Bank Foreclosing on Whistleblower

Robert Kraus lost his job in 2006 after he says he raised red flags about questionable activities in the corporate and investment bank at Wachovia Corp., now part of Wells. Since then, he says he has fallen behind on his mortgage because he hasn’t been able to find work in financial services.

“It’s impossible to support my family,” Kraus said in an interview. “I’m unable to find work in my field.”

Wells Fargo started foreclosure proceedings against Kraus and his wife, Julianne, in December, according to court documents. The couple is behind on payments on the $515,000 mortgage for their Waxhaw, North Carolina, home. A hearing before the Union County Clerk of Superior Court is scheduled for June 9.

It’s not unusual for whistle blowers to fall on hard times, said Fred Alford, a professor of government at the University of Maryland who has written a book on whistle blowers. About half lose their jobs, and of those, many lose their homes, he said.

“When a would-be whistleblower calls me, I tell them check your bank account, check your mortgage, check your marriage, check your religion, because all of these will be put under a tremendous strain,” he said. “You’re not just going to blow the whistle and go find another job. It’s going to become your life.”

Whistle blowers need a better support system because society needs insiders to come forward about wrongdoing, Alford said.

“We are a society that idealizes the notion of the individual standing up against the system, but most individuals who stand up against the system get crushed,” he said.

Long-Running Fight
Soon after being recruited to Charlotte-based Wachovia in 2005, Kraus alleges he found “problematic practices” related to the booking of trades, the reporting of losses and other activities inside the investment bank, according to a lawsuit he later filed in state court.

Kraus, who was a controller in the unit, brought his concerns all the way to the then-head of the investment bank, Steve Cummings, according to the suit. But months later, in July 2006, a lawyer for the bank told Kraus that an internal investigation had uncovered no wrongdoing, and he was offered a severance package on a “take it or leave it basis,” according to the complaint.

With a pregnant wife and a new home under construction, Kraus accepted.

Two years later, Wachovia was in serious trouble, hobbled by losses in its mortgage portfolio and in the corporate and investment bank. San Francisco-based Wells swooped in to buy the faltering bank in the fall of 2008 at the peak of the financial crisis.

Kraus filed suit against the bank in 2010, but a judge dismissed the case a year later because the bank said his severance agreement barred him from suing. Wachovia has said Kraus’ allegations were “completely without merit,” and Cummings, now chief executive officer of a subsidiary of a Japanese bank, has said he was confident the claims would be shown inaccurate.

Kraus, however, has kept up his fight.

In 2011, he and another whistleblower, Paul Bishop, filed a suit in federal court in New York alleging Wachovia’s investment bank violated accounting rules and skirted internal controls to pursue short-term profits, benefiting senior management at the expense of the company’s financial health. The case was unsealed in October 2014.

The complaint includes allegations that Wachovia, in violation of federal law and proper accounting practices, routinely placed loans in an off-the-balance-sheet entity called the College Street Funding Master Trust, known internally as the “Black Box.” Wachovia’s former headquarters was on College Street in Charlotte.

The goal was to skirt regulatory constraints on the amount of loans the bank could keep on its balance sheet, according to the suit.

In a 2005 email, a Wachovia executive, according to the suit, wrote that the accounting process was “held together with band-aids, spit and gum.”

Wells Fargo has said the bank “continues to believe these claims are without merit” and is seeking to have the suit dismissed.

Kraus and Bishop filed their lawsuit on behalf of the federal government, alleging the bank defrauded U.S. agencies that loaned money and provided other assistance to the bank in the financial crisis.

In such False Claims Act suits, whistle blowers can be eligible to receive up to 30 percent of any damages or penalties awarded under the action. The government has declined to join in the suit, but Kraus and Bishop can pursue the case on their own. Should they prevail, the government would still receive its share of any settlement or judgment.

Patrick Burns, co-director of the Taxpayers Against Fraud Educational Fund, said it’s not unusual for the government to decline to join False Claims Act lawsuits, and it’s happening more often. That’s because prosecutors don’t “like cases unless they are very simple and easy to explain,” said Burns, whose group advocates for effective whistleblower laws.

Some big cases declined by the government have proceeded with success, he said, with those cases resulting in at least $3 billion in recoveries.

‘I Did My Job’
Kraus, 44, doesn’t think it’s a coincidence that he faces foreclosure as his whistleblower lawsuit is pending.

“I refuse to believe the bank is so dislocated that they’re not very aware of it,” he says.

Wells Fargo declined to comment on whether the foreclosure action was connected to the whistleblower case.

“The loan currently is in the foreclosure process, but there is not a sale date scheduled,” a Wells spokesman said.

According to his 2010 lawsuit, Kraus received a loan modification from the bank after he sent a hardship letter explaining his dismissal from Wachovia. According to the suit, Wells pushed back payment on $395,000 of the balance until the end of the loan term and charged 2 percent interest on the remaining amount.

According to one of Kraus’ mortgage statements, his monthly payment is $1,192 for interest, principal and escrow.

Kraus says his wife works, but it’s not enough to keep up with the family’s bills. The couple have two children.