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Blowing the Whistle on the SEC Whistleblower Program

Though the SEC's responsibilities have grown considerably, its enforcement budget -- relative to total managed investment assets in the market -- has fallen by nearly 50 percent since 2005.
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Last summer the Securities and Exchange Commission announced the first payout under its new whistleblower program, finally tapping its $450 million reserves two years after being authorized to compensate tipsters who report violations of securities laws. The informant received $50,000. At that rate of compensation, the SEC will have to pay one whistleblower every day for the next 25 years before they've exhausted their pile of cash. Three months later, however, there still have been no new awards.

Yet the SEC's scheme to reward snitches with riches has much bigger problems than the meager size of that first payout. This is what I discovered after I became a whistleblower myself.

In March, I alerted the SEC about an investment firm that was orchestrating a $15 million bond fraud and an apparent $200 million Ponzi scheme. The principal of the firm had a clean record and claimed to have already rooked nearly 100 high-net-worth families and individuals with his sham portfolio, an elaborate maze of shell corporations and missing assets. He's another Bernie Madoff in the making. And he's just getting started.

I'd uncovered the fraud while conducting due diligence for a corporate client. Prior to notifying the SEC, I consulted an old friend and attorney with experience in securities enforcement cases. I asked whom I should contact to ensure that the fraudster was promptly prosecuted. He referred me to the Office of the Whistleblower, explaining that the 2010 Dodd-Frank Wall Street Reform legislation created provisions to reward people who expose violations of federal securities law, including insider trading and offering fraud. Tipsters are eligible to receive up to 30 percent of any resulting SEC sanctions. "You might see some significant money," he advised.

I submitted a detailed report to the SEC and offered to share my confidential files, which contain hundreds of pages of courtroom-ready evidence, including copies of email correspondence, internal documents, audio recordings and witness statements. My facts and my message were clear: "The risk to potential investors is extraordinarily high and this matter warrants further investigation by the SEC."

Eight months have passed, and the SEC has expressed no interest in pursuing the case. They've never asked to see my evidence. What should have been a slam dunk prosecution resulted in little more than a form letter from Sean McKessy, head of the Office of the Whistleblower.

I'm director of a national investigative firm licensed in over 40 states and Washington, D.C. My clients include insurers, financial institutions and government agencies. If the SEC won't actively pursue a complaint from someone with my credentials, then what exactly are they doing?

They're digging out from under an avalanche of information, overwhelmed by tips of Wall Street crimes and corporate malfeasance. The SEC whistleblower program received 334 tips in its first seven weeks in August 2011, and over the past year has averaged nearly 10 new tips per day.

Though the SEC's responsibilities have grown considerably, its enforcement budget -- relative to total managed investment assets in the market -- has fallen by nearly 50 percent since 2005. Seven years ago, S.E.C. funding covered 19 examiners for every trillion dollars in investment adviser assets under management. Today, the agency can only afford 10 examiners per trillion dollars. That's one examiner for every $100 billion. Requests by the Obama administration to shore up the SEC budget have been consistently rebuffed by Congress.

For eight years, the SEC ignored reports from Boston fraud investigator Harry Markopolos, who urged the agency to investigate the Ponzi scheme run by Bernie Madoff. It wasn't until Madoff's own sons called the FBI that the so-called "Wizard of Wall Street" was finally put behind bars. Markopolos became a strong proponent for the creation of the SEC whistleblower program, telling Congress: "Complaints from within industry or by investors have got to be the cheapest, most effective way to identify fraudsters." However, without enough SEC staff to review and pursue the allegations, complaints will simply keep piling up, overlooked and ignored.

Fulfilling your ethical duty to report a crime would require no reward in a corporate culture that truly values accountability. It remains to be seen what impact, if any, these bounties will have on Wall Street. The average year-end cash bonus at Wall Street firms exceeded $120,000 last year, and at Goldman Sachs it was nearly $370,000. The prospect of a $50,000 lump sum payment from the SEC is unlikely to persuade anyone in this crowd to put their job at risk.

The SEC now has almost a half billion dollars of taxpayer funds to pay informants. Most of that money would be better allocated to hiring more SEC investigators and enforcement attorneys, rather than paying bonuses to the same people the agency is supposed to be policing. Otherwise we'll just be throwing good money after bad.

John Powers is director of Beacon Investigative Solutions ( As a licensed private investigator specializing in corporate intelligence, he advises well-known multinationals, major law firms, financial institutions and government agencies.

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