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Madoff Scam Renews Interest in Whistleblower Bounties
David Kotz, the US Securities and Exchange Commission’s inspector-general, has called for regulators to pay whistleblowers for information on frauds (The Financial Times, “Whistleblower bounties urged if SEC is to stop another Madoff”, July 2, 2009). Bounty payments, he claims, could motivate individuals to reveal illegal activity. But keep your forensic hat on. It’s all been tried before. Nothing’s going to replace solid skills in computer forensics and forensic accounting any time soon. You either know how to uncover financial crimes or you don’t.
Ask Harry Markopolous, the former US money manager turned fraud investigator who tried for nine years to alert the SEC to Bernie Madoff’s $65 billion Ponzi scheme. Markopolous told a Congressional hearing into the case that, in effect, he “gift-wrapped” the case and delivered it to the regulatory authority on a silver platter. He claimed it was a combination of incompetence and an unwillingness to act that led the SEC to ignore his evidence and advice. As he pointed out, the SEC’s hierarchy was captive to the industry it was meant to be overseeing.
Bounties had nothing to do with Markopolous’s motivation, but even if they had, it’s hard to imagine that large rewards would have encouraged him do any better than he did. Most whistleblowers are affronted not just by the moral failure they are witnessing, but also by the fact that in doing their job they trip over – or are stymied by – a professional breakdown within the organization as a whole. It was a similar case with Britain’s bank scandals, which saw four former heads of the country’s two largest banking casualties apologising unreservedly to the House of Commons Treasury Committee for their “professional failure”.
The whistleblower in the UK system was Paul Moore, who was head of regulatory risk for HSOB. That meant he was the one whose duty it was to warn the bank of imminent danger. In a nutshell, Moore could see that the bank was expanding too quickly, but no one wanted to listen. Instead, he was forced out of his job by the bank’s then chief executive, Sir James Crosby, who later became deputy chairman of Britain’s Financial Services Authority. You have to relish the irony in that.
Whistleblowers – whether paid or not – customarily lose not only their job but just about everything else. That’s why most people shy away from such acts and why negative cultures thrive. What was unique about Moore’s case was that he survived to see his nemesis toppled. True, it didn’t save his old bank, and it only came about because he had the chance to give evidence to a panel of politicians obliged for reasons of face and honour to listen to what he had to say. Then the cat was out of the bag.
As the SEC’s David Kotz points out, there’s been a bounty scheme in existence in the Commission for more than two decades, though few payments have been made. The system was restricted to instances of insider trading.
The reality is that no matter how strict the oversight of investment advisers, banks and hedge funds becomes – not just in the US and UK – the only thing you can ultimately rely on is an independent group of professional investigators who have the forensic skills and experience to uncover what’s really going on.
With 150 years in prison to contemplate his $65 billion achievement (while penning his Guinness Book of Records entry), Bernie Madoff would no doubt agree.
G H Diel says:
The Whistle Blower Equivalence
The other side of the equation to free market enterprise and self-regulation is not solely regulation by agency or governmental bureau, but robust, legally enforceable, generous ‘whistle blower’ rewards and protections. This is the self-serving equivalency of the personal gain incentive versus corporate, share holder, greed incentives. Both sides of the equation then appear equal.
Corporate entity, step out of line? Someone in YOUR organization, who knows the rules of the game, will be finely rewarded to show the error of your ways. Sleazy? Sure. But, apparently, that is how the game is played. You, corporate America, lobbied and made the rules. Now, live by them.
Sorry if this solution seems like a simplistic solution and rather morally sleazy…but hey, right or left, corporate America, this is the standard you live by and promote as solutions across the board to almost every issue, but only, if the solution is to YOUR benefit.
Live by the gun, die by the gun. You know, it’s the ‘eye for an eye’ thingy.
July 2nd, 2009 at 10:55 pm