Practical insights for compliance and ethics professionals and commentary on the intersection of compliance and culture.

MiFID II conduct principles and markets integrity

MiFID II – the second Markets in Financial Instruments Directive – became law across the European Union on January 3, 2018.  It’s intended to overhaul the entire supervisory framework for financial sector organizations who are in the EU, have clients in the EU, or wish to have access to or establish equivalency for the markets there.  Its predecessor law, MiFID I, became law in 2004 and was judged to have not stood the test of time in the aftermath of the global financial crisis.  Therefore the seven year drafting process – from 2010 to 2007 – that culminates in MiFID II implementation this year is aimed to set a higher regulatory standard for investment banks, broker-dealers, and other institutional market participants and their employees.

Much of the attention about MiFID II implementation has focused on the burden to organizations from financial costs, human capital and efforts, and changes in commercial strategy that will be required for firms to work toward compliance with the new laws.  The laws are thousands of pages long and touch nearly every area of the financial services markets.  Some of the major areas of focus in MiFID II are investment research, transaction reporting, and brokerage compensation arrangements.  However, the far reach of banking and securities markets activities into the economy means that laws intended to govern this sector have a broad and dramatic scope as well.


Whistleblowers from significant scandals in financial services

This is the first of a three-part series profiling whistleblowers in different industries. This starts with today’s post, focused on the financial services industry, describing events where whistleblowers came forward to expose misconduct in investment banking, wealth management, and accounting. Tuesday November 7th’s post will cover the pharmaceutical industry, including AstraZeneca, Pfizer, and more. The post for Tuesday November 14 will be about whistleblowers who exposed high-profile corporate fraud in diverse companies such as WorldCom and Archer Daniels Midland.

Whistleblowers in the financial services industry have sparked reform for investor protection and shed light on the often secretive or mysterious culture within banking organizations, where trouble can be hidden from competitors and the public alike, as cultural problems deepen inside the organization completely unchecked by controls or encouraged by business strategy.

  • Bradley Birkenfeld, UBS: Brad Birkenfeld is an American banker. His disclosures regarding actions by UBS Group AG that enabled US tax evasion led to a $780 million fine from the US Department of Justice against UBS and publication of information that exposed the previously mysterious world of Swiss private banking. Indeed, Switzerland amended its federal banking law in 2009 and over the years subsequent made significant contributions to cooperation with other countries regarding reporting of tax data of their citizens. In 2013, Switzerland signed the Convention on Mutual Administrative Assistance in Tax Matters, cementing this obligation to roll back banking secrecy in this treaty which over 60 countries signed. For more on Brad Birkenfeld, who both did jail time and received a $104 million reward for his disclosure, check out this Bloomberg profile of him.
  • Rudolf Elmer, Julius Baer: Rudolf Elmer worked for the Swiss private bank Julius Baer for almost twenty years. In his last role, he was the head of the bank’s Caribbean operations for eight years. In 2002, the bank discovered that internal data had been stolen and subjected all employees to a lie detector test. Elmer declined the test once and then took it and failed, leading to this termination. Following this Elmer spent several years trying to share the information he had taken, culminating in releasing a cache of documents to WikiLeaks in 2008 and again in 2011. These documents provided evidence supporting allegations that Julius Baer had facilitated clients’ tax evasion through banking practices in the Cayman Islands. Elmer was tried several times in court for breach of banking and business secrecy laws, which historically have been notoriously tough in Switzerland, but have begun to be rolled back or scrutinized in the wake of cases such as Julius Baer’s.   Elmer also faced charges of harassment and other nuisance offenses for public disputes he got into with the bank and its employees, which demonstrates the complex and sometimes problematic emotional impact whistleblowing can have on people and their relationships with their ex-employers and ex-colleagues. In 2016, Julius Baer settled a deferred prosecution agreement, related to aiding US citizens in the commission of tax evasion, with the US Department of Justice for $547 million. For more information on this, check out this Forbes article from 2016.
  • Richard Bowen, Citigroup: Richard Bowen was a senior executive at Citigroup in the period leading up to the 2008 global financial crisis. He was the chief underwriter of the Consumer Lending Group unit, and in this capacity he was responsible for evaluating and maintaining the creditworthiness of the unit. From June 2006 on, Bowen warned the board of directors of Citigroup about major issues in the risky mortgages being bought and sold by the unit. Bowen reported evidence to the board that many of these mortgages were defective, fraudulent, or both. Despite Bowen’s weekly warnings via required reporting throughout 2006 and 2007, the board did not take action. Bowen requested outside investigations of the Consumer Lending Group unit which substantiated his reports and showed that the unit had been operating with insufficient controls against these risks since 2005. This information should have been provided to shareholders per the Sarbanes-Oxley Act, but it was not, despite the fact that the bank claimed compliance with the Sarbanes-Oxley Act during this period. In exchange for his whistleblowing, Citigroup took away most of Bowen’s responsibilities and eventually fired him. Bowen offered crucial testimony to the Financial Crisis Inquiry Commission in 2010. He is now a motivational speaker on ethical leadership and corporate culture within the banking industry. For a look at what happened to Richard Bowen after he blew the whistle on Citigroup, check out this New York times article from 2013.
  • Antoine Deltour, PricewaterhouseCoopers: Antoine Deltour was a French employee of PricewaterhouseCoopers who was involved in providing information to the press related to tax rulings in Luxembourg for multinational companies. The documents became known as the Luxembourg Leaks and were the focus of a global investigation conducted and published by the International Consortium of Investigative Journalists. The investigation showed that PwC and other major accounting firms were facilitating registration in Luxembourg by multinational companies in order to benefit from advantageous tax rulings for revene reallocation. The legality of these practices is questionable on a number of grounds, including anti-trust, market abuse, and tax deals as illegal state aid. As a result of the disclosures, Deltour and his fellow PwC employee who also released documents, Raphael Halet, received prison sentences (later changed to suspended or overturned) and fines, but have also received a lot of credit for helping to shed light on the secretive practices surrounding these Luxembourg tax rulings and brought greater attention to the need to identify and prevent state-sponsored tax avoidance and evasion. In this sense, like the Julius Baer case, the whistleblower helped to ignite an open dialog about whether banking secrecy laws serve the public interest. For more on this sentiment, check out this piece about the role of citizens in holding the EU accountable.

Individuals like the above speaking up about misconduct they suspect or observe in the financial services industry have brought much-needed exposure and change to business practices. They have also often been punished, fired, criticized, or doubted for their bold decision to expose wrongdoing by their employer and/or colleagues. The 2009 US Dodd-Frank Wall Street Reform and Consumer Protection Act, which was intended to promote transparency and prevent fraud in the financial services industry, now prohibits retaliation against whistleblowers and expands the powers of the Securities and Exchange Commission in order to provide for other protections and rewards for whistleblowers who speak up about corporate malfeasance. Nonetheless, whistleblowers in the US continue to face retribution for their actions, and in Europe they remain open to legal liability in addition, as their disclosures break laws that some may say are designed to enable the concealment of other fraudulent or illegal practices.

Check back in two weeks, on Tuesday November 7, for the second post in this series of three about whistleblowers in historical events. Next Tuesday’s post will discuss individuals who exposed fraudulent business practices in the pharmaceutical industry.


The Madoff Ponzi scheme scandal

For more than 40 years, Bernie Madoff was one of the most prominent figures in the US financial services industry.   His trading firm, Madoff Securities, was founded in 1960 and due to its early adoption of then cutting-edge technology quickly became one of the major market makers in the business. The firm’s technology that it participated in creating later became the NASDAQ trading exchange. Apart from its brokerage business, Madoff Securities also offered investment management and advisory services to many prominent clients. These included banks such as Banco Santander, HSBC, RBS, and BNP Paribas; hedge funds; university endowments; charitable organizations; and famous individuals such as Steven Spielberg, Zsa Zsa Gabor, Sandy Koufax, and Elie Wiesel.

Madoff himself was very well-known in the securities industry. He was on the board of directors of the Securities Industry Association (SIA), the predecessor to the Securities Industry and Financial Markets Association (SIFMA), and served as chairman of SIA’s trading committee. He was also active in the National Association of Securities Dealers (NASD), the self-regulatory organization (SRO) for brokerage firms and exchange markets that predated the Financial Industry Regulatory Authority (FINRA), and served on the board of directors of the SRO, for a period even as its chairman

This last professional designation for Madoff seems ironic now. In reality, Madoff’s investment management business was revealed in December 2008 as a $65 billion Ponzi scheme, the largest financial fraud in US history. This massive fraud was carried out by Madoff and a close group of associates right alongside his legitimate brokerage business and taking full advantage of his huge network of investors and prominent reputation in the industry. In the scheme, trades and returns were completely fabricated and investor redemptions were funded by new infusions from individuals that Madoff aggressively pursued, touting his performance.

Despite numerous SEC investigations of various areas of Madoff’s business, and several outside analysts publicizing urgent and detailed concerns about the business and its purported performance claims which could not be replicated for authentication purposes, this scheme continued unmitigated for at least 15 years, per Madoff’s admission. It may have gone on for as long as 30 years, back to the very beginning of the investment advisory arm of Madoff Securities.

Madoff struggled to keep the fraud going as the global financial crisis caused the markets to contract throughout the fall of 2008, and investors sought redemption. Still, he managed to stay afloat until December 2008, when his sons, Mark and Andrew, confronted him about bonuses he wished to pay amid the mounting investor redemptions. Madoff confessed to his sons that the investment management business was a fraud, and his sons then reported him to law enforcement. In the subsequent months the shocking scale of his fraud and the losses it caused became the subject of public fascination.

For interesting insights on the fraud and scandal surrounding Bernie Madoff’s Ponzi scheme to defraud investors, check out these videos:

  • The Madoff Affair – An episode of the PBS documentary program Frontline from May 2009, when the complete scope of the scandal was still being discovered, which aims to tell the story of the fraud from the beginning and question how it was able to go on for so long.


  • The Man Who Knew – This March 2009 60 Minutes segment features Steve Kroft interviewing Harry Markopolos of Rampart Investment Management. Markopolos was a vocal critic and doubter of Madoff’s claimed investment returns. He attempted to alert the SEC on a number of occasions to the fraudulent practices he believed he had discovered in his study of the alleged performance of Madoff Securities, but he was ignored or his claims were not thoroughly investigated.


  • Ripped Off: Madoff and the Scamming of America – This is an April 2009 which looks at Bernie Madoff’s fraud in comparison with other Ponzi Schemes of the prior hundred years. With this study, the investigation assesses the magnitude of the damage Madoff’s scheme caused and places it in context of the global financial crisis which was beginning to deepen at the end of 2008.


  • The Hunt for Madoff’s Money– This February 2009 segment from the ABC news program 20/20 asks where the money that Madoff defrauded from his investors went, other than fund withdrawals by others’ withdrawals. The investigation looks at the luxury lifestyle and properties of Madoff and his family members and associates that were enriched by his fraudulent investment management scheme.



  • Madoff Victims on Guilty Plea – In this March 2009 report from CBS News, nine people who lost their investments in Madoff’s Ponzi scheme speak to Katie Couric about their reactions to the exposure of the massive fraud and his guilty plea that resulted in him being sentenced to 150 years in prison without standing trial.


Selected Frontline documentaries on financial crisis and compliance

Frontline is a documentary series that has been broadcast by PBS since 1983. The series covers a broad range of social, political, and historical topics. Among these documentary programs have been several episodes that have covered financial crises or compliance issues in the markets or at organizations. These topics range from the 2008 global financial crisis to an overview of corruption and unethical behaviour on Wall Street to fraudulent and misleading practices within specific companies that contributed to market instability and economic collapse.

  • To Catch A Trader and insider trading – This 2014 episode covers the history of SAC Capital Advisors, a group of hedge funds founded in 1992 by Steven A. Cohen which was very successful for many years but declined after numerous investigations by the US Securities and Exchange Commission for insider trading. Several former traders were indicted by the US Department of Justice and the firm itself pled guilty to insider trading charges, subsequently shrinking away after returning external investors’ money to them and divesting the rest of its capital. SAC Capital Advisors no longer exists as of 2016, but the divestment process is ongoing and continues to raise questions about conflicts of interest and ethical practices at the firm. As for Cohen himself, he runs what was once SAC Capital Advisors as a family office and remains active in the financial industry despite his failure to supervise at SAC.


  • Dot Con and financial markets fraud during the dotcom bubble – From 2002, this episode looks at the “dotcom bubble” of the late 1990s, when the financial markets were crazy for new internet companies and their IPOs were aggressively marketed to the investing public. At the time this was a totally new frontier and the growth of the bubble was fuelled by aggressive allocation practices in the IPO process. Did the eagerness to exploit this new market tip over into fraudulent or misleading handling of the IPOs? In the rush to take companies public, risks were certainly ignored or unknowingly assumed by investors. Transparency in the marketplace was really lacking, and no one wanted to miss on profits to slow down and question whether what was going on was appropriate or advisable. This is a formula which is bound to repeat over and over again in future financial market advances and collapses.


  • Inside the Meltdown and the causes of the 2008 global financial crisis – This 2009 documentary starts with the seeds of fear that were sown in late 2007 about the effect that the bursting housing bubble would have on Wall Street investment firms. Saddled with bad debt and hounded by rumors of instability, in 2008 financial organizations began to decline and collapse precipitously. First Bear Sterns, and then Fannie Mae and Freddie Mac, failed and needed rescue. Then finally in September 2008 came Lehman Brothers – and from the Treasury Secretary Henry Paulson, who was subject to immense political pressure and criticism from the handling of prior crises, there came no bailout. In the aftermath of this, the financial crisis unfolded and ensued. Questions still remain about how this happened so quickly and severely, who caused or could have avoided it, and whether the plans to fix it and avoid it happening again have been effective.


  • Money, Power and Wall Street and the effects of the 2008 global financial crisis – In a sense picking up where the previous documentary left off, this 2013 episode looks at the often problematic efforts to recover from the financial crisis. In the many efforts to repair the global economy and strengthen the system to withstand future crises that are similar or more several, the financial markets and the governments that regulate and supervise them have struggled against themselves and each other. With investors and taxpayers all over the world on the hook for the risk and the bill, bold decisions as well as failures to act have characterized the rescue and rebuilding process, and continue to raise doubts about the resilience for the future.


  • The Warning and failure to regulate the derivatives market – This 2009 documentary looks at the financial crisis not from the perspective of the firms that weakened the market or collapsed within it, but from one segment, the derivatives market. This market is mysterious and key regulators took a hands-off position in investigating or managing it. The fears were that regulating the market could lead to financial crisis; it’s possible that not regulating it was one of the key causes of the downturn, in the end. These complex dynamics which prevented changes in the risky derivatives market still exist in governments and the markets today. Failing to change or move on from these to close the regulatory gap suggests that future crises are inevitable.


These are only just some Frontline episodes from over the years of the program that have touched on historically important events and issues relating to financial crisis and corporate compliance. These compelling documentaries provide a rich and informative, yet accessible, view into the complex and wide range of these topics.


The bankruptcy of Lehman Brothers

For over 150 years, Lehman Brothers Holdings Inc. was one of the largest financial services organizations in the world. In the United States it had far-reaching business operations in investment banking, securities sales and trading, research and analysis, asset and wealth management, and private equity investments.

Despite this long history, in the early 2000s Lehman Brothers was deeply impaired by the firm’s involvement in the subprime mortgage market, the impending bursting bubble of which precipitated the 2008 global financial crisis. Losing clients, market value, and rating status rapidly, Lehman Brothers filed for bankruptcy on September 16, 2008. This date is often seen as the impetus of the subsequent financial crisis, when widespread, sustained market collapse commenced.

The Lehman Brothers businesses were almost immediately taken over by Barclays in North America and Nomura Holdings elsewhere in the world. However, the impact of the bankruptcy was seismic. It had a strong effect both in concrete terms of losses in the financial markets and stress to the economy as well as a symbolic effect in representing the “too big to fail” categorization that troubled the global financial system and the many large firms within in that suffered great losses during the ensuing crisis.

  • A Colossal Failure of Common Sense – Also a best-selling book by Lawrence G. McDonald with Patrick Robinson, this lecture goes into great detail of the events leading up to, during, and following the Lehman Brothers bankruptcy during the years 2007-2010. The study goes even further back as well, to unpack the changes in financial regulation and banking industry laws from the 1990s which allowed the business conditions under which products like the subprime mortages and resulting securities were created and sold.
  • The Last Days of Lehman Brothers: Moral Hazard – This film dramatizes the events of the weekend leading up to, and in hopes of preventing, the eventual bankruptcy of Lehman Brothers. The subtitle “moral hazard” refers to the situation in which precarious risk calculations are made by individuals who do not face the liability and/or loss if the decision was the wrong one.   This sort of risk-taking was prevalent during the lead-up to the financial crisis and in the subprime mortgage securitization market. The bankruptcy of Lehman Brothers served as both a reminder that the risk could come home to roost after all, as well as a cautionary tale for financial firms and governments in the future to continue to try to mitigate this exposure.
  • Wall Street Crash of 2008 – This is the real-time video from CNBC on the evening of September 14, 2008 which reports the unfolding story that Lehman Brothers was going to collapse and file for Chapter 11 bankruptcy protection the next day (followed by a bankruptcy filing the day after that).
  • Did Lehman Brothers Cause the Financial Crisis & Stock Market Crash on Wall Street? – This interview between Maria Bartiromo and Yves Smith analyses the effects of the Lehman Brothers bankruptcy to ask whether the firm’s collapse contributed to the causes of the global financial crisis or simply signalled the beginning of a trend.
  • Five Years After Lehman Brothers – This discussion on The Agenda with Steve Paikin from 2013 looks into what has changed, or not, in the global economy and financial services sector since Lehman Brothers went bankrupt in 2008 and the markets and industry began their prolonged collapse.


The story of the rapid decline and fall of Lehman Brothers, and the collapse of the global economy and markets that followed, is one that will remain captivating to students of the 2008 financial crisis for years to come. Furthermore, the events of that weekend in September 2008, and their causes and effects, serve as an interesting and important measure against which compliance professionals and decision-makers in the business should judge their assumptions of risk and expectations for liability.


Selected documentaries on the 2008 global financial crisis

The Great Recession, which began in 2007-2008 with the collapse of the subprime mortgage market and led to an international banking crisis, offers many lessons for compliance practitioners and enthusiasts alike. Many documentaries have been produced in the ensuing years to offer new insights on the crisis and its causes.

  • American Casino and the origins of the subprime collapse – The filmmakers of American Casino started their work in 2008 with a theory that the housing market was in trouble. Over the year that they filmed, this idea took root in reality and unfolded before them. The 2009 documentary that resulted offers a vivid explanation of how the subprime mortgage market evolved and then fell apart. The stories of average Americans who held the mortgages that were underlying the bonds created by big investment firms humanize the origins of the crisis and help to ground the actions in the financial markets by connecting them to the many people that were affected.

  • Inside Job and non-disclosure of conflicts of interest – This 2010 documentary reaches back into the international origins of the financial crisis, to begin with an look at the collapse of the Icelandic banking system. One of the movie’s principal assertions is that academics and scholars who are professors at many of the prominent educational institutions have conflicts of interest due to their financial ties to firms such as Goldman Sachs and other large market makers. The film’s argument suggests that these conflicts of interest are not subject to mandatory disclosure and so the economists express opinions about investments and financial systems which cannot be transparently evaluated.

  • Capitalism: A Love Story and the dangers of deregulatory trends – Michael Moore’s 2009 documentary takes a wide view on general contemporary economic conditions in the United States, ethically questionable practices of major corporations, and the status of the American worker in modern capitalism. Germane to the subject of the 2008 global financial crisis, Moore takes a look at the lending practices of Countrywide, one of the main players in the subprime lending practices that led to the market collapse and ensuing crisis. Countrywide operated in an generation of regulatory relaxation, leading to unduly risky practices of giving loans to people who could not reasonably afford them as well as giving discounts and special deals to politicians and regulators in hopes of keeping the good times rolling.

  • The Flaw and the evolving state of modern American capitalism – A good companion movie to Capitalism: A Love Story, this 2011 documentary focuses on explaining how the consumer society in the United States has a symbiotic relationship with the markets, at the expense of the American citizen whose main value in society becomes determined by spending power.   In this dynamic, the rich get richer while the poor stay poor and the middle class drifts ever downward, with interventions such as the easier extension of lending in the pre-2008 years only seem to present a possibility for upward mobility for them, but rather just create financial crises where they bear the brunt of the losses.

  • Money for Nothing: Inside the Federal Reserve and the cyclicality of major financial crises – The ebb and flow of regulatory pressures in the United States are enabled by the lack of understanding most Americans have about what the Federal Reserve System is and how its policies impact the economy and the markets. This 2013 documentary suggests that these policies had a major role in the 2008 financial crisis and will continue to contribute to the creation of bubbles that culminate in future crises. The firm suggests that awareness of the public and citizens’ engagement in activism for more accountability and greater transparency by the Federal Reserve System are critical for protecting society from ever-greater financial crisis in the future.

These are just a few examples of documentaries which can provide an informative and compelling view into the events of the 2008 global financial crisis. For years to come there will surely be many more such documentaries to add further insights to the historical record on the Great Recession.