BRIAN KENNY: The Oxford Dictionary defines a conflict of interest as “a situation in which a person is in a position to derive personal benefit from actions or decisions made in their official capacity.” You may have seen such behavior in your own place of work, a colleague accepting an expensive gift from a supplier whose contract is up for renewal, or a person buying software on the company’s dime, which they then use in their own side business. Some behaviors are a little less clear-cut – like the colleague who’s getting paid to work after hours for a client of the firm. And what if the conflict extends beyond the individual to the firm itself? Or perhaps even the entire industry? If you suspect it, do you tell someone? According to the SEC, whistleblower complaints reached record highs in 2022, so it’s clear someone’s talking, but the stakes are high. Today on Cold Call, we’ve invited Professor Jonas Heese to discuss the case entitled, Conflict of Interest at Uptown Bank. I’m your host, Brian Kenny, and you’re listening to Cold Call on the HBR podcast network. Jonas Heese studies corporate misconduct with a special focus on the role of regulators, whistleblowers, the media and compliance systems to prevent misconduct. Jonas, thanks for joining me today.
JONAS HEESE: Yeah. Thank you for having me, Brian.
BRIAN KENNY: So, let’s just dive right in. I’m going to ask you to start by telling us what the central issue is in the case, and what’s your cold call when you get into the classroom to start the discussion?
JONAS HEESE: As you mentioned, the case is titled Uptown Bank. Just to be clear, right from the onset, we had to disguise the name of the bank. We had to disguise the name of these individuals. And the central issue here is, as you laid it out, is these two relatively junior employees, they get into this bank, they get assigned a specific review. They have to look at these internal … “What is going on? What are we doing here in our private bank business?” And the core issue here is, and the core concern is that the private bank has maybe disproportionately invested funds internally and didn’t act in the best interest of their clients.
BRIAN KENNY: And I’m curious, we always ask faculty about what motivates them to write a particular case. Clear, that from your research area, which I just described for our listeners, that this is right in your sweet spot. How did you hear about Uptown Bank, and what prompted you to write the case?
JONAS HEESE: As you mentioned, I’m really interested in whistleblowing. And, basically, at a really high level, whistleblowing seems to be much more effective in finding problems than many of these other traditional control systems. Asking someone, “Where’s the problem?” is much easier than just trying to look for it yourself. So, if you believe that is a powerful mechanism, then the next question is how do you make employees speak up about it? How can you find it out? And then if you’re really serious about that and really want to understand what’s going on, you actually have to get into the specific situation where someone observed something and then decided to eventually blow the whistle. And here this is like a really, really nice setting because you have these two employees: Akash Ratik and Neel Mehta, and they have the same set of information. One eventually goes and blows the whistle with the SEC. The other one thinks, “There is nothing here. This is a nothing burger.” So, how do these people differ in their psychology, in their decision-making and what can we learn? We, being maybe regulators; ourselves when we are in these situations, but also companies in how to deal with these employees.
BRIAN KENNY: Do you ask students at the outset of class if anybody’s ever been a whistleblower? Have you had a whistleblower in class?
JONAS HEESE: So, the interesting thing is, as soon as you use the term whistleblower, there are only a few people that would somehow associate themselves with this. If you ask more carefully, “Have you ever been in a situation that made you feel uncomfortable where you were wondering, ‘Is this the right thing to do?’” almost everyone raises their hand.
BRIAN KENNY: Right.
JONAS HEESE: And if then the next question is, “What did you do about it?” Almost no one said that they spoke up because they’re so afraid to talk about these issues.
BRIAN KENNY: I totally … I mean, it’s a scary thing. You put yourself out there and you’re making an accusation about a colleague and you’ve got to have proof of that. So, I’ve great respect for whistleblowers. There have been some very high-profile ones over the years obviously and clearly it’s a scary thing to do. So, we’re going to dig into the backgrounds of each of these two employees too. And I think there’s some very interesting insights that you might be able to glean from that, which is I’m sure why you put it in the case. Maybe for those listeners who aren’t as close to the financial services industry, we start with a few definitional terms. Can you describe the fiduciary and suitability standards? What are they and how are they different?
JONAS HEESE: The fiduciary duty here is really the most important law here in the specific setting because, remember, here’s the private bank, the private bank is acting as a fiduciary. What does that mean? They can invest money on behalf of the client without the approval of the client. And so, then the fiduciary standard, now it gets a little bit wishy-washy, high level, conceptional and that’s part of the issue here is you are supposed to act in the best interest, avoid conflict of interest, disclose all material information, and you can, by the way, violate this fiduciary standard even if there’s no monetary harm to the client.
BRIAN KENNY: Okay.
JONAS HEESE: Now, the second part is the suitability standard. That’s a much, much lower standard. It’s less of a concern here, and that applies to financial advisors that advise their client, who then make the investment decisions themselves.
BRIAN KENNY: Got it. Okay.
JONAS HEESE: So, that’s the big difference.
BRIAN KENNY: Okay. Okay, and so the difference between advisors and brokers is that brokers are buying on behalf of their clients. Advisors are just advising?
JONAS HEESE: Brokers are advising the clients what they’re supposed to do. And the big thing here is the registered financial advisors, they are acting as fiduciaries-
BRIAN KENNY: Got it.
JONAS HEESE: … out there.
BRIAN KENNY: Okay. So, all of that matters, listeners. Just so you know, we’re giving you some background here. It seems like the conflicts can arise when firms are allowed to offer both services. So why is that allowed?
JONAS HEESE: So, why it is allowed? It is allowed, but historically, what we have seen is many large financial institutions have actually stopped offering both of these services to-
BRIAN KENNY: Okay.
JONAS HEESE: … kind of avoid this problem, because the problem is natural. You have this private bank business where you’re acting as fiduciary, you can invest wherever you want to invest the money. Maybe it’s kind of tempting to invest it in your own products that you have in the other side of your bank business because you’re kind of double dipping,-
BRIAN KENNY: Yeah, you’re keeping it all in-house.
JONAS HEESE: You’re keeping it all in-house, exactly. And there’s this additional fee that you can maybe collect by investing in your own products. And so there’s no rule against it. You just have to be very, very careful as a financial institution that you clearly disclose this and make this obvious to your client that this is something that’s going on.
BRIAN KENNY: Okay. And the SEC obviously is the regulation agency that oversees all of this, what’s their role?
JONAS HEESE: So, they’re the primary enforcement agency here, so they are going to watch you. And the thing about the financial institutions is … And a lot of violations, but part of the reason also is because there’s a lot of scrutiny. The SEC is really watching you closely because a lot of money is at stake. It’s not only rich people, it’s quite often retirement funds that are invested in all of those things. So you actually want that, that someone is really taking a close look and make sure that the companies follow policies and laws.
BRIAN KENNY: And the case gives some examples of firms that have crossed the line. Can you describe a couple of those?
JONAS HEESE: I like that question. It’s almost easier to turn it around and say, “Who are the companies that didn’t cross the line?” So, that is part of the challenge here. So it comes a little bit with the territory. The financial industry is set up in a way that risk taking is rewarded but, at the same time, you have a lot of regulations in place, and it’s kind of this cat and mouse game in some instances. And almost all of the financial institutions, especially when we get to the specific issue here, which was the lack of disclosure of you acting as a fiduciary, but you’re not really telling that to your clients. There was a widespread industry practice in the early 2010s, so 2010, 2011, 2012. So, common problem.
BRIAN KENNY: Okay. So, let’s talk about our two central characters in the case and we’ll start with Ratik. Talk a little bit about his background. What’s he like?
JONAS HEESE: So, he’s a very, very interesting guy and, I guess, I enjoyed talking to him but I was also from time to time shocked. So his background is he’s a son of Indian immigrants, grew up in the US, middle class upbringing, and he wanted to make it without putting in the effort, kind of, that’s a little bit in a nutshell.
BRIAN KENNY: I’ve known some people like that.
JONAS HEESE: Exactly. And going back to his high school time, he was rotating through three different high schools. He was kind of a troublemaker. That’s the type of person we’re dealing with here.
BRIAN KENNY: But he ended up going to West Point, which is pretty good. I mean, that’s not an easy thing to do.
JONAS HEESE: He was very strategic. So here’s the interesting thing: As I said, he wanted to get somewhere, preferably an Ivy League school, but it turned out his grades were not good enough. So he thought, “Maybe I can apply to West Point and take the indirect route. Once I’m there, maybe I can then transfer from there to the Ivy League school.” And he thought, with his demographic background, “Maybe there are not too many other people who apply, so maybe I can get in.” And guess what? He got in.
BRIAN KENNY: Well, the strategy worked.
JONAS HEESE: It worked, yeah.
BRIAN KENNY: He did have a situation at West Point, though, that I think gives us a little bit of a glimpse into what’ll happen later. So if you can describe that, that would be great.
JONAS HEESE: All the cadets were living in a dorm. He transferred out of his dorm, and someone else came in and took a bottle of a nutritional supplement. So, not a big deal, you would think. Just a bottle of nutritional supplement, and Ratik suspected who that person was who took it, confronted that person. That person said, “No, I didn’t do it.” Then eventually it turned out, because Ratik went to that person’s room when that person wasn’t there, that actually that person had taken the bottle. And even though this person really apologized and explained all of the reasons why he did it, Ratik decided that he had to report it. And that’s a big deal because it’s a violation of the honor code at West Point. And he knew if he did this, this person’s time at West Point would be over and that’s a really, really big problem. Quite often, you’re the star of your community if you go to West Point and people have a lot of expectations, and then you have to leave early for something like this.
BRIAN KENNY: It’s awful.
JONAS HEESE: It’s a big deal. It’s awful.
BRIAN KENNY: And he didn’t come about this decision easily. He really sort of struggled with it, right?
JONAS HEESE: He struggled with it. And we’re getting back to, again, it’s a similar theme coming up over and over again. It’s like, “I have to do it because if I don’t do it, I somehow look weak. So I got pushed around by this person. I cannot accept that. There are also rules. The rules are clear cut. There is no discussion. So I have to do it. If I don’t do it, if I don’t report it, I would regret it myself.” That’s how he described it to me when I talked to him. And he understood the consequences, but he felt he still had to do it. He had to go forward with it. And the thing that is surprising, and that will also recur later on, is he did not consider the consequences to himself. He actually eventually had to leave West Point. He had severe death threats actually from-
BRIAN KENNY: Wow. Wow.
JONAS HEESE: … this, so it was pretty serious.
BRIAN KENNY: Okay. So, he’s a complex guy. I mean, I think that’s what we’re figuring out. What would you say motivates him in his career as he thought about what he wanted to do? What’s he motivated by?
JONAS HEESE: So, he has this … Even though his upbringing was kind of middle class, the original family background is more upper class. So he described it himself. He said, “I had this privilege. I had this idea that I’m a little bit more privileged. I should have a higher standing and, most importantly, I should have a lot of money. I should get a lot of money.” And he wanted to tick the boxes. He also wanted to get this Ivy League school experience. He wanted that. I think his parents were very keen on that. And then, at the same time, he wanted to get a lot of money.
BRIAN KENNY: Okay. Let’s go to Mehta now. Okay. So Mehta is the person that he’s partnered up with to do this project, this review. What’s his background?
JONAS HEESE: Also, Indian immigrants. So from that standpoint, they’re comparable,-
BRIAN KENNY: Culturally comparable.
JONAS HEESE: … culturally comparable. He went to an Ivy League school, also worked at the Obama administration for I think a year or so, and then worked at a top consulting company for also some time and then went into the wealth management industry. So I can clearly see how some people can clearly identify with him, with his background: very straight, concrete steps, and a very impressive background.
BRIAN KENNY: But they got along pretty well?
JONAS HEESE: They did. They actually enjoyed each other’s company. Despite that, who’s maybe the best person for me to have a really good understanding how Ratik is actually behaving, it’s Neel Mehta, and he’s really confirming this as, “Yeah, we got along.” And, by the way, Neel was one level higher, so he was kind of Ratik’s boss. But this guy sometimes disappears for half of the day and shows up late in the evening and what’s going on? Still, he respected him because he got the job done, and he was, according to Neel Mehta, very, very bright, very smart and was able to do a lot of the very complex things.
BRIAN KENNY: I want to go back to Ratik for a second because his career transition into financial services, I wouldn’t describe it as smooth. It’s not like he eased himself in and hit the ground running. He had some interesting experiences, but I think they also colored his view of the industry itself.
JONAS HEESE: Yeah. Let’s recall: He wanted to get rich, so he wanted to go to Wall Street, and he believed he needed some of these Ivy League things on his CV to get there. And so, he got into a boutique, a relatively small investment company. He was super excited at the beginning. He really enjoyed the lifestyle, the money, the deals he got. He was really impressed. But then, over time, he kind of soured on the whole experience. He didn’t really appreciate the type of things, the tasks that he had to do. Too simple. “I want to talk to the clients directly. I know how to make a big deal. I don’t need to do all of this, the legwork. I don’t want to do this.” And he started to under-appreciate or become very, very critical about the level of skills that some of his peers and/or his bosses had. He somehow believed he’s actually smarter and better in doing what they are doing. And, ultimately, he believed … Remember, this was around the time of the financial crisis. He believed no one had a clue what was going on. He actually left Wall Street and did an MBA.
BRIAN KENNY: Okay. All right. So, let’s talk about the project that they’ve been put together on now. Describe what they’re being asked to do.
JONAS HEESE: Yeah, so the situation, maybe so often there’s newspaper articles describing that problem in the industry. And so the company did what, at least what Neel Mehta felt, was a very, very responsible thing and said, “Okay, let’s put together a team that reviews what we are doing here at our institution.” And that’s exactly what the two of them did. And their task was to understand what is this private bank actually doing? In particular, to what extent are they investing in in-house financial products as compared to third-party products? And what they found was roughly 50% of the money that was invested in the private bank was then eventually invested in in-house products. And now you can have this long debate. Is that in and of itself problematic? Not so sure. Maybe it is. That was the core finding.
BRIAN KENNY: Okay.
JONAS HEESE: The other concern related to that was, “Did we appropriately disclose to our private bank clients that we would prefer our in-house products over third-party products?” Was unclear with the tendency to appreciate that maybe it wasn’t clear enough.
BRIAN KENNY: And this goes back to that fiduciary responsibility that we talked-
JONAS HEESE: Exactly, exactly.
BRIAN KENNY: … about earlier on.
JONAS HEESE: Which is kind of a weird thing. You can still do it if you tell someone that you’re going to do it.
BRIAN KENNY: Disclosure. So, how did they each react to these findings?
JONAS HEESE: Disclosure. So, Neel, again, a little bit higher up here, thought, “Okay. This makes sense. We’re trying to resolve this issue.” It’s not clear that there’s actual harm because let’s remember what is going on here. Whoever decides to put their money into the private bank, they pay a fiduciary fee and then they pay an additional fee for whatever product that private bank invests in. So that fee is there no matter what, no matter if you invest it internally or if you invest it in third-party providers.
BRIAN KENNY: Okay.
JONAS HEESE: It is there. So, is there direct financial harm? Unclear. So, that was one of the big first points of Neel Mehta, “There’s no financial harm.” It’s also not clear that those products are worse because if you’re investing in an ETF, it’s kind of the same thing, potentially. So, is there really harm? So, he was very, very reasonable and said, “Okay. Let’s just understand this. We’re trying to resolve this. We understand the problem. It’s okay.” And Ratik said, “No, these guys, they’re really onto something here.” These guys being the management of the private bank and more broadly the whole bank, because they’re de facto double dipping. That was his concern. By keeping it in house, you get the fiduciary fee and you get the fee for the internal product. And because there were 50 billion, according to his estimates, 50 billion invested internally and there’s a 1% fee on it, we’re talking about annual revenue, additional revenue, of 500 million. And a lot of that money was used to pay maybe the compensation and salary for some of these employees. So, everybody benefited from that practice, and he believed this is an absolute no-go. Independent of the potential legal consideration, he believed it was unethical and not in line with the spirit of this fiduciary standard which, at the beginning, it’s kind of vague, broad.
BRIAN KENNY: Right.
JONAS HEESE: How does it really apply in each setting? Not so clear.
BRIAN KENNY: Okay. So, we’re seeing shades of West Point come back here, right?
JONAS HEESE: We’re seeing it all over again. He runs into … The problem he’s already framed, like, “Everybody is against me here. They’re trying to make me silent and I’m not going to take it.”
BRIAN KENNY: But they do bring their findings to the general counsel of the firm, the lawyers, and how do the lawyers react?
JONAS HEESE: So, they had this meeting with, I think, it was one level below that. The general counsel is a-
BRIAN KENNY: Okay.
JONAS HEESE: … little bit important here. It was more like a junior-
BRIAN KENNY: Oh, junior lawyer.
JONAS HEESE: … lawyer. And this guy was, according to Ratik, at least, was very dismissive and was saying, “Okay. Don’t accuse us of doing anything illegal here. You should, in fact, never ever use this word. That’s not your job. We have to think through how we can keep this practice.” Neel doesn’t remember that type of conversation, and it’s a little bit … It’s unclear what was actually being said, but from Ratik’s point of view, whatever was actually said, the way he understood it, let’s put it that way, was, “This is additional evidence that they really want to suppress this whole thing. They don’t want us to change anything about it, and I’m not going to do this.”
BRIAN KENNY: So, it’s kind of fascinating that they both come at this from such different perspectives with the same information in front of them.
JONAS HEESE: Exactly. And I think this is what makes it kind of beautiful if you want to understand what is the difference here in psychology and character traits between these two individuals. And, let’s be honest, I think most of us, I guess, would be more reacting like Neel Mehta. You’re at this company, you are still a relatively junior person, “I get to drop by my boss to review this whole thing. So, they seem to be interested in resolving this. I’m finding something. I’m telling them about it.” Of course, there’s some discussion, “What can we do?” But this is not the way how Neel Mehta always says, “This is not an Enron-like situation, or where you find people sitting in a smoky room trying to collude.” And from his point of view, there was no evidence like that. So, there was no reason to be so aggressive.
BRIAN KENNY: And I’m sure in the eyes of some, they see what Ratik is doing as courageous and heroic maybe. He’s taking a stand on this and saying, “This isn’t right. We’ve got to do something about this.”
JONAS HEESE: Absolutely. You want these types of employees in your organization because they speak up, they have no filter, that’s how Neel Mehta describes, I think. They just speak up when they think there’s a problem. And at the same point, precisely because of that you might start to dismiss them. They might feel a little bit like a problem creator.
BRIAN KENNY: So, Ratik goes through sort of a mental calculation as he thinks about what his options are, in particular the SEC. Can you describe a little bit about what he’s conflicted about there?
JONAS HEESE: Yeah. So, we have to remember, we are in 2012. The SEC just started its massive whistleblowing program two years earlier. But there are no big rewards yet. It’s all in theory. In theory, you can get 30% of whatever fine there is, but there’s nothing big yet. So, he’s thinking through, “What can I do? Should I report this through the proper channels internally, compliance department, maybe the general counsel, maybe the board of directors? Or can, and do, I actually have to go to the regulator?” meaning the SEC?” So, the way how he sees this is, “I kind of already reported it internally because we presented our findings. I talked to this junior lawyer, and I already got their reaction. I don’t think they want to do anything about it, so I have to take the next step.” The problem is the next step can have huge implications for him. Several problems: First of all, he doesn’t fully understand the legal considerations here and the legal requirements. Is it actually concrete legal violation? How can I prove this? Even if I can, will I ever get compensated for that?”
BRIAN KENNY: And that factors large into his thinking, right? The compensation piece?
JONAS HEESE: It played an important role that there is the option and the opportunity, even though it was remote, to be fair, it was maybe highly unlikely at that point in time, but there was this opportunity that he could get rewarded.
BRIAN KENNY: Yeah, it’s understandable. He knows he’s probably going to get fired and it’s going to be hard to get a job back in the industry. So, you got to think about that.
JONAS HEESE: I think that’s absolutely fair. And I think this is … Before you jump to conclusions, say, “Okay. Someone who is financially motivated to maybe report wrongdoing, could actually turn it around. Everyone else is financially motivated to keep the wrongdoing going.” And so it’s okay to have economic considerations before you speak up because you put your career on the line, and this is one of the largest banks. He talked to some lawyers. He couldn’t even find a law firm because they were all working for that bank. It was super difficult.
BRIAN KENNY: Sure.
JONAS HEESE: He knew he would not find a job in that industry anymore.
BRIAN KENNY: But at least he’s thinking about the consequences this time versus when he is at West Point and he just took action. In your research of this whistle blowing phenomenon, is it most often that the whistleblower is kind of like a lone person howling in the wind here? Do they ever have a base of support or are there groups that blow whistles?
JONAS HEESE: So, if you take a step back, so the first thing that I actually see … I’ve analyzed more than 2000 lawsuits filed by whistleblowers, and what you can see is several things: In the vast majority of cases, the issue has first been reported somehow internally. So that reminds me a little bit here of Ratik talking to the junior lawyer saying, “There’s a problem. What can we do about it?” In several of these instances that I’ve looked at, there’s several people speaking up either as a group or in different orders. So this case is based on a true occurrence, there were some other people that were also speaking up. That being said, they were not working together.
BRIAN KENNY: Okay.
JONAS HEESE: So, they independently came to the conclusion to speak up.
BRIAN KENNY: And some may have not wanted to go to the extreme measure of reporting this-
JONAS HEESE: Correct.
BRIAN KENNY: … externally and continue to work through internal channels.
JONAS HEESE: Correct.
BRIAN KENNY: So, spoiler alert: What happens?
JONAS HEESE: It is actually, it’s fascinating. So, he decided to contact the SEC, file the report, didn’t hear back for quite some time. Then the SEC started its investigation. He could give them a lot of information as a learning here because he did the internal review-
BRIAN KENNY: Sure.
JONAS HEESE: … so he had a lot of-
BRIAN KENNY: He had the goods.
JONAS HEESE: He had the goods, and he brought the goods. And then the SEC decided that the practice was okay, but the lack of disclosure was a violation of the law, imposed a multimillion dollar penalty on the bank. And because you get 30% of that multimillion dollar penalty, he got a larger than $50 million award from the SEC.
BRIAN KENNY: Okay. Wow.
JONAS HEESE: I just discussed this case in the class. He came to class and once he drops that bomb it’s like, “Whoa. Okay.”
BRIAN KENNY: So, he’s laughing all the way to the bank as the saying goes.
JONAS HEESE: Exactly. And he achieved his lifelong dream to become rich.
BRIAN KENNY: But he did some good in the process. I mean, that’s another takeaway here, right?
JONAS HEESE: So, this is now where … Who’s the hero and who’s the villain here? It’s actually a little bit more complicated because you could say, on the one hand, maybe we actually want individuals like his colleague, Neel, who tried to resolve the issue internally. Was it really necessary? Didn’t the bank already understand that they need to change something? “Did we need to go through this process to go externally and oppose this huge fine?” Not clear that that was necessary. Now, the flip side here is because that happened, now everyone else in this industry is quickly looking at their own policies to make sure that the disclosures are all correct. So, this is a little bit where the trade-off is. So, yes, several people would say, “He really changed industry practice.” Others would say, “There are different ways how you can resolve this.”
BRIAN KENNY: It’s a fabulous case. And this has been a really fun conversation. Jonas, let me just ask you one more question, which is, if you want our listeners to remember one thing about the Uptown Bank case, what would it be?
JONAS HEESE: So, I think, for me, what is really, really important to understand for companies here is, who are these people who eventually decide to speak up? It is, typically, they are more courageous. They typically speak up despite the cost that they face. And the challenge here really for companies is, “How can I channel and collect that information and receive that information internally, and what can I do in the process to avoid that I somehow make them feel uncomfortable or make them feel unheard.
BRIAN KENNY: Really something to think about.
JONAS HEESE: It’s something to think about.
BRIAN KENNY: Jonas Heese, thanks so much.
BRIAN KENNY: If you enjoy Cold Call, you might like our other podcasts, After Hours, Climate Rising, Deep Purpose, IdeaCast, Managing the Future of Work, Skydeck, and Women at Work. Find them on Apple, Spotify, or wherever you listen. And if you could take a minute to rate and review us, we’d be grateful. If you have any suggestions or just want to say hello, we want to hear from you. Email us at [email protected]. Thanks again for joining us. I’m your host, Brian Kenny, and you’ve been listening to Cold Call, an official podcast of Harvard Business School and part of the HBR podcast network.