Monday, July 27, 2009
"Regulators should pay whistleblowers for information about frauds, according to an official investigating the US [SEC's] failure to uncover Bernard Madoff's $65bn scam. David Kotz, SEC inspector-general, said 'bounty' schemes, would provide 'necessary incentives' for individuals to bring complaints about possible illegal activity. There was evidence that similar programmes by the [DOJ] and the [IRS] had been effective, he said. ... The current system applied only to insider trading cases and criteria for judging awards were 'vague'. ... Since missing the Madoff fraud, the SEC has been hit by an avalanche of criticism. Credible allegations about the scam were brought to its attention by Harry Markopolos, a whistleblower, for at least a decade. ... His recommendations reinforce proposals by the US Treasury and the SEC for making better use of whistleblowers and the thousands of complaints and tips that flood into regulators' offices every year", Joanna Chung at the FT, 2 July 2009.
"Sir, While the inspector general of the [SEC] is right to propose a new bounty programme to encourage whistleblowers (July 2), such a programme would be pointless without a requirement that the SEC actually investigate reports of investor fraud and pursue the ones deemed worthwhile. The SEC already receives plenty of whistleblower and investor complaints--more than 700,000 annually. The problem is that important information about significant cases of investor fraud--such as Bernard Madofff's scheme--get buried in with crackpot complaints. There's no question the [DOJ's] bounty programme created under the False Claims Act [FCA] to stop fraud against the government has been successful, with recoveries from whistleblower cases totalling more than $14bn", my emphasis Erika Kelton (EK), letter to the FT, 6 July 2009.
Is Kotz serious? The DOJ's whistleblower program is a sick joke. The SEC's will be no better.
EK is an attorney at Phillips & Cohen. EK, I disagree. Requiring the SEC to do anything will give miscreants an incentive to drown the SEC in bogus complaints. The SEC should adopt my "Blankfein Test". I doubt Markopolos' information was buried. The SEC works this way in my experience: whoever read the information noted Markopolos was a nobody; Madoff a somebody. Stop. That the DOJ recovered $14 billion from whistleblower cases proves nothing. The DOJ intervenes in about 14% of FCA cases. We don't know how many billions, or tens of billions, the DOJ "left on the table". EK, you commited a Type One Error. Back to statistics class.