Most Successful SEC Whistleblower In History Says SEC Listens

Barron’s reports famed Madoff whistleblower Harry Markopolos is unhappy the U.S. Securities and Exchange Commission hasn’t paid him for his work. Markopolos recently published a report accusing GE of fraud and claims he has filed 9 other SEC whistleblower complaints yet has never received a financial award.

Says Barron’s, “There are whistleblowers who have gotten paid- just not Markopolous.”

Happily, my experience with the SEC differs starkly from Markopolos.

Over the past 35 years—since leaving employment at the SEC—I have been an SEC whistleblower hundreds of times. To my knowledge, I have successfully blown the whistle to the SEC more than anyone in history.

The record is clear the SEC has heard and acted on my whistleblower complaints over the decades—significantly impacting disclosure and business practices in my field – asset management. Targets of my complaints have paid record penalties to regulators amounting to hundreds of millions. Some really bad firms have been shuttered and individuals barred (at least temporarily) from the industry. Widespread unethical industry practices have been exposed; disclosures to investors have been improved.

If this sounds quixotic, I’ll be the first to admit that virtually every bad actor or practice I’ve successfully challenged in my career has re-emerged (sometimes in worse form) within a few (3-5) years. No industry “clean-up” ever lasts long, in my experience.

When I blew the whistle time and again in the 1980s, 1990s and 2000s, there was neither opportunity for, nor expectation of, reward. Rather, I encountered wrongdoing in the industry—oftentimes in connection with forensic investigations—and felt duty-bound to report it to the SEC to prevent further harm to investors.

Until recently, the SEC did not have a program to pay whistleblowers.

The agency’s whistleblower program which permits financial awards to whistleblowers of up to 30% of the amount the SEC recovers only went into effect in 2010 as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act and is still quite new. To date, there have been a handful of awards and I am thankful to have secured the largest SEC (and CFTC) awards.

When I graduated from law school in 1983, I went to work as an attorney advisor in finance in the Division of Investment Management at the SEC in Washington, D.C. regulating the money management industry. It was a hybrid position—half finance, half law and involved reviewing mutual funds and other financial innovations, such as mutual fund securities lending and asset-backed securities. From the SEC, I was hired as Legal Counsel and Director of Compliance of one of the largest global asset managers.

In 1988, for the first time, I became an SEC whistleblower. Fortunately, as a former SEC attorney-adviser in finance, I had fully investigated both the investment and legal dimensions of whistleblower matter and, perhaps equally important, I knew whom to call. There was no Office of the Whistleblower for members of the public to contact at that time. The SEC neither solicited whistleblowers nor was accustomed to hearing from them. My first whistleblowing experience took a long time to resolve but, thankfully, ended with a record-breaking fine for the culprit.

The SEC took action.

For the next ten years I owned and operated FINRA-registered brokerages that sold “soft dollar” trading services to pensions and money managers. During this period, I kept former colleagues at the SEC abreast of the questionable practices I witnessed in the regulatorily-sensitive soft dollar business and urged the agency to examine more closely the products and services money managers were buying with their client’s commission dollars.

In 1996, I recommended the SEC conduct its first-ever sweep investigation of soft-dollar brokers focusing on the role brokers played in facilitating abuses, as well as money manager disclosure of soft dollar trading arrangements with brokers. (Historically, the SEC had focused on solely money manager practices and not the role of brokers in promoting soft-dollar abuses.)

According to the SEC’s findings which were made public in 1998, about one-third of the 75 brokers audited by the SEC in the sweep examination paid for the money managers’ rent, travel, expenses, employee salaries, postage, parking, furniture, college tuition and even wedding expenses—all of which are not permissible under applicable law.

This SEC soft dollar regulatory initiative—a sweep examination of an entire industry exposing widespread abuses involving dozens of firms—resulted from a single whistleblower tip.

The SEC took action.

But my career has largely been focused upon the management of assets—particularly pensions—and that is where the impact of my whistleblowing has been most profoundly felt.

In 2001, I was retained by the Metropolitan Government of Nashville and Davidson County to conduct an unprecedented investigation into a pension adviser scheme that revealed significant fiduciary breaches, undisclosed compensation and excessive fees. I subsequently investigated this same investment adviser on behalf of the City of Chattanooga pension fund and found the same abuses. Each municipal pension recovered millions ($10 million and $6 million) through my efforts and both matters were reported by me to the SEC.

The SEC took action.

Next, securities regulators from the State of Florida asked to meet at my offices to review files regarding similar pension abuses I had uncovered involving a single Florida-based adviser who had as clients over a hundred in-state pensions providing retirement security to tens of thousands municipal workers. This information was also provided to the SEC. The firm announced it was closing down its Florida pension advisory practice, agreed to settle the SEC’s charges and pay a $1 million penalty.

The SEC took action.

In early 2003, I was contacted by senior SEC staff for recommendations regarding a potential high-impact inquiry focused upon pensions. As a result of the abuses I had uncovered in Nashville, Chattanooga, and Florida, it was agreed that pension consultants should be the focus.

A few months later, the staff of the SEC announced an inquiry into conflicts of interest involving investment consultants to pensions, including allegations of “pay to play” practices. “Pay to play” in the pension context refers to the then-common practice of investment consultant gatekeepers—retained by pensions to provide objective advice regarding which money managers pension clients should hire—requiring managers to pay in order to be recommended to pension clients.

On May 16, 2005 the staff of the SEC’s Office of Compliance Inspections and Examinations issued a report to the public which concluded that conflicts of interest were pervasive and disclosure practices lacking in the pension investment consulting industry.

On June 1, 2005 the SEC and Department of Labor issued a publication entitled “Guidance Addressing Potential Conflicts of Interest Involving Pension Consultants.” To encourage the disclosure and review of more and better information about potential conflicts of interest, the Department of Labor and SEC took the unusual step of developing and issuing a set of questions to assist plan fiduciaries in evaluating the objectivity of the recommendations provided, or to be provided, by a pension consultant.

Most significantly, conflicts of interest at investment consulting firms were found to result in substantial financial harm to plans by the Government Accountability Office in a 2007 report.

In its report, the GAO took the extraordinary step of quantifying the harm a conflicted adviser to a plan can cause. “Defined Benefit plans using these 13 consultants (with undisclosed conflicts of interest) had annual returns generally 1.3% lower. These 13 consultants had over $4.5 trillion in U.S. assets under advisement,” the report stated.

Soon thereafter, in 2006, my investigation of the Shelby County, Tennessee pension revealed that the pension’s investment consultant was subject to myriad conflicts of interest. These conflicts, as well as the compensation derived by the investment consultant, had not been adequately disclosed. The review uncovered that the consultant had undisclosed arrangements with many of the Fund’s managers and earned $4 million to $5 million a year in brokerage commissions.

The SEC took action and the firm was shuttered.

In 2007, the SEC also issued cease-and-desist orders to two other pension consulting firms, citing inadequate disclosure of conflicts of interest.

Today, as a result of whistleblower initiatives, failure to disclose conflicted sources of compensation and the amounts of the kickbacks paid to trusted advisers to sponsors of retirement plans, as well as the potential economic harm to pensions resulting from such conflicted advice, has been well documented by the SEC, DOL and GAO.

So, the SEC, DOL and GAO—all of whom I worked with extensively—listened to my whistleblower tips and took action against corrupt pension adviser schemes costing workers tens of billions annually.

That’s fraud annually the size of Madoff.

I have only cited above those tips to the SEC which the agency acted upon and where the public record clearly indicates my involvement. There are greater instances where the SEC has acted on my whistleblower complaints—particularly with respect to individual asset managers—but the public record does not reveal I was involved.

To be sure, of the $1 trillion-plus in forensic investigations of pensions I have undertaken and referred findings to the SEC, the SEC has not always initiated inquiries or taken enforcement action when I think it should have. For example, my 2012 report to the SEC as independent counsel to a whistleblower trustee of the Kentucky Retirement System revealed widespread placement agent abuses and resulted in an SEC investigation but, in the end, the SEC took no action. My forensic investigations of the Rhode Island and North Carolina pensions approximately 5 years ago exposed pervasive wrongdoing involving hundreds of hedge and private equity funds, as well as fund of funds which, to my knowledge, the SEC has yet to fully address.

Further, while I never received any financial reward from the SEC for whistleblowing until recently, I firmly believe that to encourage whistleblowers globally and maximize investor protection, whistleblowers should get paid.

There is no question in my mind that today’s whistleblower programs give regulators critical leverage in enforcing the law and enhancing protection of investors which is a game-changer.

I am well aware that there is no one at the SEC, or any other federal agency, with as much experience investigating pension and asset management wrongdoing as I possess—35 years. Your average federal investigator has, I estimate, 7 years experience. Today’s whistleblower programs permit government agencies to access leading industry experts—like me—and pay them, if and only if, they provide valuable insights.

Whistleblower programs meet the very definition of fiscal conservatism.

Pay whistleblowers more, I say—the sky should be the limit.

If Wall Street crooks can earn billions from scamming, it should be possible for whistleblowers to earn billions ending the fleecing—paid out of funds recovered by the SEC. Just as there is no cap on Wall Street compensation, there should be no cap on whistleblower awards.

I am now working on two whistleblower matters which focus upon compensation routinely paid by mutual funds to pension intermediaries —kickbacks not disclosed to pension sponsors, participants or regulators. If the SEC and other federal regulators take effective action regarding the pervasive industry abusive practices cited in these complaints, retirement plans will be improved. Millions of American workers and retirees will have greater retirement security.

With respect to these two matters, to date the SEC has promptly reacted but it’s too early to say the SEC has taken action.

As to Markopolous, I hope he exposes any other Madoffs that are out there and eventually gets a hefty financial award from the SEC. Hopefully the next culprit he uncovers will have the resources to pay a fine to the SEC out of which the SEC can pay him. But, Harry, not every legitimate complaint results in an award.

Take it from someone who’s been playing in this sandbox a lot longer than you have.