backlog in processing claims for awards.
After Madoff’s arrest in December 2008, Markopolos won acclaim for his early warnings. But he was miserable, he said at the time, haunted by the investor losses and the apparent suicide of a French money manager Markopolos said he had warned.
As chronicled in a 2011 story in the Journal, Markopolos became intrigued about the possibility that trust banks were overcharging clients in currency markets after reading a book by Yale University’s chief investment officer that pointed to unpredictable “foreign exchange translations”.
Markopolos asked a friend who had worked with State Street who said custody banks typically charge pension funds unfavourable foreign-exchange, or FX, prices. “No one ever checks FX,” the friend said.
Markopolos set out in search of bank employees to prove his case, persuading Cera, Gagne and Wilson to help.
The group organised Delaware partnerships, with the whistle-blowers as the partners, to keep their identities out of public view. Markopolos served as a litigation consultant to the lawyers.
Markopolos and his team spent years digging up evidence of the currency manipulations, much as he worked to accumulate evidence on Madoff.
This article was published by The Wall Street Journal