Late last month, the Securities and Exchange Commission issued an oblique news release announcing that it was awarding an unnamed whistle-blower $400,000 for helping expose a financial fraud at an unnamed company. The money was the latest whistle-blower award — there have been 13 so far — paid as part of the Dodd-Frank financial reform law, which includes both protections for whistle-blowers and financial awards when their information leads to fines of more than $1 million.
The law also prevents the SEC from doing anything to publicly identify the whistle-blowers — hence, the circumspect press release. But through a mutual friend, I discovered the identity of this particular whistle-blower, who, it turned out, was willing to tell his story.
His name is Bill Lloyd. He is 56 years old, and he spent 22 years as an agent for MassMutual Financial Group, the insurance company based in Springfield, Massachusetts. Although companies often label whistle-blowers as disgruntled employees, Lloyd didn’t fit that category. On the contrary, he liked working for MassMutual, and he was a high performer. He also is a straight arrow — “a square,” said the mutual friend who introduced us — who cares about his customers; when faced with a situation where his customers were likely to get ripped off, he couldn’t look the other way.
In September 2007, at a time when money was gushing into variable annuities, MassMutual added two income guarantees to make a few of its annuity products especially attractive to investors. Called Guaranteed Income Benefit Plus 6 and Guaranteed Income Benefit Plus 5, they guaranteed that the annuity income stream would grow to a predetermined cap regardless of how the investment itself performed.
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Then, upon retirement, the investors had the right to take 6 percent (or 5 percent, depending on the product) of the cap for as long as they wanted or until it ran out of money, and still be able, at some point, to annuitize it. It is complicated, but the point is that thanks to the guarantee, the money was never supposed to run out. That is what the prospectus said, and it is what those in the sales force, made up of people like Lloyd, were taught to sell to customers. It wasn’t long before investors had put $2.5 billion into the products.
The following July, Lloyd — and a handful of others in the sales force — discovered, to their horror, that the guarantee didn’t work as advertised. In fact, because of the market’s fall, it was a near-certainty that thousands of customers were going to run through the income stream within seven or eight years of withdrawing money.
Lloyd did not immediately run to the SEC. Rather, he dug in at MassMutual and, as the SEC news release put it, did “everything feasible to correct the issue internally.” For a while, he thought he was going to have success, but, at a certain point, someone stole the files he had put together on the matter and turned them over to the Financial Industry Regulatory Authority, which is the industry’s self-regulatory body. It was only when the regulatory authority failed to act that his lawyer told him about the whistle-blower provisions in Dodd-Frank and he went to the SEC, which began its own investigation.
The Dodd-Frank law has provisions intended to protect whistle-blowers from retaliation, but there are certain aspects of being a whistle-blower that it can’t do anything about. “People started treating me like a leper,” recalls Lloyd. “They would see me coming and turn around and walk in the other direction.” Convinced that the company was laying the groundwork to fire him, he quit in April 2011, a move that cost him both clients and money. (Lloyd has since found employment with another financial institution. For its part, MassMutual says only that “we are pleased to have resolved this matter with the SEC.”)
In November 2012, MassMutual agreed to pay a $1.6 million fine; Lloyd’s $400,000 award is 25 percent of that. It was a slap on the wrist, but more important, the company agreed to lift the cap. This will cost MassMutual a lot more, but it will protect the investors who put their money — and their retirement hopes — on MassMutual’s guarantees. Thanks to Lloyd, the company has fixed the defect without a single investor losing a penny.
Ever since the passage of Dodd-Frank reform, the financial industry has been none too happy about the whistle-blower provisions, and there have been rumblings that congressional Republicans might try to roll back some of it. The SEC now has an Office of the Whistleblower, and a website where potential whistle-blowers can report fraud. It has given out $16 million in whistle-blower awards.
There are, without question, parts of the Dodd-Frank law that are problematic, not least the provisions dealing with the Too Big to Fail institutions.
But the whistle-blower provisions? They are working as intended. That is the moral of Bill Lloyd’s story.
© 2014 New York Times News Service