Canadian whistleblower’s testimony leads to multi-billion dollar settlement

WATCH ABOVE: 16×9’s “The Whistleblower”

For more than five years –big U.S. banks have been under scrutiny for their part in the 2007-2008 financial crisis.

JPMorgan Chase & Co. – America’s largest bank- is no different. For its part in the crash – the bank made an agreement with the U.S. Department of Justice to payout $13 billion to atone for misleading investors.

“I was completely caught off guard by the settlement,” says a former JPMorgan employee.

That’s Canadian-born, Alayne Fleischmann. She worked for JPMorgan as a transaction manager. Her job was to review and find the red flags in home loans the bank wanted to purchase from a mortgage lender.

She says what she witnessed during her tenure – helped the Department of Justice in their settlement against JPMorgan.

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“These were completely private loans and we have every right to not buy them and we certainly never had to securitize them,” explains Fleischmann.

“It was simple greed. The more loans that you securitize and sell to investors, the more money you can make.”

Alayne is talking about mortgage-backed securities – that’s when banks, including JPMorgan, buy home loans and bundle them together to sell to investors.

Investors were told the securities were high quality. But in fact – that wasn’t quite true.

According to Fleischmann, a number of those mortgages were likely to fail because the homeowner couldn’t afford to make the payments.

But the bank never told this to investors.

“It got to the point where the quality of the loans got so bad that I think anyone could look at them and realize these people weren’t going to be able to pay back their loans,” says Fleischmann.

Fleischmann says she tried to warn her bosses about the bad loans but her concerns fell on deaf ears.

“I warned an executive director and a managing director that they couldn’t securitize these loans. I was still worried after that they would do it. So a couple of weeks later I submitted a written memo which outlined general issues I was seeing,” Fleischmann says.

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WATCH BELOW: An extended interview with Alayne Fleischmann

A little more than a year after she wrote that memo – Fleischmann was laid off along with others at JPMorgan.

”JPMorgan was one of those big players that was very much involved in these kinds of bad loans,” explains William Black, an associate professor of economics and law at the University of Missouri in Kansas City.

“They absolutely hyper-inflated the bubble, drove the crisis, [and] created the great recession.”

Black is no stranger to prosecuting Wall Street – he used to work for the U.S. Federal Government as a financial regulator.

He says whistleblowers often face huge repercussions for speaking out.

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“There’s the Fleischmann’s of the world who are competent professionals who are taught you’re supposed to protect the bank from loss, and they’re going ‘this is crazy, no bank would buy this, what are we doing?’,” explains Black. “And that’s the problem because that threatens the gravy train.”
Out of work – Fleischmann moved back to Canada.

Then in 2012 – she got a call from an Assistant U.S. Attorney with the Department of Justice. They found her memo and wanted her to testify. So she did.

“They had all the emails and the reports and the notifications and my memo,” Fleischmann says.

But instead of bringing criminal charges against JPMorgan – the Department of Justice cut a deal with the bank.

“What Ms. Fleischmann was to deliver on a platinum platter, a criminal case, against the senior managers of JPMorgan,” explains Black, “of course that didn’t happen.”

Black says it’s easy to get CEOs to agree to huge fines in an organization because they don’t have to pay out of their own pocket.

“Here’s what the CEO cares about. #1: I don’t go to prison. #2: I don’t lose my job. #3: I don’t have to pay back my bonuses,” Black says.

16×9 reached out to Jamie Dimon – the CEO of JPMorgan Chase & Co. – to ask about the settlement agreement and Alayne’s allegations. We were told he wasn’t available to do an interview.

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But JPMorgan did admit, in the settlement agreement with the Department of Justice, it failed to disclose to investors that some of these investments did not meet their own policies.

For more, watch “The Whistleblower” Saturday, February 21st, 2015 at 7:00 p.m.

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