The Moral Quandaries of a Government Whistleblower

[Joanne98]

By William K. Black

This article discusses the three times I blew the whistle on wrongdoing by senior government officials. I also discuss the time I didn't blow a whistle at the direction of the heads of my agency (and my decision to follow those directions). I focus; however, on the time I didn't blow a whistle entirely at my own decision.

Blowing the Whistle on Bank Board Member Henkel

I blew the whistle on two separate occasions about the actions of presidential appointees who ran my agency. Both of them resigned in disgrace, and both involved Charles Keating of Lincoln Savings. He was able to convince the Reagan administration to appoint Lee Henkel to be one of the three "Members" of the Federal Home Loan Bank Board in late 1986. Keating was able to convince the Administration to appoint two Bank Board members of his choosing. Reagan replaced one of them because he fell afoul of unrelated political problems at the last moment.

Lincoln Savings was in massive violation (by $600 million) of a rule limiting a type of investment. Henkel's first substantive act was to propose an amendment to the rule, drafted by Keating's lawyers, which would have immunized Lincoln Savings' from sanctions for this rule violation. The amendment was carefully crafted. It did not mention Lincoln Savings by name, it was buried in a long list of amendments and it was in legalese. I was the only one at the Bank Board with the background (I am a lawyer and I knew about Lincoln Savings' violation of the rule) to spot that the amendment was designed to aid Lincoln Savings. I blew the whistle on Henkel and he eventually resigned in disgrace. I was directed by Ed Gray, the Bank Board's Chairman to confirm to the press the extent of Lincoln Savings' violation of the rule. This eventually led to Keating suing me in my individual capacity for $400 million, to Keating making a criminal referral about the agency to the Justice Department, and to Keating hiring private detectives to investigate me.

The criminal referral was particularly amazing. Lincoln Savings had disguised its violation of the direct investment rule by forging and backdating scores, perhaps hundreds, of documents. The Bank Board made a criminal referral to the Justice Department - which sat for well over a year with no action taken. Keating's criminal referral was done through Sidley & Austin; one of the scores of powerful law firms, Lincoln Savings retained. One of the advantages of "control fraud" (fraud by controlling persons) is that the entire assets of the firm can be used to do whatever is most useful to aid the fraud. Sidley & Austin represented both Henkel and Lincoln Savings. One of its partners, Rex Lee, had recently left his position as Solicitor General of the United States, the number three position in the Justice Department. A firm partner contacted William Weld, a senior Justice Department official (later Governor of Massachusetts). The Justice Department began a criminal investigation of the agency within days. FBI agents questioned the Bank Board's field office in San Francisco. They found nothing and reported that to headquarters. Soon, as an amazed FBI agent would later tell one of the agency attorneys in San Francisco, he received a telephone call directly from a top Justice Department official, ordering him to go back in and investigate more. He had never received such a direct call from such a senior Justice Department (not FBI) official in his career. There being nothing to find, the FBI found nothing.

http://www.scu.edu/ethics/publications/submitted/black/whistleblower.html