COPY Through The Eyes of A Whistle-Blower - How Sherry Hunt Spoke Up About Citibank's Mortgage Fraud

ADAM WAYTZ AND VASILIA KILIBARDA KEL852
Through the Eyes of a Whistle-Blower:

How Sherry Hunt Spoke Up About Citibank’s Mortgage Fraud
On March 22, 2011, Sherry Hunt, vice president and chief underwriter at CitiMortgage, raced
down the endless rows of cubicles until she reached her office and closed the door behind her.
Her hands were shaking, her heart pounding. Moments before, Jeffery Polkinghorne—an
executive three levels above her—had requested an impromptu meeting with Hunt and her
colleague in a conference room. His face had reddened as he raised his voice and pointed at her.
If the mortgage defect rate reported by Hunt and her quality control unit did not fall substantially
and immediately, he said, menacingly, “It’s your asses on the line.”1
As she struggled to regain her composure, Hunt considered her options. She knew the defects
she was finding were legitimate and some even indicated fraud. They put Citi at serious risk, and
she could not sign off on reports that obscured the facts. However, the financial crisis had hit the
mortgage industry hard and there were no available jobs for someone with her qualifications.
She fell heavily into a chair and put her head in her hands. She felt both scared and angry that
she was being asked to fudge reports. What was she going to do?
Sherry Hunt
Sherry Hunt was raised in rural Michigan. The reserved and warm mother of two sons, she
worked hard, prided herself on following the rules, and built a long, successful career in the
mortgagei business. She began her career as a mortgage processer at a small bank in Alaska and
later returned home to the Midwest, moving from state to state as she worked her way up the
corporate ladder at some of the top banks in the United States. All the while, however, Hunt
i
Mortgage: Residential mortgages are loans made to individuals for large real estate purchases for which they cannot pay the full
value up front. Through a predetermined number of payments, the borrower (the home buyer) repays the loan plus interest to the
lender (the bank). One key element of a mortgage is the fact that the home buyer must pledge his or her home to the bank as collateral
in case the home buyer defaults on paying the mortgage. If the home buyer does not make his or her mortgage payments, the bank can
evict the home’s tenants, sell the home, and use the income from the sale to repay the mortgage debt.
©2014 by the Kellogg School of Management at Northwestern University. This case was prepared by Professor Adam Waytz and
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Winner of the 2014 competition for Outstanding Case on Anti-Corruption, supported by the Principles for Responsible Management
Education (PRME), an initiative of the United Nations Global Compact, which seeks to inspire and champion responsible
management education, research, and thought leadership globally.
This document is authorized for use only in DR. LOGASVATHI MURUGIAH's LENDING MANAGEMENT_1 at Universiti Utara Malaysia from Feb 2019 to Aug 2019.
THROUGH THE EYES OF A WHISTLE-BLOWER KEL852
stayed true to her roots—raising horses, fishing in her free time, and playing legendary cowgirl
Annie Oakley in Wild West shows in her community.
When she was 47, her sons grown and off starting families of their own, she moved to
Missouri in November 2004 to accept a post as vice president and chief underwriter of the
correspondent channel at CitiMortgage’s headquarters. “I loved the mortgage business. I was
helping people purchase their first homes or refinance [their homes] to pay for their kids’ college
educations. It was a thrill to put together the puzzle of someone’s life, making sure they meet all
the different rules. Everyone is different. I was never bored . . . it was fascinating,” said Hunt.2
Citigroup, REL, and the Correspondent Channel

Citigroup (Citi) was a multinational financial services company headquartered in Manhattan,
New York. It was the sixth largest residential lender in the United States in 2004 and was rapidly
growing.3 Shortly after Hunt joined the company in 2004, Citigroup restructured. The consumer
lending group was formed, which brought together Citi’s consumer lending activities, including
prime and subprime mortgages, home equity, student loans, and automobile loans. All of the
mortgage-lending operations within the consumer lending group were then grouped under the
real estate lending (REL) division.4
REL comprised the following subsidiaries: CitiMortgage (primeii mortgage lending),

CitiFinancial Mortgage (subprimeiii mortgage lending), and Citi Home Equity.5 Mortgage lending
was an important line of business for Citi and all large U.S. banks, as mortgages kept them in the
black. A dependable and low-risk source of profits, mortgages were typically the last expense
homeowners defaultediv on when faced with financial troubles.6
When REL was formed, most of the new upper management came from CitiFinancial.7
Among them was Richard Bowen, who became REL’s business chief underwriter for
correspondent channels. Correspondent channels were the channels through which Citi purchased
mortgages from external mortgage companies (called correspondent lenders) and then sold the
mortgages to investors—primarily government-sponsored enterprises (GSEs) such as Fannie
Mae and Freddie Mac, as well as government entities such as the Government National Mortgage
Association (“Ginnie Mae”). There were two distinct underwriting workflows for processing
loans that were purchased from correspondent lenders (see Figure 1). Underwriting is the process
by which a bank checks that each mortgage file contains all policy-required documents (e.g.,
proof of income, employment verification, etc.) and meets the minimum criteria established by a
bank’s credit policy.
After receiving this promotion, Bowen thought it critical to familiarize himself with REL’s
entire correspondent business, which he oversaw from Citi’s new office in Irving, Texas. Having
come from CitiFinancial, he was inexperienced in prime mortgage underwriting, so he visited
teams across the country that reported to him—from Hunt and her team at CitiMortgage in
ii
Prime: Prime refers to the credit quality of the mortgage borrower, as determined by various credit rating bureaus (e.g., FICO,
Equifax, and Experian). The highest-quality borrowers (or individuals with the lowest risk of default) are referred to as prime.
iii
Subprime: Subprime borrowers are those with tarnished or limited credit history and poor-quality collateral. They have lower credit
scores and are more likely to default than prime borrowers.
iv
Default: When a home buyer defaults on a mortgage, they have failed to pay the lending bank their monthly mortgage payment.
2 KELLOGG SCHOOL OF MANAGEMENT

KEL852 THROUGH THE EYES OF A WHISTLE-BLOWER
Missouri, who worked on the underwritten flow, to the employees that sat on the floor above his,
many of whom worked on CitiMortgage’s delegated flow.
Figure 1: The Two Flows of the Correspondent Business Channel

The purchasing of loans from external lenders
Correspondent Business Channel
Underwritten Flow:
Citi underwriters reviewed each mortgage file before Citi agreed to purchase it
from a correspondent lender. In this flow, Citi had not delegated the
responsibility to the correspondent lenders to underwrite the mortgages
themselves (because they had not met certain criteria).
Delegated Flow:
Citi underwriters underwrote only a small sample of mortgage files (in essence,
spot‐checking the quality of mortgage pools) after large volumes of mortgages
had already been purchased from the correspondent lenders. In this flow, Citi
had fully delegated the responsibility to the correspondent lenders to
underwrite the mortgages. Only prime mortgages were purchased in this flow.
Source: Testimony of Richard M. Bowen, III, Hearing on Subprime Lending and Securitization and Government Sponsored Enterprises,
Presented to the Financial Crisis Inquiry Commission, April 7, 2010, and Sherry Hunt, in interview with the authors, April 14, 2014.
“There was a real learning curve for Richard and the folks from CitiFinancial. They didn’t
understand my business [prime lending], and I didn’t understand theirs [subprime lending],”
recalled Hunt.8 In learning about the work of the underwriters in his building, Bowen began to
uncover problems. “I discovered that [front-line employees] were telling me one thing, yet their
boss was telling me something completely different.”9 Their boss was Conniev—Hunt’s direct
supervisor, who reported directly to Bowen and who led both the underwritten and delegated
flows. Bowen suspected that Connie was being dishonest, as Hunt had informed him that often
when she would tell Connie that a loan was bad and that Citi should not purchase it, Connie
would overrule her.10 He dug deeper and found that reporting done by the quality assurance
(QA) underwriters whom Connie oversaw was dubious.
QA was the group of underwriters who underwrote a small sample of already-purchased

loans obtained through the delegated flow. The QA underwriters would assign each mortgage file
in their sample an agree, disagree, or agree-contingent decision. This signified whether QA did
or did not agree with the originating mortgage company (the correspondent lender) that the file
adhered to Citi credit policy. The agree-contingent designation meant that the QA underwriters
agreed with the originating mortgage company, pending the file’s receipt of missing policy-
required documents. The results were then reported to a committee, which Bowen had recently
joined.
v
First name only provided, as this was how interviewees preferred to refer to Sherry Hunt’s original direct supervisor.
KELLOGG SCHOOL OF MANAGEMENT 3

While on the committee, Bowen learned of Citi’s

expectation that if the flow were functioning properly, 95
percent of loans purchased through the delegated flow What does “reps and
should receive the agree designation. In 2006, the results warrants” mean?
that QA reported to the committee confirmed the 95 percent
agree to 5 percent disagree ratio. However, upon further Citi represents and
investigation, Bowen discovered that the total of the agree warrants to GSEs that the
and agree-contingent decisions was being reported as the mortgages sold to them
comply with Citi policy. If a
agree rate. To Bowen’s shock, most of the Citi underwriters mortgage file was not in
with whom he spoke believed that over half of the 95 compliance with Citi policy
percent agree rate comprised agree-contingent files that or had missing policy-
were missing required documents. The reports should have required documentation,
reflected that QA’s results were 40 percent agree, 55 percent the mortgage file was
agree-contingent, and 5 percent disagree. This meant that 60 considered defective. If a
mortgage that Citi
percent of the mortgages that Citi had purchased in 2006, represented and
had represented and warranted, then had sold to GSEs were warranted was discovered
likely defective.11 to be defective, the owning
GSE could force Citi to
Bowen quickly acted to improve the accuracy of purchase it back.
reporting and to terminate Connie in September 2006. Now,
Hunt reported directly to Bowen (see Exhibit 1). “I was
What is a defect?
very impressed with Sherry when we met in Missouri. She’s
a very sharp lady. That’s why I wanted to promote her,”
Defects ranged from
Bowen recalled.12 missing tax forms and
missing signatures on
documents to more
CitiMortgage egregious fraud such as
straw buyers, borrowers
who listed nonexistent
Far from Citigroup’s new Irving office and its employers, and loan
Manhattan headquarters stood three glass buildings in officers who fabricated
O’Fallon, Missouri—CitiMortgage’s headquarters. This borrower income.
prime mortgage lending organization employed over 3,000
people.
Prior to the U.S. financial crisis in 2008, CitiMortgage

purchased approximately $90 billion annually in home loans
from correspondent lenders.13 Different teams within CitiMortgage worked on the different parts
of this high-volume pipeline. The sales team actively solicited and purchased loans from
correspondent lenders (smaller banks that, to increase their cash flow, would sell their mortgages
to Citi). Underwriting teams checked that mortgage files were complete and adhered to policy—
both Citi’s credit policy and any additional criteria required by government entities, such as the
Federal Housing Administration (FHA), in order for that entity to insurevi a loan. Finally,
another team sold the mortgages to GSEs, which bundled the loans into securities to sell to
investors.14
vi
Government insurance: When a government agency such as the FHA or the U.S. Department of Veteran Affairs insured (or
“guaranteed”) a loan, it promised to pay the lending bank a percentage of the losses it would incur if the borrower defaulted on his or
her loan. By insuring loans, government agencies could enable certain groups of people (e.g., first-time home buyers or veterans) to
more easily obtain home loans.

HUNT’S TEAM
Hunt—who by 2007 was CitiMortgage’s chief underwriter for both of the correspondent
flows—had 65 direct reports working the underwritten and delegated flows in O’Fallon, as well
as a group of indirect reports working in QA in Irving. In ensuring that loans met Citi’s standards,
her team gave Citi’s seal of approval to investors (i.e., the documentation indicated that
borrowers were likely to repay the mortgages). This responsibility took on an amplified level of
importance with the FHA, the largest insurer of mortgages in the world, which was part of the
U.S. Department of Housing and Urban Development (HUD). Unlike Fannie Mae and Freddie
Mac—which double-checked samples of the mortgages they guaranteed for defects—the FHA
did not have this layer of quality control. Instead, it delegated all quality control to lenders. From
2007 to 2012, the FHA increased the number of loans it guaranteed from $700 billion to $1.1
trillion, all of which depended upon the quality control processes of lenders (such as Citi and its
correspondent lenders) to ensure that U.S. taxpayers’ dollars that supported the FHA were being
responsibly invested.15
Hunt’s team found all kinds of defects in the loans that Citi had already purchased from
correspondent lenders. “For example, to get an FHA loan, you have to live in the home as your
primary residence. We found a guy who had nine [FHA loans] with nine different banks, saying
he was going to live in all of these houses, and then he didn’t live in any,” Hunt recalled.16 And
the borrowers were not always the perpetrators. Sometimes it was the bank’s loan officers.
“We found that loan officers sometimes backed into the numbers. When filling out
applications for stated income loans, which did not require back-up documentation, they would
think, ‘What income do I need to put down that the borrower earns in order to qualify for the
loan?’ Whether the borrower earned that or not, the loan officer would write that income on the
mortgage application. The loan officer may have said something along the lines of, ‘Don’t worry
about that. It’s no big deal. Do you want that house or don’t you?’” Hunt elaborated, “How many
nail technicians do you know who make $10,000 a month? Think about the number of manicures
a technician would need to do to earn that amount, and that’s when your mind starts telling you
this doesn’t make any sense. The loan applicant only has $50 in the bank. How could they buy a
half-million-dollar home at 100 percent financing? Shouldn’t somebody be looking a little
deeper?”17 Hunt reported the defects in regular reports, but colleagues did not welcome her
warnings.
“Instead of the manager of an underwriter who made a mistake [like misstating a borrower’s
income] sitting down with the underwriter, addressing the problem, and sending the underwriter
on probation or to additional training, they fought us on why or how we found the problems. It
ended up being a war every day,” Hunt recalled. “They didn’t like me very much. I had been
working with the FHA since 1986, while many of these people had been for two or three years. I
could quote like scripture where the [FHA] rules applied to each loan. They would try to tell me a
mortgage fit FHA guidelines, and I could assure them that it didn’t.”18
Being disliked was not new to Hunt. There had been objections from upper management
when Bowen tried to formally promote her to Connie’s position. Hunt explained, “They knew I
was by the book. I offered solutions for every instance that I could [to close a loan] but only
through staying within our policy’s guidelines . . . I wasn’t as flexible as they needed me to be for
their paychecks.”19

The Culture within REL

In the years that followed Citigroup’s restructuring, a significant corporate emphasis was
placed on growth and market share, with all REL employees receiving quarterly memos
congratulating them on consecutive quarters of growth in mortgage originations and highlighting
their rising rank in market share—from thirteenth place in market share for real estate lending in
2001 to third place in 2006. Corporate headquarters praised employees’ valiant efforts.20
To continue on this trajectory and meet investors’ high demand for mortgage-backed
securities at the time, Citi had incentives in place. The discretionary salary and bonuses of
CitiMortgage employees up to its CEO depended upon the percentage of loans approved.21 “My
bonus was based on how many loans we processed. My former direct supervisor [Connie] used to
brag about how she paid cash for her cars when she got her bonus,” said Hunt. “My thought has
always been that loan officers should not be paid on commission because it can lead people to do
things that aren’t ethical or moral to get a paycheck.”22
Bloomberg journalist Bob Ivry described the interaction between Citi corporate headquarters
and CitiMortgage headquarters: “Connecting the mother ship from the far-flung outpost was a
corporate ladder whose every rung was populated with go-getters who lived to please those above
them . . . The only glimpses New York had into what O’Fallon was up to were periodic reports on
the quality of the home loans CitiMortage was processing . . . the reports conveyed the message
to the top that the mortgage factory was well greased and purring. Performance was improving
every day.”23
Hunt believed that most employees of Citi were ethical. “Citi is full of wonderful people,
conscientious people [too],” she said.24 She fondly recalled times when her office ran informal
fundraisers during which employees contributed $20 to a local nonprofit for the privilege of
wearing blue jeans to work, resulting in donations of nearly $25,000 per month.25 But overall she
felt there was a culture on the surface of doing the right thing—for example, offering Sarbanes-
Oxleyvii training and management classes—but ultimately fostering a diffusion of responsibility
and a strong catering to the sales department. “Anything that opposed sales [those who bought
loans from correspondent lenders] or getting new business in the door was squashed a lot of
times. We were expected to play nice in the sandbox and if sales wanted a new program, we
needed to go along with it, even if I thought it wasn’t a good program to have on our books,”
explained Hunt.26
The constant change in upper management also was a major cultural issue. “Say you have a
box. And once every two to three months you take all of upper management, throw them into the
box, shake it up, and dump it out. Wherever they land, that’s what their specialty is now. They
didn’t have experience in those areas. I can’t tell you how frustrating that was,” remembered
Hunt.27 She estimated that the position of second in command under CitiMortgage’s CEO
changed fifteen times from 2004 to 2011.
vii
The Sarbanes-Oxley Act of 2002 was a federal law in the United States that set new standards for all U.S. public companies and
public accounting firms in order to further protect investors and enhance corporate responsibility. Section 302 of Sarbanes-Oxley,
called “Disclosure Controls,” required that a company’s principal officers (e.g., CEO and CFO) certify and approve the integrity of
their company’s financial reports on a quarterly basis. Officers’ signatures verified that they had reviewed a report, and—to the best of
their knowledge—the report did not contain any untrue statement of material fact or omit to state a material fact necessary in order to
make the statements not misleading.

2006–2007: Hunt’s and Bowen’s Problems Continue

During this period, Hunt and Bowen recalled the defect rate of REL’s mortgages hovering
between 60 and 80 percent. The industry’s rule of thumb was to keep the rate below 5 percent.
Starting in 2006, they worked together to try to identify and fix the myriad problems underlying
the high defect rate: Citi’s systems could not effectively track important criteria. For instance,
Citi’s computer system could not stop a loan officer from moving forward with a loan application
if he or she entered an applicant who did not meet a loan program’s minimum credit score. The
fact that this simple indicator could not be flagged was one among many reasons that Hunt and
Bowen could not systematically prevent Citi from buying loans from correspondent lenders that
did not meet Citi’s requirements. “We had a very small, understaffed QA group. Citi was buying
5,000 to 8,000 loans per month [from correspondent lenders], and we had four people looking at
what they could, [manually] sending out notices to the lenders. But we had no method to follow
up to see if these lenders were fixing the problems,” said Hunt.28
At the time, there were numerous initiatives within REL to become more efficient and
drastically reduce the number of employees.29 Hunt and Bowen were frustrated with the hiring
freezes and refusals to authorize overtime. They were fighting a spiraling problem with shrinking
resources.
Bowen recalled, “I would make presentations, capture people in the hallways, warn my
superiors. No one could tell me that what I was finding wasn’t true, but they would argue that it
was just technical exceptions that I was finding. The real estate market was in a bubble phase, and
there really were no delinquencies yet, so there was no hard evidence that the defects [we were]
finding would translate into losses. They were just ‘exceptions to policies.’ There was no
empirical evidence. I was hearing [these excuses] even from the chief risk officer who presided
over CitiMortgage. He’d say, ‘These are prime mortgages. They just don’t default. We won’t
have losses on them.’”30
When Hunt sent another increasingly grave summary of her defect findings to Bowen in late
2007, he concluded that Citigroup was at dangerous risk. If the defective mortgages were to
default, the affected GSEs might require Citi to repurchase billions of dollars in defective loans
that it had represented and warranted. Hearing in the press that on Sunday, November 4, 2007,
Robert Rubin would be named Citigroup’s new chairman of the board, Bowen knew he needed to
warn him. From his home on Saturday, he sent an email to Robert Rubin, copying Citi’s chief
auditor (who reported to the board of directors), Citi’s chief financial officer, and Citi’s senior
risk officer in Manhattan. “The reason for this urgent email concerns breakdowns of internal
controls and resulting significant but possibly unrecognized financial losses existing within our
organization,” Bowen wrote, hoping to be invited to speak at the board meeting on Sunday. (Read
the full email in Exhibit 2.)
On Tuesday he received a call from one of Citigroup’s top general counsels, who said, “We
got your email, and we’re taking this seriously. Don’t call us. We’ll call you.”31 However, Bowen
said, general counsel never called back despite the emails he sent in November and December,
offering to share more details. “They didn’t want to know the details,” Bowen concluded. “They
wanted to sign off on Sarbanes-Oxley at the end of the year.”32

An Unexpected Personal Crisis for Hunt

Hunt did not know Bowen had sent this email until months later because the weekend after
Bowen sent it, she and her husband were involved in an automobile accident with an elderly
drunk driver. Hunt spent time out of the office while she and her husband recovered from serious
injuries. They befriended a lawyer named Finley Gibbs, who became a trusted advisor throughout
the traumatic experience. “You come out of an experience like that with a commitment to making
the most of the time you have and making the world a better place,” said Hunt.33
With her husband on disability and a stack of medical bills, Hunt returned to work at
CitiMortgage. She was promptly told that Richard Bowen had taken a medical leave and that she
would now report to Bowen’s boss.34 Saddened, Hunt knew that Bowen had been dealing with
recent illnesses in his immediate family, and she decided not to contact him out of respect to
allow him to deal with those matters.
Soon thereafter Hunt was asked to meet with a group of Citi’s lawyers, who had flown in
from New York.35 She assumed their questions would pertain to collecting information about
litigation-related issues that CitiMortgage was having with some of its lenders at the time.
However, after meeting with the attorneys and ruminating on the questions they had asked, she
began to suspect they had something to do with Bowen.36
When she and Bowen finally spoke by phone, “[s]he said, Dick, I’m going to take very
careful notes, and I’m going to keep copies of documents at my desk. And I said, ‘Good for
you’!” Bowen recalled with admiration.37 From that point forward, Hunt began keeping a detailed
spreadsheet on her home computer, recording every problematic encounter or email she had at
work each day.
2008: Citi Reacts and Crisis Hits

In early 2008, Bowen was stripped of his underwriting responsibilities,38 and the number of
people he managed was reduced from 220 people to 2.39 In April 2008, he filed a complaint—in
line with procedures under the Sarbanes-Oxley Act—with the Occupational Safety and Health
Administration (OSHA), claiming that Citigroup had retaliated against him for the email he had
sent to Robert Rubin.40
That April, Citi modified Hunt’s responsibilities as well. She went from supervising 65
people to 1. “I was literally put in a corner [with the supervisor under me] and told I was going to
be ‘quality,’ but we were placed as far away in the office as possible from the underwriters, who
couldn’t really come talk to us. They didn’t change my title or my salary, but they changed
everything else.”41
In July 2008, Bowen testified before the U.S. Securities and Exchange Commission (SEC),
which had approached him with interest after reviewing his OSHA complaint. Bowen presented
over 1,000 pages of documents to the SEC to verify his experiences and was told the commission
would pursue his case, but he never heard back.42

“Looking back, I think that [the U.S. government] couldn’t pursue fraud charges and at the
same time give Citi a $45 billion bailout. The public wouldn’t have accepted that,” Bowen
surmised.43
Citi’s Bailout during the U.S. Financial Crisis
In 2008, big changes were underway at Citi: the housing bubble had burst and there were
widespread defaults on mortgages, causing the company to lose over $30 billion during 2007–
2008.44 Vikram Pandit joined Citigroup as its new CEO in December 2007, and Sanjiv Das
became CitiMortgage’s new CEO during 2008. Pandit embarked on a campaign to create a
culture of what he called “responsible finance” at Citi. “We’re going to stand for the financial
services company that practices responsible finance—making sure we’re transparent, making sure
we’re honest, making sure we manage our shareholders’ money prudently,” he pledged to clients
and stakeholders in a video on Citi’s blog.45
As Citi was considered a SIFI (systemically important financial institution), the U.S.
government stepped in to stabilize the bank during the financial crisis. Starting in October 2008,
the U.S. Department of the Treasury bought $45 billion in preferred stock to provide Citi with a
capital infusion. And the government went on to guarantee $301 billion in toxic assets (many of
which were pools of defective loans) on Citi’s balance sheets. Combined with approximately
$100 billion in emergency overnight loans from the Federal Reserve, these sums made Citigroup
the bank that received the most bailout dollars in the United States.46
2009–2010: Hunt’s Situation Worsens

By 2009, Hunt had been moved from her two-person team in the corner to the quality
control (QC) unit. “They said they didn’t have anything else for me to do, until a leader from the
quality control unit—who was based out of CitiMortgage’s Ann Arbor, Michigan, office—
reached out to me. I remained in O’Fallon but became a supervisor in that unit,”47 Hunt recalled.
“Citi had lots of silos. You had different groups all responsible for doing the same things, but
nobody knew what the others were doing.”48 In QC, Hunt and her team reviewed not only
mortgage files from the correspondent lenders but also mortgages that Citi had directly issued to
home buyers and had approved for government insurance.
While working for QC, Hunt continued to witness fraud. “This wasn’t my first rodeo,” she
said. She had seen fraud in three or four of the other major banks in which she had worked
throughout her career in the mortgage industry. “You know when they say people tend to have a
fight or flight response? Ordinarily, I took flight. I’d leave a company each time I saw unethical
behavior. But this time I was trapped. I couldn’t leave. Nobody was hiring, especially not at the
VP level, during the economic crisis.”49
In November 2009—a year after Citi received its bailout—Hunt discovered 1,000 loans that
had been flagged by her team for not just defects but fraud and had been escalated to
CitiMortgage’s fraud prevention and investigation group. “The thousand loans I found were
Fannie, Freddie, and FHA loans that should have been clean as a whistle, but they weren’t,”
explained Hunt.50 Citi had made a commitment to the FHA that it would alert the administration
within one month if it found anything suspicious in the loans that the FHA had guaranteed. The
fraud prevention and investigation group had not taken action on some of the loans in this group

for over two years.51 Previously, when Hunt’s team had escalated loans to the fraud prevention
and investigation group and it had responded, approximately 80 to 90 percent were confirmed as
fraud.52 “I kept squawking [about these] outstanding fraud referrals, and then I realized that they
weren’t ever going to go back and get caught up [on the backlog]. They were too far behind, and
my boss told me they were concentrating on current events. They were just going to start from
scratch. I thought, ‘You’re kidding me.’ There are a thousand loans I know of with suspected
fraud that you won’t be responding to?” Hunt recalled.53
Soon thereafter, CitiMortgage created a new group in 2009 called the quality rebuttal
committee. Its task was to review and potentially refute the defects in the mortgages identified by
QC. For example, a document called a HUD-1—a form that itemizes all charges imposed on the
buyer and the seller in a real estate transaction—was required to be signed and submitted for
every loan that was approved for FHA insurance. Government guidelines stated that a loan should
be rejected if missing the HUD-1. The quality rebuttal committee would overrule Hunt, claiming
that the absence of a signed HUD-1 did not necessarily indicate that a loan was bad and
approving the file for FHA insurance. Hunt felt disrespected and ignored as she watched
members of the quality rebuttal committee receive employee-of-the-month awards in January
2010.54
Bowen Leaves Citi and Testifies to Congress
In January 2009, Bowen—who had continued to be employed by Citi but had been placed on
paid administrative leave from the moment he had been stripped of his underwriting
responsibilities—left the company. “I had to move on with my life. [All this] had taken a real toll
on my family and my health, and I had to end it,” he said.55 He signed a separation agreement
with Citigroup, which settled his OSHA complaint and granted him a severance package of less
than $1 million.56
In May 2009, Congress formed the Financial Crisis Inquiry Commission (FCIC), whose
mandate was to investigate the causes of the financial crisis. Freed from the provisions of his
confidentiality agreement with Citigroup for the government investigation, Bowen felt hopeful
when the committee invited him for an interview on February 27, 2010. His lawyers by his side,
Bowen spoke with two FCIC investigators for four hours, the recording and transcript of which
were sealed and sent to the National Archives (available for public review starting in 2016).57 He
was then asked to testify publicly in front of the commission on April 7, 2010, though in the final
days leading up to his public testimony, the deputy general counsel of the commission—under
pressure from Citigroup’s lawyers—made Bowen remove pieces of his 28-page testimony.
Bowen was asked to delete any mention of his concern that Citi had materially misrepresented its
certifications of internal controls, delete the names of individuals within Citi, and delete
information about his essential demotion after having sent the email to Robert Rubin.58
Phil Angelides—the former state treasurer of California who led the FCIC—told the New
York Times that “[Wall Street banks] and their phalanx of attorneys were putting enormous
pressure [on the commission] every day of every week with every witness [in an effort] to
discredit people who were testifying against their interests.”59 Bowen’s attorney also told the
media that he felt Bowen had been censored.60

The output of the commission was a 500-page report61 that was criticized for not drawing
concrete conclusions. “It basically said that the financial crisis was caused by a combination of so
many things . . . that it was nobody’s individual fault,” recalled Bowen.62 When reflecting on his
journey, the word that came to mind was devastating. “It truly was,” he said. “From my
standpoint, the corruption extends to the highest levels of government. I feel absolutely,
completely violated. Every principle that I grew up with, and even when I did a brief stint in the
R.O.T.C. and the Air Force, [is] just completely
violated.”63
Bowen later embarked on a second career as an

What is the Dodd-Frank
accounting professor at the University of Texas at Dallas,
Act?
where he shared his experiences with his students and
continued to be a public speaker for companies and
The Dodd-Frank Wall Street
associations working to build more accountable corporate
Reform and Consumer
cultures. “By God, I’ve got to leave this country better off
Protection Act was a piece of
than the way I found it,” he said.64
financial reform legislation
that was signed into federal
law under the administration
Hunt Begins to Study the Dodd-Frank Act of U.S. President Barack
Obama on July 21, 2010. Its
In November 2010, a colleague forwarded Hunt an provisions intended to
email from a senior executive at CitiMortgage.65 The decrease risks in the U.S.
executive had emailed all of his subordinates, ordering financial system.
them to meet the bank’s goal of a maximum 5 percent
defect rate on home loans. That month Hunt’s QC team Section 922 of Dodd-Frank
had found 10 loans with severe defects from a pool of 138 required the SEC to
loans, which represented a 7.25 percent defect rate. The establish a new
executive told his subordinates to use “brute force” if Whistleblower Program that
necessary on Hunt’s team to drive down the rate.66 Hunt paid awards (when certain
soon saw reports that showed decreasing defect rates, but limitations and conditions
she knew that this wasn’t the result of fewer defective were met) to whistle-blowers
mortgages. Hunt could not understand why Citigroup’s who voluntarily provided the
leaders did not appear to want to address the root SEC with original information
problems. “You can’t look at these reports and think about violations of securities
everything is rosy,” she thought. “How can you effectively laws. For more information,
lead thousands of employees here in O’Fallon from a high visit the SEC Office of the
rise in New York City? [CitiMortgage CEO] Das came Whistleblower,
into town about once a year.”67 www.sec.gov/whistleblower.
It was at this point that Hunt began to study the Dodd-

Frank Actviii at home, hoping to educate herself on how she
might report the violations she was witnessing.
viii
It is important to note that when the Act was passed on July 21, 2010, the provisions were slightly different than they were when
the case was published in 2014. At the time this case was written, the most up-to-date terms of Dodd-Frank had been released and
took effect on August 12, 2011. Among this version’s most controversial proposed rules was the absence of any requirement that a
whistle-blower report initial findings through a company’s internal compliance program, prior to approaching the SEC. See
D. Michael Crites and Christian Gonzalez, Dinsmore & Shohl LLP, “Dodd-Frank: Final Whistleblower Provisions Take Effect August
12th: Is Your Company Ready?” July 28, 2011, http://www.dinsmore.com/final_whistleblower_provisions.

In the months that followed, Hunt reported Citi’s fraud anonymously on HUD’s website.
When there was no response, she did the same on the FBI’s website. “I kept trying and
thinking—how could I be anonymous with this? I created a new email address. I just wanted
them to investigate the claims. I thought the FBI would certainly be interested in fraud, but I
never heard back. It was so frustrating.”68
At work she would peer at the lyrics of the Rascal Flatts song Stand that she had pinned to
her office wall:
Decide you’ve had enough.

You get mad. You get strong.
Wipe your hands. Shake it off.
Then you stand.
The Last Straw

The night of March 22, 2011, after Citi executive Jeffery Polkinghorne had threatened her in
the conference room—insisting that she change reports—Hunt lay awake in bed. For almost a
year she had applied to hundreds of other jobs across the country to no avail. She had sold her
horses, even sold her truck. She was ready to leave Citi and move in an instant, but there was
nowhere to go.
The time had finally come. She had to take a stand. But who should she go to, and what
should she say?
(See Figure 2 on the next page for a timeline summarizing the events leading up to March
2011.)

Figure 2: Timeline of Major Events in the Case
Source: Created by case author.
Exhibit 1: Hunt’s Place in the Underwriting Reporting Structure
Citigroup
Consumer Lending Group
CLG Chief Risk Officer
Citigroup
Real Estate Lending
REL Chief Underwriter
REL REL REL

Business Chief Underwriter Business Chief Underwriter Business Chief Underwriter
Correspondent Channels Direct Lending Channel Wholesale Channel
Richard Bowen
CitiMortgage
VP & Chief Underwriter of
Correspondent Channels
(Underwritten & Delegated Flows)
Sherry Hunt
Source: This figure was created from information retrieved from Sherry Hunt, in interview with the authors, April 14, 2014; Richard Bowen,
in interview with the authors, April 21, 2014; and Testimony of Richard M. Bowen, III, Hearing on Subprime Lending and Securitization and
Government Sponsored Enterprises, Presented to the Financial Crisis Inquiry Commission, April 7, 2010, http://fcic-
static.law.stanford.edu/cdn_media/fcic-docs/2010-04-07%20Richard%20Bowen%20Written%20Testimony.pdf.

Exhibit 2: Richard Bowen’s Email
From: Bowen, Dick [GCG-REO] [dick.bowen@citi.com]

Sent: Saturday, November 03, 2007 5:47 PM
To: Rubin, Robert E [CCC]; Bushnell, David C [CCC]; Crittenden, Gary [CCC]; Howard, Bonnie [CCC]
Cc: Bowen, Dick [GCG-REO]
Subject: URGENT—READ IMMEDIATELY—FINANCIAL ISSUES
TO: Robert Rubin, Chairman of Executive Committee
David Bushnell, Senior Risk Officer
Gary Crittenden, Chief Financial Officer
Bonnie Howard, Chief Auditor
Gentlemen:
I am currently (since early 2006) the Business Chief Underwriter for the Real Estate Lending
Correspondent channel, which is within the Consumer Lending Group. From 2002 to 2006 I was SVP and
Chief Underwriter for the Correspondent and Acquisitions channel within CitiFinancial Mortgage. I am
also licensed as a Certified Public Accountant in the State of Texas.
The reason for this urgent email concerns breakdowns of internal controls and resulting significant but
possibly unrecognized financial losses existing within our organization.
Since mid-2006, I have continually identified these breakdowns in processes and internal controls. The
REL Chief Underwriter (my 2006 manager) and I have widely communicated these breakdowns, with
possible ramifications, in weekly reports, emails, and discussions (which included the CLG Chief Risk
Officer). There have also been two special investigations by CLG Business Risk and Control (the first
initiated by me), with the findings confirming these breakdowns.
However, to my knowledge, these breakdowns have not been communicated to or recognized by either
Audit or Finance.
I have been agonizing for some time over these issues, and in all good conscience feel I must now
communicate these concerns outside of the Consumer Lending Group. I sincerely regret the delay.
Concern #1—Correspondent Fundings Through Delegated Authority

We currently purchase from mortgage companies and sell to third party investors approximately $50 billion
annually ($42 billion YTD 2007) of mortgage loans which have not been underwritten by us but which we
rep and warrant to the investors (primarily Fannie/Freddie) that these files are complete and have been
underwritten to our policy criteria.
Our internal Quality Assurance function, which underwrites a small sample of these files post-purchase,
has reflected since 2006 (when this function started reporting to me) that 40–60% of these files are either
outside of policy criteria or have documentation missing from the files. QA for recent months indicate 80%
of the files fall into this category.
If any of the mortgages in this category default, the investor may require that Citi repurchase the defaulted
files based upon our reps and warrants. Under seller reps and warrants Citi may then force the selling
mortgage company to repurchase the files, if the seller mortgage company remains financially viable at that

Exhibit 2 (continued)
time. (As one example, QA results indicate that Citi may be responsible for in excess of 50% of the losses
associated with files purchased from the failed Aegis Mortgage—$2.5 billion purchased since Jan ’06).
A CLG BRC investigation, requested by me, confirmed the breakdowns associated with the QA process
and the fact that the QA findings were significantly out of compliance with QA Risk Policy. The Chief
Underwriter responsible for this function was terminated and a new QA Risk Policy was approved in 2006.
We continue to be significantly out of compliance with the new QA Risk Policy.
I do not believe that our company has recognized the material financial losses inevitably associated with
the above Citi liability.
Concern #2—Correspondent Fundings Through Wall Street Bulk Purchases

During 2006–07, there were pools of mortgage loans aggregating $10 billion which were purchased from
large mortgage companies with significant numbers of files identified as “exceptions” (higher risk and
substantially outside of our credit policy criteria). These exceptions were approved by the Wall Street
Channel Chief Risk Officer, many times over underwriting objections and with the files having been turned
down by underwriting. These pools involved files aggregated and originated by Merrill Lynch, Residential
Funding Corp, New Century, First NLC, and others.
The purchase decisions on many of these pools were approved even though the execution rates and other
criteria established by the CLG Bulk Acquisition Policy were not met.
Because of the initial high losses associated with many of these pools, CLG BRC investigated and
reviewed correspondence which documented underwriting objections to purchasing identified pools.
BRC conducted an investigation of one Merrill Lynch pool, identifying generic breakdowns of process
required by policy and recommended needed changes.
Changes were made in the bulk purchase process, but I do not know if the expected material financial
losses from these pools has been recognized.
I know that this will prompt an investigation of the above circumstances which will hopefully be conducted
by officers of the company outside of the Consumer Lending Group, and I pledge my full cooperation.
As a professional, as well as a shareholder of this company, I am deeply distressed with having to report the
above.
I will be in the office Monday, and can be available by cell phone, if needed, this weekend.
Dick Bowen
469-220-1151 office
214-497-0241 cell
Confidential
Source: Testimony of Richard M. Bowen, III, Hearing on Subprime Lending and Securitization and Government Sponsored Enterprises,
Presented to the Financial Crisis Inquiry Commission, April 7, 2010, http://fcic-static.law.stanford.edu/cdn_media/fcic-docs/2010-04-
07%20Richard%20Bowen%20Written%20Testimony.pdf.

Endnotes
1
Bob Ivry, The Seven Sins of Wall Street: Big Banks, Their Washington Lackeys, and the Next Financial Crisis (New York:
PublicAffairs, 2014).
2
Sherry Hunt, in interview with the authors, April 14, 2014.
3
Ivry, The Seven Sins of Wall Street.
4
Testimony of Richard M. Bowen, III, Hearing on Subprime Lending and Securitization and Government Sponsored Enterprises,
Presented to the Financial Crisis Inquiry Commission, April 7, 2010, http://fcic-static.law.stanford.edu/cdn_media/fcic-docs/2010-04-
07%20Richard%20Bowen%20Written%20Testimony.pdf.
5
Ibid.
6
7
8
Ibid.
9
Richard Bowen, in interview with the authors, April 21, 2014.
10
11
The facts in this paragraph came from Testimony of Richard M. Bowen, III, Hearing on Subprime Lending.
12
13
14
Bob Ivry, “Woman Who Couldn’t Be Intimidated by Citigroup Wins $31 Million,” Bloomberg, May 30, 2012.
15
16
17
Ibid.
18
Ibid.
19
Ibid.
20
Testimony of Richard M. Bowen, III, Hearing on Subprime Lending.
21
Ivry, “Woman Who Couldn’t Be Intimidated by Citigroup Wins $31 Million.”
22
23
24
25
Ibid.
26
27
Ibid.
28
Ibid.
29
Testimony of Richard M. Bowen, III, Hearing on Subprime Lending.
30
31
Ibid.
32
Ibid.
33
34
35
36
37
38
Ibid.
39
The Financial Crisis Inquiry Report: Final Report of the National Commission on the Causes of the Financial and Economic Crisis
in the United States, Official Government Edition, January 2011, http://fcic-static.law.stanford.edu/cdn_media/fcic-
reports/fcic_final_report_full.pdf.
40
William D. Cohan, “Was This Whistle-Blower Muzzled?” New York Times, September 21, 2013.
41
Sherry Hunt, in interview with the authors, May 9, 2014.
42
Cohan, “Was This Whistle-Blower Muzzled?”
43
44

45
“The Cornerstone of a New Citi: Responsible Finance,” Citi Blog, February 1, 2010, http://blog.citigroup.com/2010/02/our-ceo-on-
the-new-citi-and-creating-a-culture-of-responsible-finance.shtml. See also Ivry, “Woman Who Couldn’t Be Intimidated by Citigroup
Wins $31 Million.”
46
47
48
49
50
51
52
53
Ibid.
54
55
56
57
Ibid.
58
Ibid.
59
Ibid.
60
Ibid.
61
The Financial Crisis Inquiry Report.
62
63
64
Ibid.
65
66
67
68
Ibid.


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ADAM WAYTZ AND VASILIA KILIBARDA KEL852

Through the Eyes of a Whistle-Blower:

Citigroup, REL, and the Correspondent Channel

REL comprised the following subsidiaries: CitiMortgage (primeii mortgage lending),

2 KELLOGG SCHOOL OF MANAGEMENT

Figure 1: The Two Flows of the Correspondent Business Channel

QA was the group of underwriters who underwrote a small sample of already-purchased

KELLOGG SCHOOL OF MANAGEMENT 3

While on the committee, Bowen learned of Citi’s

Prior to the U.S. financial crisis in 2008, CitiMortgage

4 KELLOGG SCHOOL OF MANAGEMENT

KELLOGG SCHOOL OF MANAGEMENT 5

The Culture within REL

6 KELLOGG SCHOOL OF MANAGEMENT

2006–2007: Hunt’s and Bowen’s Problems Continue

KELLOGG SCHOOL OF MANAGEMENT 7

An Unexpected Personal Crisis for Hunt

2008: Citi Reacts and Crisis Hits

8 KELLOGG SCHOOL OF MANAGEMENT

Citi’s Bailout during the U.S. Financial Crisis

2009–2010: Hunt’s Situation Worsens

KELLOGG SCHOOL OF MANAGEMENT 9

Bowen Leaves Citi and Testifies to Congress

10 KELLOGG SCHOOL OF MANAGEMENT

Bowen later embarked on a second career as an

It was at this point that Hunt began to study the Dodd-

KELLOGG SCHOOL OF MANAGEMENT 11

Decide you’ve had enough.

The Last Straw

12 KELLOGG SCHOOL OF MANAGEMENT

Figure 2: Timeline of Major Events in the Case

Source: Created by case author.

Exhibit 1: Hunt’s Place in the Underwriting Reporting Structure

REL REL REL

14 KELLOGG SCHOOL OF MANAGEMENT

Exhibit 2: Richard Bowen’s Email

From: Bowen, Dick [GCG-REO] [dick.bowen@citi.com]

Concern #1—Correspondent Fundings Through Delegated Authority

KELLOGG SCHOOL OF MANAGEMENT 15

Concern #2—Correspondent Fundings Through Wall Street Bulk Purchases

16 KELLOGG SCHOOL OF MANAGEMENT

KELLOGG SCHOOL OF MANAGEMENT 17

18 KELLOGG SCHOOL OF MANAGEMENT

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