What’s a Whistle-Blower to Do?

5.4 What’s a Whistle-Blower to Do?

Controversies: 3.11, 3.15, 3.19, 4.12 Key Words: whistle-blower, nonprofit agency, city, federal grant, abuse of power Case Complexity → Moderate CD: 7.5 Why are people (un)ethical?

You recently retired from the U.S. Air Force and go to work for a nonprofit agency that works with the city’s low-income housing program, which is funded by a fed- eral grant. On four separate occasions over the next few months you are told by the city program administrator to use money from one federal grant to pay for a project that wasn’t covered by the grant. At first you follow orders and then begin to realize

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that if anyone objected, you would be vulnerable to charges of misusing federal funds. So what do you do?

You put your objections in writing and call the regional headquarters of the U.S. Department of Housing and Urban Development, identifying yourself as

a whistle-blower. In the meantime, you are asked to approve the expenditure of $87,150 on a private residence that would sell for $70,000. You resist, asserting that federal guidelines prohibit the city from spending that much money on any low- income housing. The program administrator complains to your boss that you are not attentive, productive, or responsive to city staff. Your boss removes you from the project. Frustrated but convinced that you did the right thing, you quit your job and write a letter to the mayor detailing your concerns about the misuse of federal funds. The mayor never responds.

A few months later, HUD officials admonish city officials about using low-income housing funds to help residents who did not qualify. Fast forward two more years— the city’s internal auditing staff reports to the mayor that the housing administrator has issued questionable loans, kept poor records, and awarded noncompetitive bids. HUD officials also warn the mayor that the administrator may have misused $1.4 million in federal funds. The mayor dismisses the criticism by HUD officials, saying that he has made changes in response to the internal audit report.

Federal auditors are still not satisfied and warn that the city may have to repay the $1.4 million. The administrator claims that the feds are applying ridiculous rules. The mayor backs him. The administrator appears before city council and asserts that “we do not intend to follow HUD’s direction at this point.” All but one member of city council praises the administrator.

Fast forward two more years—a federal indictment charges that the city housing administrator used government jobs to reap thousands of dollars in gratuities for seven years. The city is required to wire transfer the U.S. Treasury a total of $1,402,650.

Discussion Questions

1. Is the whistle-blower guilty of “going along to get along”? After all, he did not contact HUD until after he had approved four contracts.

2. Should the whistle-blower have stayed within the organization and tried to change the practice of “fudging” federal funds?

3. Should he have leaked the story to the media?

Case Assessment

Roberta Ann Johnson, Professor of Politics, University of San Francisco:

Th e whistle-blower in this case could rightly feel a sense of satisfaction that the wrongdoing he witnessed and tried to stop was exposed and addressed. The city program administrator was indicted and the city

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was required to return the federal dollars that were spent inappropri- ately. But it took seven years to expose the wrong doing and it cost the whistle-blower his job. How might he have protected his job and how might he have been more effective as a whistle-blower?

Systemic problem: Let’s call the whistle-blower Larry. He found himself in a situation where corruption was tolerated, where a pub- lic agency was bending and breaking rules, where watchdog mech- anisms were not working in a timely way, where elected officials ignored the problem, and where federal oversight was moving at a snail’s pace.

What to do: Larry worked for a nonprofit organization that admin- istered the city’s housing programs. (1) It would have been useful for him to try to find allies in his organization. If he talked informally to other employees about his concerns he might have found out that they were shared. He might have been a more effective whistle-blower if he had blown the whistle with others. With a group of whistle-blowers, it is also less likely that he would have left and lost his job.

(2) It was important for Larry to keep accurate records of all the questionable exchanges—recording the times when he accommodated his supervisor’s requests and the transactions when he refused to comply would provide the kind of information that a comprehensive investiga- tor needs. (3) When Larry decided to blow the whistle, he had choices of how to tell and whom to tell. He could have remained anonymous when he contacted HUD officials and the mayor’s office, but this may have been difficult working in an apparently small organization in which his identity could have been recognized. The Washington, D.C.-based whistle-blower organization, the Government Accountability Project (GAP), suggests that whistle-blowers who want to remain anonymous should consider providing information to nonprofit advocacy organi- zations that blow the whistle for them. GAP recommends the Project on Government Oversight (POGO), a group that has skillfully assisted whistle-blowers in this way for years.

But Larry chose to divulge his identity. He contacted the regional headquarters of the U.S. Department of Housing and Urban Development (HUD), the agency that was providing the funding. He also tried to expose the wrongdoing to the mayor of the city. Neither of these efforts brought timely or effective relief. The mayor supported the corrupt city administrator, and while HUD found fault with the corrupt administrator’s actions, HUD merely admonished city officials who then ignored the federal agency.

The city’s internal auditing staff remains a bright light in this story. The city auditors did their job and reported to the mayor. They found the problems and did not cover them up or blow them off. The

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whistle-blower might have provided his records to assist the audi- tors. Unfortunately, with an unresponsive mayor, the auditors were powerless.

One avenue that is often used by whistle-blowers, and was not used in this case, is the news media. Using newspaper and local television outlets to expose the wrongdoing might have been useful as a means to embarrass the mayor and city council into action. Whistle-blowers and their issues are often featured in news stories. But, there are no guaran- tees of publicity or success. This may not have been the kind of story that garners enough public attention and creates public anger. Stories about administrative rules and financial technicalities are often not

sexy enough or sufficiently riveting to excite the public. Unfortunately though, without public outcry, these elected officials did not feel any pressure to change.

When nothing changed, Larry felt and became more and more dis- empowered. This situation is the most challenging for a whistle-blower. Clearly, the problem was not just one corrupt individual, but was the elected officials who were indifferent in a political environment that tolerated wrongdoing.

Posted on ETHTALK listserv by Mark G. Michaelsen:

Whistle-blowers are motivated by many things. Some are narcissists who crave attention. Some are following through on threats made at work: Do it my way or else.

However, some whistle-blowers come forward because they know right from wrong. They come forward out of sense of civic responsi- bility. Public servants who are discharged for blowing the whistle on public wrongdoing are protected under many laws. If a whistle-blower faced grave personal risk, that might change the equation.

Consider the motivation of whistle-blower Peter T. Scannell. Promoted from an entry-level customer service representative for mutual fund giant Putnam Investments, Peter Scannell noticed some large clients, including some unions, were using international time dif- ferences to make big money in buying low and selling high. That’s

called market timing. While not illegal per se, liquidating securities to pay withdrawals of market timers cost long-term small investors. Putnam mutual fund prospectuses said market timing wouldn’t be tolerated.

Scannell went to his supervisors, who brushed him off. So, he started to keep a record of market timing transactions he personally processed. He took the records to the Securities and Exchange Commission, which didn’t act. Then he went to Massachusetts regulators, who did act. It

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resulted in charges against Putnam, which settled for $110 million. On February 1, 2005, an independent consultant determined Putnam owed another $100 million in damages to small investors.

What did Scannell hope to accomplish? He wanted to do the right thing. What did he get for blowing the whistle on market timing at Putnam? He got death threats from union members. Scannell was almost beaten to death, too.

It’s a sad, but inspiring, story. How many of us would have the courage to blow the whistle on wrongdoing when it threatens us or our family personally, not just our livelihood?

Author’s Note: Case based on a story reported in the St. Petersburg Times, March 8, 2004, B1. Peter T. Scannell testified before the Subcommittee on Financial Management, the Budget, and International Security, U.S. Senate Committee on Governmental Affairs. His testimony is available at www. senate.gov/~govt-aff/_files/012704scannell.pdf