Four years after receiving more bailout dollars than any other U.S. bank during the financial crisis, Citi defrauded the Federal Housing Administration. Citi admitted to breaking FHA rules, certifying thousands of unqualified mortgages for FHA insurance, and paid a $158.3 million settlement after CitiMortgage whistle-blower Sherry Hunt filed a false claims suit. One month after the 2012 settlement, CitiMortgage’s CEO was asked why Hunt’s concerns were not resolved inside the company. She had alerted her supervisor. She had gone to CitiMortgage HR. Filing a lawsuit had been a last resort. “Did you ask her if she spoke to me?” he responded to the Bloomberg journalist.

When Adam Waytz, an assistant professor of management and organizations at the Kellogg School, delved into Hunt’s story, he wondered: How could Citi have prevented this chain of events?

Multiple factors, he believes, contributed to a culture where unethical behavior could thrive: disorganization, misaligned incentives, physical distance between leaders and employees—and perhaps especially, an unwillingness to seriously engage with dissent. “Championing people who speak out against fraud really sends a message about the reputation of your organization,” says Waytz. “People are looking for organizations they can trust.”

Inside Citi

In 2006, Hunt, then a VP and chief underwriter at CitiMortgage headquarters in Missouri, and her boss, Richard Bowen, then a chief underwriter for Citigroup’s Real Estate Lending group in Texas, began to uncover problems with the bank’s internal controls. Quality reporting was dubious: the bank was misrepresenting mortgages it purchased from external lenders, which it then sold to government sponsored enterprises like Fannie Mae and Freddie Mac. From 2006 to 2007, Hunt and Bowen found that an astonishing 60–80% of these mortgages were defective: missing required documents or containing fraudulent information from the loan officer or loan seeker.

“People are looking for organizations they can trust.”

Hunt reported her findings to Bowen, who in turn alerted his supervisors in ongoing reports. But no significant action was taken. The problems were merely technical and would not translate into losses, Bowen was told—even from CitiMortgage’s chief risk officer.

So Bowen and Hunt worked to address the problems that plagued Citi’s understaffed Quality Assurance team, which was responsible for spot-checking the mortgages Citi had already purchased from external lenders, and attempted to implement processes to stop Citi from buying unqualified loans from lenders in the first place. Again, Bowen and Hunt’s efforts were largely fruitless. “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,” Hunt says.

Catering to sales was not entirely illogical. At the time, Citi placed a significant corporate emphasis on growth, with all employees of the Real Estate Lending group receiving quarterly memos congratulating them on consecutive quarters of growth in mortgage originations and highlighting their rising rank in market share. Bonuses for all CitiMortgage employees, including its CEO, depended on a high percentage of approved loans.

So instead of managers fixing their underwriters’ mistakes and providing additional training, these managers fought Hunt and her team at every turn. “It ended up being a war every day,” Hunt says. “They didn’t like me very much.”

The Punishment Continues

When Hunt sent another grave summary of the mortgage defect rate to Bowen in November 2007, he concluded that Citi was at dangerous risk. If the defective mortgages were to default, the affected government-sponsored enterprises could legally require Citi to purchase back billions of dollars in loans that it had wrongly certified. From his home on November 3, 2007, Bowen sent a detailed email explaining his findings to the company’s new chairman, copying Citi’s chief auditor, chief financial officer, and senior risk officer in New York City. “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.

Days later Bowen received a call from one of Citi’s general counsels, who assured him that they had received his email and would follow up shortly. Again, no significant action was taken.



In December, Vikram Pandit was hired as Citigroup’s new CEO and embarked on a campaign he called Responsible Finance. “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 stakeholders in a video on Citi’s website.

Meanwhile, by early 2008, Bowen’s direct reports were reduced from 220 people to 2, and he was forced to take administrative leave. Soon Hunt’s direct reports were reduced from 65 to 1. “I was literally put in a corner,” Hunt says, explaining that she was “placed as far away in the office as possible from the underwriters.…They didn’t change my title or my salary, but they changed everything else.”

By January 2009—after the housing bubble had burst, there were widespread defaults on mortgages, and the U.S. government had provided over $476 billion in cash and guarantees to stabilize Citi—Bowen, still on administrative leave, left the company.

Blowing the Whistle

Now Hunt began to record her troublesome findings in a spreadsheet on her home computer: the defective mortgages she found in late 2009 that Citi had failed to report to the FHA, despite having been flagged as containing evidence of fraud two years earlier; the email in 2010 from a senior executive recommending others use “brute force” on Hunt’s team to drive down the defect rate; the day in 2011 an executive three levels above Hunt told her and a colleague that their “asses [were] on the line” if they did not change their reports.

Hunt also watched as members of the Quality Rebuttal Committee—a new team that CitiMortgage had formed to review and potentially refute the mortgage defects identified by Hunt’s team—received employee-of-the-month awards.

Having witnessed Bowen’s unfortunate fate, Hunt attempted to report these issues anonymously. She submitted information through the reporting mechanism on the website of the U.S. Department of Housing and Urban Development (the FHA’s parent department). When there was no response, she did the same on the FBI’s website. Still seeing no evidence of investigations, Hunt told CitiMortgage HR, who took no significant action.



Finally, in August 2011, she filed a false claims lawsuit against Citi for defrauding the FHA. A few months later, she received word that an attorney would be joining her case on behalf of the Department of Justice. By February, Citi admitted wrongdoing and paid a $158.3 million settlement to Hunt and the DOJ.

Organizational Warning Signs

Hunt’s is a cautionary tale. Waytz suggests a variety of interventions for leaders seeking to cultivate more ethical and accountable corporate cultures:

Create clear reporting procedures in your organization’s whistle-blowing policy. Employees should know whom to approach with their concerns and what the chain of command is should they face obstacles. “Disorganization can lead to unethical behavior because it creates too much ambiguity around what is and is not acceptable,” said Waytz.

Minimize physical and psychological distance between leaders and employees. While this can mean paying more frequent visits to the workplaces you oversee, it can also be establishing more regular lines of communication during which you explicitly communicate to your subordinates that you value honest information—including negative news.

Use mission statements and incentives to reinforce your organization’s values. Waytz sees mission statements—when carefully crafted and frequently referenced in day-to-day work and decision making—as key vehicles for reminding employees of core values. They serve as a compass, helping employees determine what to do when facing a difficult choice or “gray area.” Mission statements that emphasize fairness and justice can help set organizational norms that foster ethical behavior.

But even the most admirable values are no match for incentives designed to undercut them. Consider the misalignment between Citi’s bonus structure and the values proclaimed by Citi’s “Responsible Finance” campaign.

Require senior leadership to embody your organization’s values. Leaders who are perceived as ethical have organizations that prosper. Waytz points to recent research conducted by his colleague—Paola Sapienza, a researcher in Kellogg’s finance department—who finds that proclaimed values appear irrelevant to a company’s culture, but “when employees perceive top managers as trustworthy and ethical, firm’s performance is stronger.” Sapienza and her coauthors found that high levels of perceived integrity of management were positively correlated with outcomes, including higher profitability, higher productivity, better industrial relations, and higher attractiveness to prospective job applications.

Cultivate a culture that is open to dissent. “Whistle-blowing is often seen as the most disloyal thing an employee can do,” says Waytz. “But it can be reframed [by leaders] as an act of larger loyalty—loyalty to the community in which you operate, loyalty to society, and ultimately loyalty to the long-term success of your company.”



To access the full Kellogg case “Through the Eyes of a Whistle-Blower: How Sherry Hunt Spoke Up About Citibank’s Mortgage Fraud” (winner of the 2014 competition for Outstanding Case on Anti-Corruption, supported by the United Nations Global Compact Principles for Responsible Management Education) for corporate trainings or university classrooms, visit here.