(Bloomberg News) Sherry Hunt never expected to be a senior manager at a Wall Street bank. She was a country girl, raised in rural Michigan by a dad who taught her to fish and a mom who showed her how to find wild mushrooms. She listened to Marty Robbins and Buck Owens on the radio and came to believe that God has a bigger plan, that everything happens for a reason.
She got married at 16 and didn't go to college. After she had her first child at 17, she needed a job. A friend helped her find one in 1975, processing home loans at a small bank in Alaska. Over the next 30 years, Hunt moved up the ladder to mortgage-banking positions in Indiana, Minnesota and Missouri, Bloomberg Markets magazine reports in its July issue.
On her days off, when she wasn't fishing with her husband, Jonathan, she rode her horse, Cody, in Wild West shows. She sometimes dressed up as the legendary cowgirl Annie Oakley, firing blanks from a vintage rifle to entertain an audience. She liked the mortgage business, liked that she was helping people buy houses.
In November 2004, Hunt, now 55, joined Citigroup Inc. as a vice president in the mortgage unit. It looked like a great career move. The housing market was booming, and the New York- based bank, the sixth-largest lender in the U.S. at the time, was responsible for 3.5 percent of all home loans. Hunt supervised 65 mortgage underwriters at CitiMortgage Inc.'s sprawling headquarters in O'Fallon, Missouri, 45 minutes west of St. Louis.
Hunt's team was responsible for protecting Citigroup from fraud and bad investments. She and her colleagues inspected loans Citi wanted to buy from outside brokers and lenders to see whether they met the bank's standards. The mortgages had to have properly signed paperwork, verifiable borrower income and realistic appraisals.
Citi would vouch for the quality of these loans when it sold them to investors or approved them for government mortgage insurance.
Investor demand was so strong for mortgages packaged into securities that Citigroup couldn't process them fast enough. The Citi stamp of approval told investors that the bank would stand behind the mortgages if borrowers quit paying.
At the mortgage-processing factory in O'Fallon, Hunt was working on an assembly line that helped inflate a housing bubble whose implosion would shake the world. The O'Fallon mortgage machinery was moving too fast to check every loan, Hunt says.
By 2006, the bank was buying mortgages from outside lenders with doctored tax forms, phony appraisals and missing signatures, she says. It was Hunt's job to identify these defects, and she did, in regular reports to her bosses.
Executives buried her findings, Hunt says, before, during and after the financial crisis, and even into 2012.
In March 2011, more than two years after Citigroup took $45 billion in bailouts from the U.S. government and billions more from the Federal Reserve -- more in total than any other U.S. bank -- Jeffery Polkinghorne, an O'Fallon executive in charge of loan quality, asked Hunt and a colleague to stay in a conference room after a meeting.
The encounter with Polkinghorne was brief and tense, Hunt says. The number of loans classified as defective would have to fall, he told them, or it would be "your asses on the line."
Hunt says it was clear what Polkinghorne was asking -- and she wanted no part of it.
'I Wouldn't Play Along'
"All a dishonest person had to do was change the reports to make things look better than they were," Hunt says. "I wouldn't play along."
Instead, she took her employer to court -- and won. In August 2011, five months after the meeting with Polkinghorne, Hunt sued Citigroup in Manhattan federal court, accusing its home-loan division of systematically violating U.S. mortgage regulations.
The U.S. Justice Department decided to join her suit in January. Citigroup didn't dispute any of Hunt's facts; it didn't mount a defense in public or in court. On Feb. 15, 2012, the bank agreed to pay $158.3 million to the U.S. government to settle the case.
Citigroup admitted approving loans for government insurance that didn't qualify under Federal Housing Administration rules. Prosecutors kept open the possibility of bringing criminal charges, without specifying targets.
Citigroup behaving badly as late as 2012 shows how a big bank hasn't yet absorbed the lessons of the credit crisis despite billions of dollars in bailouts, says Neil Barofsky, former special inspector general of the Troubled Asset Relief Program.
"This case demonstrates that the notion that the bailed-out banks have somehow found God and have reformed their ways in the aftermath of the financial crisis is pure myth," he says.
As a reward for blowing the whistle on her employer, Hunt, the country girl turned banker, got $31 million out of the settlement paid by Citigroup.
Hunt still remembers her first impressions of CitiMortgage's O'Fallon headquarters, a complex of three concrete-and-glass buildings surrounded by manicured lawns and vast parking lots. Inside are endless rows of cubicles where 3,800 employees trade e-mails and conduct conference calls. Hunt says at first she felt like a mouse in a maze.
"You only see people's faces when someone brings in doughnuts and the smell gets them peeking over the tops of their cubicles," she says.
Over time, she came to appreciate the camaraderie. Every month, workers conducted the so-called Jean Charities. Employees contributed $20 for the privilege of wearing jeans every day, with the money going to local nonprofit organizations. With so many workers, it added up to $25,000 a month.
"Citi is full of wonderful people, conscientious people," Hunt says.
Those people worked on different teams to process mortgages, all of them focused on keeping home loans moving through the system. One team bought loans from brokers and other lenders. Another team, called underwriters, made sure loan paperwork was complete and the mortgages met the bank's and the government's guidelines.
Yet another group did spot-checks on loans already purchased. It was such a high-volume business that one group's assignment was simply to keep loans moving on the assembly line.
Still another unit sold loans to Fannie Mae, Freddie Mac and Ginnie Mae, the government-controlled companies that bundled them into securities for sale to investors. Those were the types of securities that blew up in 2007, igniting a global financial crisis.
Workers had a powerful incentive to push mortgages through the process even if flaws were found: compensation. The pay of CitiMortgage employees all the way up to the division's chief executive officer depended on a high percentage of approved loans, the government's complaint says.
By 2006, Hunt's team was processing $50 billion in loans that Citi-Mortgage bought from hundreds of mortgage companies. Because her unit couldn't possibly review them all, they checked a sample.
When a mortgage wasn't up to federal standards -- which could be any error ranging from an unsigned document to a false income statement or a hyped-up appraisal -- her team labeled the loan as defective.
In late 2007, Hunt's group estimated that about 60 percent of the mortgages Citigroup was buying and selling were missing some form of documentation. Hunt says she took her concerns to her boss, Richard Bowen III.
Bowen, 64, is a religious man, a former Air Force Reserve Officer Training Corps cadet at Texas Tech University in Lubbock with an attention to detail that befits his background as a certified public accountant. When he saw the magnitude of the mortgage defects, Bowen says he prayed for guidance.
In a Nov. 3, 2007, e-mail, he alerted Citigroup executives, including Robert Rubin, then chairman of Citigroup's executive committee and a former Treasury secretary; Chief Financial Officer Gary Crittenden; the bank's senior risk officer; and its chief auditor.
Bowen put the words "URGENT -- READ IMMEDIATELY -- FINANCIAL ISSUES" in the subject line.
"The reason for this urgent e-mail concerns breakdowns of internal controls and resulting significant but possibly unrecognized financial losses existing within our organization," Bowen wrote. "We continue to be significantly out of compliance."
There were no noticeable changes in the mortgage machinery as a result of Bowen's warning, Hunt says.
Just a week after Bowen sent his e-mail, Sherry and Jonathan were driving their Toyota Camry about 55 miles (89 kilometers) per hour on four-lane Providence Road in Columbia, Missouri, when a driver in a Honda Civic hit them head-on. Sherry broke a foot and her sternum. Jonathan broke an arm and his sternum.
Doctors used four bones harvested from a cadaver and titanium screws to stabilize his neck.
"You come out of an experience like that with a commitment to making the most of the time you have and making the world a better place," Sherry says.
Three months after the accident, attorneys from Paul, Weiss, Rifkind, Wharton & Garrison LLP, a New York law firm representing Citigroup, interviewed Hunt. She had no idea at the time that it was related to Bowen's complaint, she says.
The lawyers' questions made her search her memory for details of loans and conversations with colleagues, she says. She decided to take notes from that time forward on a spreadsheet she kept on her home computer.
Bowen's e-mail is now part of the archive of the Financial Crisis Inquiry Commission, a panel created by Congress in 2009. Citigroup's response to the commission, FCIC records show, came from Brad Karp, chairman of Paul Weiss.
He said Citigroup had reviewed Bowen's issues, fired a supervisor and changed its underwriting system, without providing specifics.
One change resulting from Bowen's e-mail affected Bowen himself. He went from managing 220 people to overseeing two, according to the FCIC report. By January 2009, Bowen no longer worked for Citigroup, he told the FCIC.
"More people haven't come forward because they saw what happened to me," says Bowen, who's now an accounting and finance professor at the University of Texas at Dallas. He says Hunt is the exception. "Sherry is an absolutely fantastic lady who knows what she's doing. She has a conscience. I have the highest regard for her."
Bowen declined to comment on the circumstances of his departure from Citigroup. The bank denies any retaliation against him.
After Bowen left, Hunt had only one person she could confide in: her husband. She and Jonathan, 51, met in 1998 at a Minnesota casino. He trained search-and-rescue dogs for a living. They share a love of animals, especially horses. She says she was attracted to his sense of humor. He would quote country songs to make her laugh. They were married in 1999.
When Sherry worked for U.S. Bancorp in Missouri, she and Jonathan bred and raised horses. As members of the Old West Society of Minnesota, the couple performed in re-enactments of 19th-century events, such as the shootout at the O.K. Corral.
Sometimes she dressed up as a society woman, wearing a bustle. When she played Annie Oakley, she wore a buckskin outfit with a bullwhip coiled around her shoulder. She galloped into the arena on her horse -- but never too fast, her husband says.
'Don't Get Along'
"Sherry and speed on a horse don't get along," he says with a grin.
Every workday for eight years before winning her lawsuit, Sherry Hunt left their house on its 10-acre (4-hectare) lot and drove along a dirt road where cows and horses grazed in pastures. She turned onto a two-lane county highway that passed over a river bridge barely wide enough for two cars. About 45 minutes later, she'd arrive at the office.
After Bowen went public with her findings, Hunt says she was transferred to the quality-control group on April 1, 2008. She went from supervising 65 people to managing none.
"What I saw there was 10 times worse," she says. "Every time I turned over a rock, I found a snake."
One place where she uncovered flaws was in the fraud prevention and investigation group. That's where Hunt's team shipped questionable loans, with issues such as obviously forged signatures, whited-out income lines on tax forms or misspelled bank names on borrower bank statements.
The group was supposed to investigate the mortgages for fraud and notify the FHA within a month when it found it. In November 2009, Hunt says, she came across a list of about 1,000 loans that the quality-control team had identified for possible fraud.
The fraud prevention and investigation group had left some of the mortgages in the queue for more than two years without checking them, Hunt says. Not one notification went to the FHA before July 2011, when the U.S. Attorney's Office in Manhattan issued a subpoena to the O'Fallon office, the government's complaint says.
In 2009, different teams began feuding, internal e-mails made public in the Justice Department case show. That's when CitiMortgage created yet another team whose mission was to challenge the findings of Hunt's quality-control group and persuade her and her colleagues to change their decisions on the suitability of loans.
In November 2010, Ross Leckie, a senior director of CitiMortgage's retail bank mortgage unit, sent an e-mail ordering his staff to meet its goal of a maximum 5 percent defect rate on home loans. Quality-control employees had identified 10 loans with severe flaws from a pool of 138, Leckie said, for a rate of 7.25 percent.
"Drive this rate down by brute force," he wrote. "We need three loans to be removed to get to 5.07 percent."
CitiMortgage defect rates did plummet, according to notes Hunt kept. It wasn't because there were fewer bad mortgages, she says.
"It's because they were beating us up over the quality- control reports," she says.
In late 2010, Hunt began studying the new federal whistle- blower rules that Congress had just enacted in July as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act.
'You've Had Enough'
The stress had been mounting for Sherry and Jon. Conflicts at the office, the physical pain that lingered from the car wreck and growing anxiety over Citi's bad mortgages were taking a toll. The Hunts say the laughter they often shared had faded.
Sherry says she drew inspiration from a country song by Rascal Flatts called "Stand."
"Decide you've had enough," it goes. "You get mad. You get strong. Wipe your hands, shake it off, then you stand."
Hunt says she pinned the lyrics to her cubicle wall.
"It made me stronger," she says.
Hunt needed the strength on March 22, 2011. That's the day Polkinghorne, who was three levels above her in the chain of command, called her and a colleague aside and told them their asses were on the line if the defect rates didn't fall.
Polkinghorne couldn't be reached for comment, and Citigroup declined to make him available for an interview.
That night, she and Jon agreed the time had come for her to take a stand. So Hunt decided to follow the first step prescribed by Dodd-Frank: formally complaining to the company. The prospect kept her awake at night.
'My Life Savings'
"I was ready to give up my career and my life savings to get this done," she says.
On March 29, 2011, Hunt walked into CitiMortgage's human resources department in O'Fallon and told them everything: how the bank had been routinely buying and selling bad mortgages for years, how the fraud unit wasn't doing its job and how the quality-control people were being pressured to change their ratings.
Whistle-blower rules mandate that Hunt had to notify the Securities and Exchange Commission, the government regulator that oversees Citigroup's mortgage business, within 90 days of reporting her concerns internally.
"I am afraid of what I know," she wrote the SEC on May 24, 2011. "I do not want to know what I know. I have nothing to gain from coming forward and have no hidden agenda."
Hunt hired a lawyer, Finley Gibbs of Rotts & Gibbs LLC in Columbia, Missouri. He had represented the Hunts after their car accident. Starting on June 27, 2011, Hunt and Gibbs shared details from her spreadsheet in four conference calls with Justice Department investigators.
Had to Do It
The officials made no promises about whether they would take action against Citigroup.
For two months, Sherry and Jon sweated over what could happen if she sued Citigroup without help from the government. They concluded she had to do it, Hunt says. On Aug. 5, 2011, Hunt filed a false-claims complaint in U.S. District Court in Manhattan.
"I still had to go into work," Hunt says. Because the complaint was sealed, no one in her office knew about it. She pinned a postcard of Leonardo da Vinci's Mona Lisa next to the Rascal Flatts lyrics. Like Mona Lisa, Sherry Hunt had a secret.
She knew her chances of winning were slim because she couldn't match the resources of a big bank. Just 20 percent of whistle-blowers get help from government prosecutors, and without that, success is rare, according to the National Whistleblowers Center in Washington.
After filing the lawsuit, Hunt says, she felt like a ghost navigating the cubicles of CitiMortgage. Nobody knew, she says, yet she felt vulnerable, as if she could lose her job at any moment.
Sherry and Jon were elated on Jan. 3, 2012, when she got a call from her lawyer: U.S. Attorney Preet Bharara in Manhattan had decided to join her on behalf of the Justice Department in the case.
There was no testimony and no trial. Citigroup admitted wrongdoing on Feb. 15 and paid the $158.3 million to settle. In a press release the same day, Citi said it was pleased to resolve the matter.
"We take our quality-assurance processes seriously and have proactively undertaken process improvements to ensure that they are as robust as possible," the bank wrote. The statement didn't mention Hunt.
Bank of America
Citigroup isn't the only bank that's been held accountable for processing bad mortgages. In February, Charlotte, North Carolina-based Bank of America Corp. settled a false-claims case with the government for $1 billion, without admitting wrongdoing.
In May, Frankfurt-based Deutsche Bank AG agreed to pay $202.3 million for endorsing unqualified mortgages for FHA insurance, and admitted wrongdoing.
What continues to set Citigroup apart is that the bank approved flawed loans well past the 2008 financial crisis. A battleground over loan quality persisted at CitiMortgage even as the settlement was signed in February, the complaint says.
Just months after Citigroup settled with the Justice Department, another big financial institution, JPMorgan Chase & Co., announced a multibillion-dollar trading loss -- helping to rekindle the debate over regulation of so-called too-big-to-fail banks.
President Barack Obama invoked the JPMorgan loss as more evidence of the need for tighter regulation of Wall Street. Mitt Romney, the presumptive Republican presidential nominee, has meanwhile continued to call for the repeal of Dodd-Frank, the law Sherry Hunt followed when she blew the whistle on her employer.
If Citigroup has learned anything from Sherry Hunt, it's not clear from the comments of CitiMortgage CEO Sanjiv Das, who's based in New York. He says his division does terrific work.
"We are focused on making sure we manufacture loans the right way," he says. "This is a complex industry. It's a complex process. It takes time. We're heading down a trajectory that I'm incredibly proud of. Is there something that is systemically wrong? Absolutely not. Absolutely not."
Citigroup CEO Vikram S. Pandit declined to comment for this story. In a video recorded in 2010 and posted by Citi on the Internet, Pandit pledged that his bank was turning over a new leaf.
'Making Sure We're Honest'
"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 says.
Citigroup repaid with interest the $45 billion in government bailout loans it took in 2008, as well as all of the money it borrowed from the Fed. The bank reported profits during each of the nine quarters ended in March 2012. Yet shareholders remain restive. Citi's stock fell 92 percent from Dec. 11, 2007, when Pandit became CEO, to May 30.
Three weeks after Citigroup settled the Hunt case, the bank's board of directors awarded Pandit $14.9 million in compensation for 2011. The pay was tied to Pandit's push for ethical conduct, the bank said in a March 8 regulatory filing.
The filing specifically cited Pandit's success in improving Citigroup's U.S. mortgage unit. On April 16, in an unprecedented move, Citi shareholders voted to reject Pandit's compensation by about 55 to 45 percent. The vote was nonbinding, and the bank's board of directors has final say on pay.
'There's a Basis'
"We gave this guy a pretty substantial incentive award, and there's a basis for it," says Richard Parsons, who was Citigroup's chairman and a member of its compensation committee until he retired in April. "Our view was, under Vikram's leadership, we did a pretty good job of moving Citigroup forward in the year 2011, but there was still progress to be made."
The amount Citigroup paid in the settlement amounts to 1.4 percent of its 2011 net income of $11.2 billion.
"It's about more than dollars; it's about the reputational risk of the enterprise and how we do business," Parsons says. "Getting our arms around the problem and getting it fixed has been a top priority."
Hunt says she hopes her victory inspires others to take a stand.
"I want people to know they can come forward," she says. "If I can do it, they can do it. We need to change what's wrong in our own backyards, and that's how we end up changing the big things."
After they received their share of the settlement, the Hunts decided to donate their house in Missouri to the Troy First Baptist Church and move to a warmer climate. Sitting at the kitchen counter, Jon calls Sherry over to watch a video on his tablet.
It's the Zac Brown Band doing a song called "Knee Deep," which is about the dream of a permanent vacation.
"Listen," Jon tells his wife, pointing to the video. Then he sings along: "Only worry in the world is the tide gonna reach my chair."
Sherry Hunt tips her head back and hoots.