No One Would Listen: A True Financial Thriller by Harry Markopolos (rainbow fish read aloud .txt) 📗

in 2006 and in less than three years the staff grew to include 18 people—and as a result the IRS now receives larger and better-quality cases than ever before in its history. Consider the cost of 18 IRS employees and office equipment against the billions of dollars in additional tax revenue they are responsible for collecting for the U.S. Treasury. Whistleblowers need to be compensated for the risks they are taking; for many people, once it becomes known that they turned in a case, their careers are essentially over. They are blacklisted from the industry.

The key to the success of that program is the fact that the IRS offers bounty payments of between 15 and 30 percent to whistleblowers for cases that lead to successful recoveries for the Treasury. These payments don’t come out of the IRS budget and they don’t come from taxpayer dollars—all bounty payments are made by the defendants. This is a no-cost program that funds itself and allows the IRS to cherry-pick from cases that come in the front door. The investigators have the liberty, and the luxury, of selecting credible cases for immediate investigation.

It seems only logical that the SEC should expand and reinvigorate its almost never used whistleblower program. Section 21A(e) of the 1934 Act allows the SEC to pay a bounty of up to 30 percent to whistleblowers—but only for insider-trading cases. The SEC can fine a person or company found guilty of insider trading triple the amount of its ill-gotten gains or its losses avoided for insider trading, and can award up to 10 percent of the penalty amount to the whistleblower.

Unfortunately, unlike the IRS’s whistleblower program and the False Claims Act, the SEC’s reward payments aren’t mandatory. The SEC can simply refuse to pay these rewards and doesn’t even have to explain why it isn’t paying. If Congress would expand this program to encompass all forms of securities violations and make the reward payments mandatory, hundreds—maybe thousands—of new cases would be brought into the office. That would provide an incentive for the foxes out there in the field to bring cases against their firms with specific and credible allegations and documents—they would be able to provide the smoking e-mails! And this is the financial industry, meaning many of those cases would lead to huge settlements. If cases brought under the False Claims Act now lead to billions of dollars recovered annually, there is good reason to believe the SEC might also recover literally billions of dollars each year.

As each tip is received, it should be logged in and assigned a case number. For tips deemed credible, meaning those that come with real evidence, the whistleblower and the whistleblower’s counsel would be put in direct contact with the SEC unit best able to investigate the complaint. This certainly would prevent anyone from having the same experience I did, in which over the years I kept submitting increasingly detailed complaints but got nowhere. The SEC just wasn’t equipped to handle whistleblower complaints; there was no central processing unit, no one to delegate investigative authority, and no one to track it. Standardizing the treatment of whistleblowers to ensure that they are not ignored or mistreated should be a priority for the SEC. The agency should be required to report annually to a congressional committee all the whistleblower complaints it receives and the agency’s follow-up actions.

Let me add one additional and very important point: the issue of self-regulation and whistle-blowing. I believe that several hundred finance professionals around the world knew or suspected that Bernie Madoff was a fraud—but none of these people contacted the SEC with their suspicions and identified themselves. Nor was there any system in place to encourage these professionals to communicate with the SEC. Unfortunately, my team and I may have been the only ones.

Getting rid of the shysters, fraudsters, and banksters is in every American’s best interest. It is imperative that we do so if we intend to restore worldwide trust in the U.S. capital markets. If I’m the CEO of an honest firm and I hire a new employee who worked at a competing firm and find out from that person that my competitor is dishonest, it’s in my economic self-interest as well as good public policy to turn that firm in to the SEC. If self-regulation is ever going to work, we need to find ways to advertise it, reward it, and measure it. And the SEC has done none of these.

Twelfth, reform the SEC or create a new super-regulatory agency. There is, of course, another option. If the SEC does not reform itself, it should be disbanded. Just zero out its budget and put every one of those 3,500 staff members on the streets, because right now they do not offer us any real protection. This would be harsh, I know, but anything short of a bottom-to-top reorganization of the SEC will not be sufficient to fight the financial frauds that plague our system.

The federal government has to get involved, too. The SEC is an agency of the government and has to abide by the rules and regulations, and the budget, set by Congress. So Congress also has a responsibility to ensure that changes are made to the way we govern our financial markets. That’s why I agreed to testify in front of both House and Senate committees. As I told them, there are several things that Congress can do to guarantee a fair playing field for investors. For example, David Kotz’s report highlights the complete lack of coordination and even communication between the Boston, New York, and Washington SEC offices, which severely hindered the Madoff investigation. It actually was even worse than that. The examination team in the New York regional office that had just finished an investigation of Madoff’s operations in 2005 wasn’t able to coordinate effectively with the enforcement team from the same office that was just starting its own Madoff investigation. If regional offices from a single agency can’t coordinate with each other,