He says he saw ethical issues at Wachovia but feared for his job. Bank disputes his claims.
By Christina Rexrode
crexrode@charlotteobserver.com
Posted: Saturday, Dec. 11, 2010
Robert Kraus is suing Wells Fargo Securities in county court over his departure from the bank in 2006, when he worked in then-Wachovia's investment bank. His departure was set into motion after he "raised serious legal, ethical, and compliance concerns," his suit says. Wachovia says the allegations are without merit. Davie Hinshaw - dhinshaw@charlotteobserver.com
Robert Kraus faced a choice with no good options.
It was early 2006, and Kraus, then 35, had been working nearly a year for Wachovia's investment bank in Charlotte. As a controller, his job was to raise red flags when he saw questionable practices, and he believed he had seen many. But whenever he told his supervisors of his concerns, he says, they told him to keep quiet.
Kraus says Wachovia's investment bank was plagued with systemic problems, such as balance sheets manipulated to hide poor returns and troubled commercial real estate deals that were not fully disclosed to investors. He believed he had a duty to stand up for the rank-and-file employees who would suffer if the investment bank imploded, and the shareholders who bought stock based on the numbers reported to the public.
But he also says he had a sense that the investment banking system was gamed, and that people who tried to question the machine would be destroyed by it. And Kraus, with a young daughter and a second baby on the way, was terrified of losing his job.
If you were Robert Kraus, what would you do?
Kraus, a New York native who graduated from Cornell and NYU, was recruited to Wachovia in 2005, when he was working as a commercial real estate consultant in New York. The executives who interviewed him told him they wanted someone who knew real estate like he did, and who would bring strict oversight to its commercial mortgage-backed securities business, he says.
Kraus says he identified problems in the investment bank almost immediately. Among his allegations: The bank was misrepresenting the value of investment products it was marketing, he says. It wasn't fully disclosing when the commercial real estate properties that it financed were souring, he says, and it would issue contradictory reports on a property's expected losses depending on who the report was for. It would transfer troubled assets to other institutions or between its own trading desks, sometimes for just days or hours, when it needed to get them off the balance sheet, he says.
Wachovia spokeswoman Elise Wilkinson said Kraus' allegations of improper business conduct are "completely without merit" and "simply unfounded."
Kraus took his concerns to his boss, Stephen Nelson, and Nelson's boss, Ira Malter, on numerous occasions. He says that Nelson and Malter consistently told him to drop the matter. He also says they and other executives left him out of projects and meetings, threatened to block his access to loan information and insinuated that his job would be in danger if he kept asking questions.
Nelson and Malter deny any wrongdoing.
"The specifics of Robert Kraus' claim of 'systemic problems' were thoroughly investigated and found to be baseless," Nelson said in a statement to the Observer. "It's unfortunate that my reputation, along with others, is being attacked by these false claims."
Malter said in a statement: "I hold myself and my team members to the highest ethical standards and levels of performance. Robert Kraus' allegations are false and I look forward to them being proven untrue."
Kraus says the problematic loans he identified include Bemis Square, One Oliver Plaza, Doubletree Portfolio, 605 W. 42nd St., Macon & Burlington, Alliance Portfolio, 600 Community Drive, the Dobie Center, CNL and Cobalt. Wilkinson, the bank spokeswoman, declined to comment on the specific loans, but emphasized that Wachovia had investigated all of Kraus' claims and found them to be false.
At work, Kraus grew stressed and frustrated but wasn't sure what to do. One Friday evening, he says, he was working late and found a future-dated performance review on his desk. He says it was visceral and hateful, and he understood the message.
The Observer asked Wachovia for copies of Kraus' performance reviews, which he consented to. The bank refused, saying that personnel files contain private information. Three people who have worked with Kraus outside of Wachovia said they couldn't speak to his experience at the bank, but that they believed him to be trustworthy. Several Wachovia investment bankers contacted by the Observer didn't return calls.
The next Monday, when Kraus was driving to work, he decided to take his concerns to Steve Cummings, the head of the investment bank. He went to Cummings' office that morning, and the two talked for an hour and a half.
Kraus told Cummings he was scared that he would lose his job for raising such questions. According to Kraus, Cummings told him that he had done the right thing, shook his hand and said that, "as a gentleman," he would guarantee that Kraus' job and family weren't in danger if there was any truth to his claims.
"I walked away at that moment feeling a huge burden off my shoulders," Kraus says. "...And that was just when things were going to get crazy."
In the coming weeks, Kraus says, he grew frustrated because he felt that his concerns were still being ignored. He went to Cummings' office a second time, and was escorted from the building by two security guards. He says that no one ever explained why.
Cummings, who left Wachovia when it was bought by Wells Fargo, denied wrongdoing.
"As Robert stated, my office door was open to anyone who had a concern about our business activities with the assurance that such conversations would be taken seriously, investigated and dealt with appropriately," Cummings said. "That was the culture that our senior team endeavored to create within our business unit. I met with him at length to listen to his concerns and then asked the appropriate members of our legal, compliance and finance staff to independently look into the issues that he raised."
Kraus says he was told that he was not fired and would still be paid but was not allowed back into the building. In July 2006, he and his attorney met with members of Wachovia's legal, compliance and internal audit departments.
A couple weeks later, the bank contacted Kraus' attorney and said it had conducted an internal investigation and dismissed all of the issues Kraus had raised.
Kraus has not seen the bank's report on its investigation. According to him, the bank told him that if he asked to see it, he would be fired immediately with no severance, and any prospective employer would be told he had been terminated with cause. Wilkinson, the Wachovia spokeswoman, denies the bank said this. She said she couldn't release the report to Kraus or the Observer because it contained proprietary information.
The bank offered Kraus a severance package worth about three months' salary. The agreement he signed included a waiver releasing the bank from any lawsuits he might file, the bank says.
Kraus says he took the severance, about $50,000, because he didn't know what else to do. His wife, Julie, was pregnant with their second child. He had just closed on an $800,000 house in Union County, and, he says, sunk his life savings into paying down the mortgage loan.
Cummings, the former head of the investment bank, said he was sorry that Kraus "has chosen to raise these issues once again," after Wachovia already investigated his claims. Cummings said he was "confident that, if and when the full story is told, his claims will be shown to be inaccurate and his case will be dismissed."
The investment bank spirals
In Wachovia's annual report for 2005, the year Kraus came to the bank, then-chief executive Ken Thompson told shareholders he had "ambitious growth plans" for the investment bank and praised its record earnings.
The unit carried weight within Wachovia. In 2006, the investment bank housed just 5percent of the employees but churned out 22 percent of the revenue.
Things started spiraling in 2007. Wachovia's investment bank, like many of its peers, started losing money and laying off workers. The following year, Thompson was dismissed as CEO. His chief risk officer and chief financial officer also left the bank.
After ousting Thompson, Wachovia hired Goldman Sachs to review its loan portfolios. Analysts including Dick Bove said the move sent a troubling message about the Wachovia investment bank and its ability to analyze bad loans.
That September, Wachovia nearly collapsed, in large part because of bad home loans but also because of problems in the investment bank. In the last 12 months before the bank announced it would be bought, it wrote down $7.2 billion in troubled loans. Of those, $4.5 billion were in the investment bank.
Cummings said the Wachovia investment bank's losses were better than many of its peers', relative to market share. "Yes, we had losses," he said, "but every other firm in the industry had losses given the financial crisis we went through."
In early October 2008, San Francisco-based Wells Fargo agreed to buy the struggling Wachovia.
Cummings left Wachovia after the bank was bought. Regulatory filings show he was eligible for $14.3 million in severance pay.
'It's not an accidental cover'
Kraus has been mostly out of work since he left Wachovia. Unable to make his monthly house payments, he sent Wells Fargo a hardship letter in July asking for a mortgage modification. In it, he detailed his allegations about the investment bank and how he left.
A month later, the bank offered to defer about 75 percent of his remaining mortgage loan until 2050, an extremely unusual and generous modification offer. His monthly payment now is about $1,000, including taxes and insurance, he says, compared to $3,400 before the modification.
Wells Fargo, asked to comment on the uncommon nature of Kraus' mortgage modification, released this statement: "Wells Fargo Home Mortgage has made more than 577,000 loan modifications for homeowners and each case is unique. We consider a range of individual criteria that is consistent with regulatory guidelines."
According to Kraus, an official in Wells Fargo's office of the president also told him the bank believed he had been wrongfully terminated and that the internal report dismissing his claims did not appear to exist. Wilkinson, the bank spokeswoman, denies that Wells Fargo said this.
Kraus says he's thankful for the mortgage workout but that Wells Fargo didn't offer what he really wanted - his name cleared. He says the bank got rid of him because he spoke up and was a threat to the big money being made in investment banking.
"There appears to be accountability but it's a cover, and it's not an accidental cover," he says. "It's done by smart people at the top and pretty smart people in the middle who aspire to be at the top."
Kraus says he believes the investment banking system is rigged, and a culprit in the nation's economic crisis. When things fall apart, the ones who suffer are the shareholders who lose their savings, the borrowers who lose their houses and the low-level workers who lose their jobs, he says.
"Show me any other event in the history of people that has been so damaging," Kraus says. "The argument that no one saw this coming is a lie."
Kraus sued Wells Fargo in October, alleging fraud and misrepresentation.
Wilkinson, the bank spokeswoman, said Kraus' claim that he was forced out for raising questions was "completely untrue."
"Wachovia policy expressly prohibited retaliation against any employee who in good faith brought forward information about possible violations, even where, as in this case, they had no merit," she said.
Wells Fargo has filed a motion to dismiss Kraus' lawsuit, arguing he has no right to sue because of the severance agreement he signed. The motion does not address the substance of his allegations against the investment bank.
Kraus says he believes his severance agreement was nullified when he was told he was wrongfully terminated.
'A really, really horrible ride'
In the past four years, Kraus has struggled to make ends meet and believes he's been blacklisted from Charlotte's investment banking community. He has maxed out his credit cards, cashed in retirement savings and worked as a night security guard at a business park. His brother pays his phone bill; other relatives help pay for lessons and other expenses for his children. He did some contract work this year for the Federal Deposit Insurance Corp., examining failed banks, but now he's considering getting a job as an airport baggage handler. His marriage, stressed by four years without his income, is in tatters.
Julie Kraus said her husband was happy when he got the Wachovia job, and saw it as a way to get the family out of New York and work for a good company. She watched his mood change after he started, when he came home frustrated.
"I think Rob was very bold and he probably went places that most people won't go," Julie Kraus says. But the fallout on their family has been debilitating, she said: "It's been a really, really horrible ride."
Robert Kraus believes that many other bankers have the same concerns that he did but stay quiet because they see what happens to the few who try to challenge the system.
"When you ask people about ethics, which way do you expect people to go?" he says. "To choose something that is self-destructive, which will end your career, which will end your future, which will destroy your family with no upside? Or, do you work within a system that has proven itself to be very, very, very successful for those people in the system?"
What bothers him the most, he says, isn't what happened to him. It's that there has been no real reckoning, no significant accountability for the people most responsible for the financial meltdown.
"The same people, the same rules," Kraus says. "Nothing's changed."
Kraus says he'd do the same thing again - press his bosses to address questionable practices in the investment bank. He's glad that he won't have to one day tell his kids that he ignored his convictions about right and wrong.
But he does wish he had never taken the job at Wachovia, or gone into banking in the first place.
He wishes, he says, that he had been a schoolteacher, or maybe a pediatrician.
Christina Rexrode: 704-358-5170
