Sunday Read: Silicon Valley Bank Collapse, Echoes of Enron

This article describing the connections between the Silicon Valley Bank and Enron collapses was sent as part of NWC’s “Sunday Read” series that aims to educate supporters about whistleblower stories and whistleblower legislative or policy initiatives and current events. For more information like this, please join our mailing list.

Anyone with a phone, television or computer recently was sure to have seen the headline that on March 10, 2023, Silicon Valley Bank (SVB) became the biggest bank to fail since the 2008 financial crisis.

The initial comparisons to the subprime mortgage collapse that sparked the 2008 financial crisis are certainly valid. But those with especially keen insight say the conditions are even closer to that of the collapse of Enron in 2002.

Just one day before SVB’s collapse was announced, hedge fund manager Michael Burry, who was masterfully portrayed by Christian Bale in 2015’s “The Big Short” — which focused on the housing crisis — weighed in on Twitter.

“It is possible today we found our Enron,” Burry tweeted cryptically on March 9.

In this Sunday Read and against the backdrop of the SVB collapse, National Whistleblower Center (NWC) will note the parallels to Enron’s fall, revisit Enron whistleblower Sherron Watkins’ pivotal role in bringing the truth to light, and provide tips on how to report bank misconduct.

SVB and Echoes of Enron

Various factors contributed to the fall of SVB, including:

• Rising interest rates.
• Venture capital drying up.
• The extended absence of a risk officer. And,
• Years of poor and possibly illegal decisions by SVB executives.

This ultimately led to massive losses that were being lamented behind closed doors for months ahead of SVB’s demise.

Indeed, the possible accounting fraud and circumstances surrounding SVB’s closure are reminiscent of the Enron collapse. The now-infamous Texas-based energy, commodities, and services company hid massive trading losses from shareholders in the four years leading up to its bankruptcy ­– $74 billion. The crisis may have seemed to come out of nowhere to outsiders, by on the inside whistleblowers were attempting to ring the alarm on the companies coming downfall.

The Enron scandal had a domino effect, as investigators found a related accounting scandal through the actions of telecommunications company WorldCom, whose auditor was the accounting firm Arthur Andersen (also retained by Enron).

Similarly, on March 12, 2023, days after SVB’s fall, state regulators closed New York-based Signature Bank, marking the third-largest failure in U.S. banking history. Signature essentially became the WorldCom to SVB’s Enron. These events serve as a critical reminder of how whistleblowing helped expose Enron’s misdeeds and how it can play a role in all corporate and banking misconduct.

Whistleblower Sherron Watkins

In the Summer of 2001, former Enron vice president Sherron Watkins wrote a letter to then-CEO Kenneth Lay warning that the company’s methods of accounting were improper and that warning that it “might implode in a wave of accounting scandals.” Watkins was uniquely positioned to make this assessment, having been with Enron for 10 years and was previously been employed by Arthur Andersen.

Watkins’ warning went unheeded. Yet, she persisted. Watkins’ brave actions exposed corporate misconduct in scandal, paving the way for sweeping corporate reform. Congress passed the historic Sarbanes-Oxley Act (SOX) in 2002, which protects employees of publicly traded companies who report violations of Securities and Exchange Commission (SEC) regulations or any provision of federal law relating to fraud against the shareholders.

In recognition of her coming forward, Watkins and two other whistleblowers were named Time “Persons of the Year” in 2002. Watkins is now Professor of the Practice at Kenan Flagler at the University of North Carolina at Chapel Hill and the Leadership and Ethics Advocate for her own company. Her journey through the Enron crisis has inspired many, and has crystallized her focus to improve the lot of whistleblowers and would-be whistleblowers.

Watkins has been a featured speaker during NWC’s National Whistleblower Day events, most recently in 2019. She is the Senior Fellow for Ethics and Policy for Whistleblower Network News where she recently voiced her public support for a permanent National Whistleblower Day.

Portrait of an SVB Whistleblower

Thanks to trailblazers like Watkins, there are laws and programs in place to protect whistleblowers who report bank fraud.

People with knowledge of misconduct or insider trading violations at SVB — or at Signature Bank or other financial institutions — might be conflicted about whether to come forward.

Media reports indicated that that poor management decisions — and not malice or fraud — led to the bank’s demise. But more will undoubtedly be revealed, and the profile of an SVB whistleblower would be someone who, like Watkins, alerted the C-Suite to unfavorable numbers or conditions and were ignored.

An SVB or Signature Bank whistleblower might look to one of the following programs for guidance and protection:

• SOX broadly defines protected activity to include reports made to federal regulatory and law enforcement agencies, Congress, an employee’s supervisor, and internal corporate investigators. The law also protects employees who participate or testify in SEC regulatory proceedings or other federal proceedings related to fraud against shareholders. More information on reporting corporate fraud can be found at the NWC’s SOX Resource Page.
• The Dodd-Frank Act permits individuals to file a complaint with the SEC or the Commodity Futures Trading Commission (CFTC), alleging that a person or company violated U.S. securities or commodities law. The Dodd-Frank Act SEC Whistleblower Program contained three major whistleblower laws: The Commodity Exchange Act, the Consumer Financial Protection Board, and the Security and Exchange Act. Learn more here.
• The Financial Crimes Enforcement Network’s (FinCEN) anti-money laundering whistleblower program became effective following passage of the Anti-Money Laundering Act of 2020 (AML). Thanks to NWC’s successful advocacy and public support, FinCEN’s AML program allows whistleblowers who report violations of the Bank Secrecy Act to receive up to 30% of any resulting monetary sanctions in excess of $1 million. Potential whistleblowers who previously felt direction-less can disclose information to FinCEN relating to complex efforts by oligarchs, drug traffickers, and terrorist organizations to hide money.
• The IRS. The Internal Revenue Act permits individuals who provide original information to the Internal Revenue Service (IRS) about a violation of the tax laws or the underpayment of taxes to obtain a monetary reward if their information results in a sanction against the tax law violator. More information on the IRS Whistleblower program is here.

A whistleblower could already be involved in ongoing investigations, and there may be several SVB insiders or employees at other banks who are considering action. It is important to be aware that whistleblowers voluntarily come forward with information to the government.

Do not wait for investigators to call you, find an attorney and make a report now. Sherron Watkins could not use the rights and protections available to whistleblowers today. Thanks to her, whistleblowers at SVB and other financial institutions today are protected from retaliation, can report to the government in secret, and are eligible for awards.

Looking Ahead

Federal regulators announced they would take steps to make SVB depositors whole starting on March 13. According to published reports, this will include auctioning the remnants of SVB, which includes SVB Private, its $17 billion wealth management unit that includes the bank’s 2021 acquisition of Boston Private. The Federal Reserve Board announced that Vice Chair for Supervision Michael S. Barr is leading a review of the supervision and regulation of Silicon Valley Bank, in light of its failure. The review will be publicly released by May 1.

Amid widespread banking fears, Moody’s placed six regional lenders — including First Republic and Western Alliance — under review for possible downgrades. This is just the beginning of a chain of events and NWC will track how the fallout from SVB’s closure impacts the whistleblower landscape.

Companies should always give full, truthful and accurate details to investors, regulators and other stakeholders about the state of their finances and business risks. If you know about failures to do so: Do not wait for investigators to call you, find an attorney to discuss your concerns.

Support NWC

NWC fights to bolster whistleblower programs and inform the employees in all sectors about available laws and protections. As a 501(c)(3) non-profit our awareness building work is made possible with the support of our generous donors. Please consider donating $50 today to help us continue to educate about critical laws like SOX and Dodd-Frank and how they can impact everyone’s lives.

This story was written by Justin Smulison, a professional writer, podcaster and event host based in New York.