There are several ways to make good money in the foreign exchange business. If you are a retail-trading guru, then high-percentage opportunities greet you every day. If not, you could always start a forex brokerage house of your own or become an Introducing Broker for someone else (there is good money to be had there, too), but it appears from the latest headlines that the most lucrative path to enormous wealth is to become a whistleblower in the forex industry. Ryan Gagne, a former VP of Institutional Sales at Alpari, and his work associate, while at State Street Bank, stand to make $45 million apiece in, perhaps, one of the largest whistleblower payoffs in history.
Don’t give up trying to make a quick killing on that turbo binary option and don’t give up your day job either. In order to grab your pot of gold for being a profligate whistleblower, there are a few job requirements that may be tough to come by. First, you have to have been internally connected to a public or private entity that left its ethical conscience by the side of the road. Next, you have to have gathered evidence of wrongdoing involving a tidy sum of money. And lastly, you have to have an avenue to blow your whistle where you will be heard, be forever protected from the scorn and consequences to follow, and eventually be rewarded, often several years to an eternity of wondering if your payday will ever arrive. Be assured that tax officials will be there, too. They are just one of many that will be eager to cash in on your largesse, as well.
How did Mr. Gagne and his cohort solve the first two prerequisites? Long before Mr. Gagne had worked for Alpari or presently for Divisa Capital, his current employer, he had spent a number of years, 1995 to 2003, with State Street Bank of Boston fame. State Street is a unique bank that had singularly made it big, not from typical banking processes like taking deposits and making loans, but from being the data processor of choice for mainstream banks. It focused upon managing trust fund accounts and all that entails for most all of the big to medium-sized banks in America. Its executives came from the likes of IBM, not from the traditional banking sector.
Gagne’s employment period with this mega-bank also was the time when investors began aggressively looking for higher returns in foreign jurisdictions, and State Street welcomed the opportunity to add a few percentage points of markup to every cross-border conversion of funds that tool place on its managed accounts. It was easy money to be had for sure. No one was the wiser, but that is a longer story to tell that we will touch upon in a bit. Suffice it to say that the SEC was not amused. According to recent press reports, State Street has “agreed to pay a total of $530 million ($382 million in fines) to resolve all pending litigation and regulatory matters in the United States related to its indirect foreign exchange business”. Outstanding whistleblower statutes stipulate that between 10% and 30% of the final settlements must go to the informants.
Yes, some 17% or roughly $90 million will be split between Ryan Gagne and Peter Cera, the other lucky lottery winner, sometime in the not too distant future. Did we get your attention? Are you scurrying about to find what could amount to material wrongdoing at a previous employer and dreaming of champagne nights laced with caviar on the French Riviera? The real linchpin for success, unfortunately, is those two little words – “material wrongdoing”. And then we have not talked about the final and most important condition that must be met – finding the right entity that will protect and pay you down the line.
What are the origins of whistleblower legislation and its impact on forex?
The need for legislation to protect whistleblowers has been recognized for decades, especially across the developed countries of the world. In the U.S., “The Whistleblower Protection Act of 1989” was instituted to protect individuals that came forward with reasonable evidence of “a violation of a law, rule or regulation; gross mismanagement; gross waste of funds; an abuse of authority; or a substantial and specific danger to public health or safety.”
Other countries across the globe have also followed this path. Laws are in place for both public and private entities for the very reason that it is extremely difficult to ferret out this type of misconduct without the help of an insider, who will surely be treated with scorn and abuse by the perpetrator of these alleged crimes. Laws have enacted in Australia, Canada, the Netherlands, Switzerland, Ireland, and the UK, to name just a few. Within the domain of foreign exchange, the responsibility for administering these laws typically resides with the respective regulator, i.e., the CFTC in the United States or the FCA in the United Kingdom.
The Financial Conduct Authority (FCA) in the UK recently updated its rules regarding whistleblowers and how firms must act in response. Tracey McDermott, the acting FCA chief executive, noted that, “Whistleblowers play an important role in exposing poor practice in firms and they have in the past few years contributed intelligence crucial to action taken against firms and individuals. It is in the interests of the industry and regulators alike that wrongdoing is identified and addressed promptly. For individuals to have the confidence to come forward, it is vital that firms have in place adequate policies on dealing with whistleblowers and that a senior manager takes responsibility for overseeing these policies.”
Since the turn of the century, there have been numerous suits filed under these whistleblower statutes in the foreign exchange arena, especially directed at banks and their internal currency conversion processes. The roots of the issue can be traced back to the advent of credit cards and their use overseas. Firms like American Express chose a daily range for a currency pair, chose the boundary value most favorable to Amex, and then applied that rate plus a percentage markup for all related cross-border transactions. Visa and MasterCard initiated similar procedures in the mid-eighties, when they took control of forex conversions from merchant banks in the system.
In the late nineties, law firms began to challenge these currency conversion processes, hoping to gain enormous payoffs from broad class action based lawsuits. Judges tended to take the side of the consumer in these matters, pushing for interbank valuations exclusive of markups, regardless of existing system wide cost issues. Serving international clients tends to be multiples of the cost figures necessary for domestic servicing. Consequently, these business practices soon spread throughout banking, as a fair way to price out activities for international customer transactions.
After card associations and banks caved in, law firms began to contest other areas within the banking industry where cross-border conversions might apply. As an aside, banks merely negotiated an acceptable settlement, while law firms cashed in at 30% of the take. Banks, however, did not skip a beat. They quickly changed the name of the fee and charged it directly to clients, as a specified cost for the transactions. These new procedures were disclosed somewhere in the small print, but consumers were none the wiser, no better off financially. At the end of the day, the lawyers were the true winners.
How did these rules play out for Gagne and Cera?
Fast forward to 2011. Harry Markopolos, the forensic accountant that is given credit for exposing Bernie MaDoff’s $65 billion Ponzi scheme, began searching for another major crime to expose. Based on his prior work, he was instrumental in have regulators up the ante for whistleblowers in the financial services industry, raising the published payouts to the 10% to 30% range existing today. According to one reporter, Mr. Markopolos began investigating “the possibility that trust banks don’t price FX transactions for custody clients, many of whom were public pension funds, financial institutions and non-profit organizations, at prevailing interbank market rates since 2011.”
His search for ex-employee assistance soon led him to Mr. Gagne and Mr. Cera for their insider knowledge of the inner workings of State Street trust account management practices. In the process, he also found a Mr. Grant Wilson, who would help with a similar action against the Bank of New York. This team of four eventually produced a mountain of evidentiary data for regulatory officials that documented alleged fraudulent forex conversion practices within these two banking institutions. The CFTC Customer Protection Fund will likely award $90 million to Gagne and Cera and another $60 million to Wilson for their efforts. The award for Mr. Markopolos has yet to be determined.
Are there other major incidences of whistleblower activity in the forex industry?
The largest federal payout on a whistleblower related lawsuit resides with the Internal Revenue Service in the United States. A Bradley Birkenfeld set the record with a $104 million award. From a securities regulator perspective, the Securities and Exchange Commission paid $30 million to a foreign whistleblower in September, a year ago. We have already noted the BNY Mellon Pittsburg litigation above, but, unless you have been living under a rock or down deep in some dark cave without Internet service, the largest forex scandal in history was stymied, with initial fines and levies issued back in November of 2014.
Currency manipulation since 2007 is the charge against our largest banks on the planet. According to one source, “Investment analysts have estimated that the settlements for currency manipulation could be as high as $41 billion across the entire industry for all regulators. They believe liability for Deutsche Bank alone could reach $6.4 billion.” Six banks (Citicorp, JPMorgan Chase, UBS, London-based Barclays, HSBC, and the Royal Bank of Scotland) have also set aside funds in their financial reserves to cover potential penalties from the FCA in the UK. Will there also be enormous whistleblower payments related to these actions? Only time will tell.
Are you ready to give up retail forex trading or to avoid the highest paying binary options on the market, all for the sake of a potential whistleblower bonanza? Do not hold your breath. There are no predictable expiration periods on these kinds of action. Unless you are a well-placed insider with thick skin and the will to trust attorneys, then, perhaps, the devil you know is better than the angel you don’t. In the meantime, stick with making money the old fashioned way by earning it or by asking Mr. Markopolos for a job.