Whistleblowers Could Help Stop Another Madoff

Last March, the watchdog of the Securities and Exchange Commission issued a stinging rebuke of an agency program created more than 20 years ago to help target insider trading and securities fraud.  The SEC program was designed to reward individuals who stepped forward, sometimes at great risk to their own careers, and shared valuable information.  Last summer, after the SEC missed the biggest Ponzi scheme in U.S. history in the Madoff case – a colossal mishap that might have been avoided if the SEC had paid attention to whistleblower information -- Congress passed legislation to dramatically beef up a whistleblower protection office inside the SEC.

Today, the legislative reforms aimed at empowering whistleblowers are in real jeopardy.  The rules the SEC has proposed for implementing the enhanced protections would unravel all the good the law should do in this area.  As drafted, the agency rules for whistleblowers are overly complex and restrictive.  They prioritize corporate internal compliance systems over the accuracy of the information provided.  They perpetuate an environment that’s hostile to whistleblowers by failing to provide any guidance to prevent retaliation against whistleblowers.

Making these proposed rules final would be a major mistake.  This week I urged the Chairman of the SEC to reconsider what’s been drafted and make meaningful corrections.  There’s still time to do it right.

I was involved in developing the reform legislation at stake here because of my record of authoring several other whistleblower protection statutes.  Whistleblowers in and out of government have proven their value.  Their information can shed a lot of light on what might be happening.  Their information has made the difference in countless cases involving fraud against taxpayers, shareholders and stakeholders.  Whistleblowers stick their necks out for the good of all of us.  Public officials who ignore this source of information do a disservice to the public.

The SEC was created during the Great Depression, in the wake of the stock market crash of 1929, when the public’s faith in capital markets needed to be restored.  The agency is supposed to strengthen investor confidence by providing transparent, reliable information and rules for fair, orderly and efficient markets.  The work of the SEC should help to facilitate the capital formation necessary for economic growth and job creation.

When the agency fails to meet its mission, the negative repercussions can impact all investors, including anyone with a pension plan or money in a retirement fund.

If the SEC fails to set up an effective whistleblower office, then regulators are compromising their own ability to identify financial wrongdoing and protect the public and marketplace.  Those kinds of stakes should help agency leaders set aside institutional ego that may prevent them from listening to someone who has valuable information, even if it’s unpopular or someone in a powerful position is involved.  The high stakes mean there must be accountability for any SEC official who fails in the mission, especially if the reason for failure is conflicted interests or compromised integrity.

There’s a great need for oversight of the SEC.  Four years ago, along with then-Senator Arlen Specter, I spelled out in a comprehensive report how the SEC Inspector General failed to investigate credible allegations by a former SEC attorney named Gary Aguirre that his supervisor pulled punches in the investigation because of one witness’ political clout.  The report hit a nerve, and that SEC Inspector General left his position the same day the Grassley-Specter report was released.  The SEC attorney who blew the whistle was vindicated, too.  Last year, the SEC finally obtained a $28 million settlement from the hedge fund manager in question and paid the attorney years of back pay in a settlement related to his termination. 

In addition, in response to the recommendations of the August 2007 Grassley-Specter report, the SEC drafted its current manual for enforcement personnel.

Separately, this month, I asked the Financial Industry Regulatory Authority to provide information on the potential scope of suspicious trading activity at SAC Capital Advisors LP, a hedge fund.  Allegations in an insider trading probe have raised serious questions about the corporate culture at SAC Capital and undercut investor confidence in a fair and balanced playing field.

Every source of information is needed to combat financial fraud.  Investors and taxpayers are exposed by wrongdoing.  I want to see the SEC embrace whistleblowers because they can help with the mission.  Whistleblowers could help stop another Madoff.