There is the effective regulation of Wall Street. Then there is what I call the mere "appearance" of regulation. Effective regulation proactively detects fraud, pursues the fraudster, stops the fraud, and protects the investing public -- all of which entails harvesting tips, analyzing data, conducting interviews, filing charges, and sending trial staff into court. In contrast, modern-day regulation has devolved into self-serving publicity by senior regulators posting endless amounts of podcasts, videos, speeches, bulletins, guidances, alerts, and press releases. The bureaucracy tells you what it would like to do rather than what it has accomplished; hence, the appearance of regulation rather than the substance.
Warnings Voiced / Lessons Forgotten
Nearly a generation ago, the SEC failed to detect the burgeoning fraud of Bernard Madoff. As early as 1999, analyst Harry Markopolos concluded that Madoff's reported market gains were impossible and likely fraudulent. Markopolos took his findings to the SEC's Boston office. He was ignored. A few years later, Markopolos went to the SEC's New York office. He was ignored. If you don't remember the history or it's a new story for you, Markopolos set it all out in his 2010 book "No One Would Listen." For a stirring reminder, watch Markopolos' Opening Statement before the Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises Hearing on "Assessing the Madoff Ponzi Scheme and Regulatory Failures" from February 4, 2009:
Søren Kierkegaard aptly admonished that "Life can only be understood backwards, but it must be lived forwards." Much can be said of Wall Street regulation. Those who regulate are often relegated to the unfortunate role of reading toe-tags in the morgue -- having failed to prevent the murder, they have little left to do but perform an autopsy.
Were the lessons of Maddoff learned by the SEC and other Wall Street regulators? Could it happen again?
Has the landscape of Wall Street regulation significantly changed during the last two decades?
Will the next generation's Harry Markopolos receive the same dismissive responses from yet another incarnation of clueless regulators?
Before you're too quick to answer, recall these closing lines from Part I of the Prepared Statement of Harry Markopolos to the Subcommittee
[F]or those who ask why we did not go to FINRA and turn in Madoff, the answer is simple: Bernie Madoff was Chairman of their predecessor organization and his brother Peter was former Vice-Chairman. We were concerned we would have tipped off the target too directly and exposed ourselves to great harm. To those who ask why we did not turn in Madoff to the FBI, we believed the FBI would have rejected us because they would have expected the SEC to bring the case as subject matter experts on securities fraud. Given our treatment at the hands of the SEC, we doubted we would have been credible to the FBI.
And, I wish to clear the air on a very important matter about ethics, public trust, civic duty and what this all says about self-regulation in the capital markets. The four of us did our best to do our duty as private citizens and industry experts to stop what we knew to be the most complex and sinister fraud in American history. We were probably a lot more foolish than brave to keep up our pursuit in the face of such long odds. What troubles us is that hundreds of highly knowledgeable men and women also knew that BM was a fraud and walked away silently, saying nothing and doing nothing. They avoided investing time, energy and money to disclose what they also felt was certain fraud. How can we go forward without assurance that others will not shirk their civic duty? We can ask ourselves would the result have been different if those others had raised their voices and what does that say about self-regulated markets?
To the victims, words cannot express our sorrow at your loss. Let this be a lesson to us all. White collar crime is a cancer on this nation's soul and our tolerance of it speaks volumes about where we need to go as a nation if we are to survive the current economic troubles we find ourselves facing; because these troubles were of our own making and due solely to unchecked, unregulated greed. We get the government and the regulators that we deserve, so let us be sure to hold not only our government and our regulators accountable, but also ourselves for permitting these situations to occur.
Thank you and May God Bless the United States of America.
Markopolos Urges an SEC Whistleblower Program
We would be wise to heed Markopolos' admonitions in 2023. Pointedly, we would do well to remember that Markopolos spoke up and spoke out about the need for the SEC to create an Office of the Whistleblower; read, Part II of his written statement "Rebuilding the SEC / The Current Situation Is Dire but Fixable: There Is No Where To Go but Up!"
Finally, I would add one more Directorate, the Office of the Whistleblower, to centralize the handling and investigation of whistleblower tips. Currently, the SEC's eleven (11) Regional Offices handle whistleblower complaints on an individualized, ad hoc basis. Every whistleblower who comes in with a tip is handled differently and no one tracks the whistleblower with the particular complaint she has brought with the object of the complaint, a particular company or individual. One would think that if ABC Company has received five complaints this year and its nearest competitors received no complaints this year, that this would be meaningful information and merit close scrutiny. Complaints from within industry or by investors have got to be the cheapest, most effective way to identify fraudsters, yet this valuable resource is currently ignored by the SEC. There can be no good reason for dismissing this valuable tool.
If my experience is any guide, the treatment accorded whistleblowers ranges from dismissive to outright unwelcome yet whistleblowers are the best, and cheapest source of great and not so great cases. The great cases cannot be culled from among the many cases submitted if SEC staff does not answer the phone or read its mail. Whistleblowers are the single largest source for fraud detection according to the Association of Certified Fraud Examiner's (ACFE) 2008 Report to the Nation (Chapter 3, page 22, www.acfe.com). According to the ACFE, whistleblower tips were responsible for detecting 54.1 percent of fraud schemes at public companies whereas external audits account for a meager 4.1 percent of fraud cases detected (note: the SEC would be considered an external auditor). Therefore whistleblowers are a full thirteen (13) times more effective than the SEC's external audits yet there is no Office of the Whistleblower. Who wouldn't want the SEC to become thirteen (13) times more effective?
. . .
I recommend that each tip, upon receipt, be logged in, given a case number, and for credible tips with real evidence behind them, the whistleblower and whistleblower's counsel be put in contact with the relevant SEC operating unit that is best able to investigate the complaint. Hopefully this will prevent a repeat of my experiences during the Madoff Case, where over the years I kept submitting better and more detailed case filings but ran into trouble because Boston's SEC Regional Office believed me but New York's SEC Regional Office apparently did not. Standardizing the treatment of whistleblowers to ensure that they are not ignored or mistreated should be a priority for the SEC. An annual reporting to Congress of whistleblower complaints and the SEC's follow-up actions should be mandatory.
Let me add one more important point concerning the issue of self- regulation and whistleblowing: consider that perhaps hundreds of finance professionals around the globe knew that Madoff was a fraudster or at least suspected that he was. How many of these people contacted the SEC with their suspicions? Unfortunately, I may have been the only one. If a whistleblower wanted to, how would they know who to contact at the SEC since there is no "Office of the Whistleblower?'' I believe that by adding such an office, we would see honest firms sending in evidence against their crooked competitors. Getting rid of the shysters is in everyone's best interest and restoring trust in the U.S. capital markets is imperative if we are to restore our nation's economy to health. If I'm the CEO of an honest firm and I hire new employees who worked across the street at a competitor and then find out from these new employees that my competitor is dishonest, it would be in my economic self-interest and in the interest of good public policy to turn them into the SEC.
If self-regulation is ever going to work, we need to find ways to advertise it, reward it, and measure it. Currently, the SEC is doing none of the above. Every tool, every resource, and every person has to be brought to bear in the fight against white-collar crime. Government has coddled, accepted, and ignored white-collar crime for too long. It is time the Nation woke up and recognized that it's not the armed robbers or drug dealers who cause us the most economic harm, it's the white-collar criminals living in the most expensive homes and who have the most impressive resumes who harm us the most. They steal our pensions, bankrupt our companies, and destroy thousands of jobs, ruining countless lives. No agency is better situated than the SEC to attack high-level white-collar crime. Therefore, the SEC is too important to allow too continue to fail.
Thank you for the opportunity to present my recommendations on how to rebuild the SEC into the world's best securities regulator, it has been a singular honor for me to appear before you today.
Also, read: "Needed: New Wall Street Whistle-Blowing Laws" (Forbes.com by Bill Singer / September 18, 2009)
March 31, 2023: One SEC Whistleblower Press Release
Some 14 years ago, Markopolos urged the creation of an SEC whistleblower program -- a sentiment that I shared and advocated. The Dodd-Frank Wall Street Reform and Consumer Protection Act provided the SEC with the authority to pay financial rewards to whistleblowers, and on August 12, 2011, the program launched. In 2023, the SEC's whistleblower program is little more than a convenient way for the federal regulator to blow its own trumpet. For example, consider March 31, 2023, when the SEC issued this Press Release: "SEC Awards More Than $12 Million to Two Whistleblowers" https://www.sec.gov/news/press-release/2023-68, which touted the SEC's adoption of the recommendation by its Claims Review Staff ("CRS") to pay over $9 million to Claimant 1 and over $3 million to Claimant 2 in Whistleblower Award Proceeding File No. 2023-48. On March 31, 2023, however, there were four SEC Whistleblower Award Proceeding Files for 2023-45, -46-, -47, and -48 posted on the regulator's website; however, only one (File No. 2023-48) was referenced in SEC whistleblower Press Release:
Order Determining Whistleblower Award Claim ('34 Act Release No. 34-97229; Whistleblower Award Proc. File No. 2023-48)
The Claims Review Staff ("CRS") issued Preliminary Determinations recommending the a Whistleblower Award of over $9 million to Claimant 1 and over $3 million to Claimant 2. The Commission ordered that CRS's recommendations be approved.
Order Determining Whistleblower Award Claim ('34 Act Release No. 34-97228; Whistleblower Award Proc. File No. 2023-47)
The Claims Review Staff ("CRS") issued Preliminary Determinations recommending the denial of a Whistleblower Award to Claimant 1, Claimant 3 and Claimant 4. The Commission ordered that CRS's recommendations be approved.
Order Determining Whistleblower Award Claim ('34 Act Release No. 34-97227; Whistleblower Award Proc. File No. 2023-46)
The Claims Review Staff ("CRS") issued a Preliminary Determination recommending the denial of a Whistleblower Award to Claimant. The Commission ordered that CRS's recommendations be approved.
Order Determining Whistleblower Award Claim ('34 Act Release No. 34-97226; Whistleblower Award Proc. File No. 2023-45)
The Claims Review Staff ("CRS") issued a Preliminary Determination recommending the denial of a Whistleblower Award to Claimant 1 and Claimant 2. The Commission ordered that CRS's recommendations be approved.
Of the four Whistleblower Orders issued on March 31, 2023, the SEC published a Press Release ONLY about its Awards to two Claimants but failed to publish Press Releases about its Denials of Awards to six Claimants.
https://www.sec.gov/whistleblower/pressreleases How is that? Why is that tolerated as an acceptable exercise in public disclosure? In 2023, the SEC pursuit of favorable publicity comes off as a tone deaf response to Harry Markopolos' 2009 impassioned warning:
If my experience is any guide, the treatment accorded whistleblowers ranges from dismissive to outright unwelcome yet whistleblowers are the best, and cheapest source of great and not so great cases.
She/He's Not Eligible
Of the four SEC's March 31, 2023, Whistleblower Orders; let's consider the Order Determining Whistleblower Award Claim ('34 Act Release No. 34-97227; Whistleblower Award Proc. File No. 2023-46) (the "2023-46 Order")
https://www.sec.gov/rules/other/2023/34-97227.pdf. The Claims Review Staff ("CRS") issued a Preliminary Determination recommending the denial of a Whistleblower Award to Claimant. The Commission ordered that CRS's recommendations be approved. In pertinent part, the 2023-46 Order asserts that:
[T]he CRS preliminarily determined that Claimant’s information did not either (1) cause the Commission to (a) commence an examination, open or reopen an investigation, or inquire into different conduct as part of a current Commission examination or investigation, and(b) thereafter bring an action based, in whole or in part, on conduct that was the subject of Claimant’s information, under Exchange Act Rule 21F-4(c)(1); or (2) significantly contribute to the success of a Commission judicial or administrative enforcement action, under Exchange Act Rule 21F-4(c)(2). The CRS preliminarily determined that Claimant’s information was not the impetus for opening the investigation that led to the Covered Action (“Investigation”) and that, while investigative staff responsible for the Covered Action met with Claimant, Claimant’s information was duplicative of information that the investigative staff had already received from staff in the Division of Examinations, formerly known as the Office of Compliance Investigations and Examinations (“OCIE”), pursuant to an examination of the Investment Adviser and other sources. In addition, the CRS preliminarily determined that Claimant provided information that ultimately was not part of the Investigation or Covered Action.Therefore, Claimant did not provide any information that helped advance the Investigation or was used in, or had any impact on, the charges brought by the Commission in the CoveredAction. Finally, the CRS preliminarily determined that, because Claimant is not eligible for an award in connection with the Covered Action, she/he is also not eligible for an award in connection with any related action.
As the 2023-46 Order explains, Claimant responded to the CRS' Preliminary Determination and argued, in part, that the tipster had:
“synthesized and summarized” information for the Commission, including during an in-person meeting with Commission investigative staff, and was told that her/his leads were “very helpful.” . . .
As such, we got a he-said-she-said standoff between the SEC's CRS and the whistleblower Claimant. the Whistleblower says that Staff stated that the provided leads were "very helpful." Did the SEC fairly, professionally, and objectively adjudicate the Whistleblower's Form WB-APP seeking an Award? In opting to deny the Claimant's claim, the SEC found in part that:
[N]either the examination of the Investment Adviser nor the Investigation were opened based on information provided by Claimant. In addition, the record demonstrates that Claimant’s tip did not cause the Commission to inquire concerning different conduct as part of the ongoing examination or Investigation, as Enforcement staff and OCIE staff were already aware of the material facts alleged by Claimant by the time Claimant submitted the tip.
The SEC informs the Claimant that whatever was offered by way of tips was known to the federal regulator's staff beforehand and as a result of staff's own efforts and initiative. Apparently, the SEC concluded that the examination and investigation at issue were NOT opened in response to any of Claimant's information. Further, Claimant's tip apparently didn't push Staff to make any inquiries about different conduct. Yet again, and once more for effort, the SEC hammers away at the theme that "staff were already aware of the material facts alleged by Claimant by the time Claimant submitted the tip."
Okay . . . sure . . . except, apparently, Claimant did, in fact, provide "information" to Staff despite the 2023-46 Order's diminution of said tips as being "duplicative," "formerly known," and otherwise not helpful in advancing the investigation. As to why Claimant so adamantly disputed the denigration by CRS of the tips, we have this assertion in the 2023-46 Order:
Third, as to statements from Enforcement staff regarding the helpfulness of Claimant’s tips, the record demonstrates that, while Enforcement staff stated in an email that Claimant’s tips were very helpful, that statement was an attempt to acknowledge and thank Claimant for Claimant’s willingness to attempt to assist the staff, not to convey any legal conclusion regarding Claimant’s eligibility for an award. As discussed above, notwithstanding this statement, the information Claimant provided did not help advance the Investigation and was not used in, and had no impact on, the charges brought by the Commission in the Covered Action.
Let me be clear and blunt: it seems that SEC Staff mislead the Claimant and fostered the state of mind that the tips were material and helpful. Pointedly, the Staff sent the Claimant an email in which it was stated that "Claimant’s tips were very helpful."
I didn't write that.
I didn't make that admission.
Claimant didn't either.
The SEC Order concedes that Claimant was told that the tips were "very helpful" -- not just helpful but "very" much so.
Perhaps appreciating the heights to which Staff had been blown on its own petard, the SEC clumsily resorted to awkward clarifications. Notably, the 2023-46 Order asserts that the "very helpful" statement wasn't what it seemed like but, to the contrary, merely "an attempt to acknowledge and thank Claimant for Claimant’s willingness to attempt to assist the staff."
One only needs to read the ever-so-strained language of "willingness to attempt to assist" to recognize the circling of a bureaucracy's wagons.
A "willingness" to "attempt" to assist?
As in that Claimant didn't actually assist?
As in that Claimant didn't even "attempt to assist?"
As in Claimant was thanked only for a willingness to "attempt to assist?"
The SEC's strained language resurrects Harry Markopolos' observation that "If my experience is any guide, the treatment accorded whistleblowers ranges from dismissive to outright unwelcome yet whistleblowers are the best, and cheapest source of great and not so great cases." Unfortunately, Markopolos was predicting the future for the SEC Whistleblower Program. Indeed, the hallmark of that program is dismissive treatment and the outright unwelcome extended to whistleblowers.
Speaking of dismissive to outright unwelcome, the addition of insult to injury is manifested in the 2023-46 Order's disingenuous flail when it retreats to one last redoubt in defense of its inexcusable repudiation of Staff's email to Claimant characterizing Claimants' tips as very helpful. Pathetically, the Order alleges that the email was "not to convey any legal conclusion regarding Claimant’s eligibility for an award."
Oh for godsakes, really? How precious. How absolutely absurd.
The SEC thanks a tipster via email during the investigative stage of a matter and now, who knows how many years later, the federal regulator wants to argue that nothing in that message was intended a constitute a "legal conclusion" about eligibility for a Dodd-Frank sanctioned Award. All of which comes off as horribly condescending. The SEC's disingenuous explanation is nothing more than a half-hearted (perhaps even half-assed) excuse. Worse, the laughable whiff at deconstruction does not ring true, and serves as an obstacle for efforts to secure the ongoing cooperation of more whistleblowers.
As bad as it is that the SEC's culture encourages a member of the Staff to pen the garbage that was published in the Order; what troubles me even more is that a supervisor cleared it for publication. Where I would reprimand the author, I would suspend or fire the editor.
CFTC Orders Goldman Sachs to Pay $15,000,000 for Violations of Swap Business Conduct Standards / Swap Dealer Failed to Disclose Pre-Trade-Mid-Market Marks and Failed to Communicate in a Fair and Balanced Manner (CFTC Release)