How did they not hear about this sooner? That's the question burned investors were asking the SEC in December 2008 when regulators charged Bernie Madoff with securities fraud for a multi-billion dollar Ponzi scheme he'd been running for decades.
Turns out the SEC did hear about it--more than six times. But when whistleblowers sounded off, the agency turned a deaf ear.
A 2009 report released by the SEC Inspector General reveals that whistleblowers filed complaints involving Madoff as early as 1992. Over the next 16 years before Madoff confessed in 2008, the SEC received six "substantive complaints that raised significant red flags." But examiners never conducted a "thorough investigation" of Madoff's operations and they rejected additional evidence from whistleblowers like hedge-fund manager Harry Markopolous.
Markopolous is just one of a number of whistleblowers who in recent years has tried to alert the SEC of potential wrongdoing, only to be ignored or misunderstood.
And the number may be dwindling. Besides book-deals and obscure Person of the Year awards, tipsters have little incentive to come forward. The SEC's whistleblower "bounty" program hasn't offered much additional incentive. Since its creation in 1989, the little known program has made reward payments to only five claimants totaling $159,537.
A new report by the SEC Inspector General recommends that its whistleblower program be overhauled. In the meantime, wet your whistle on our list of the SEC's Biggest Whistleblower Blunders:
Peter Sivere, a former JPMorgan compliance officer, provided SEC investigators with an internal e-mail he came across that showed the bank was illegally giving hundreds of millions of dollars in credit to a firm "in the business of day trading mutual funds." One of the recipients of Sivere's tip, an SEC lawyer named George Demos, passed along Sivere's warning to JPMorgan's lawyers, violating SEC confidentiality rules. But the SEC took no disciplinary action against Demos, who is now running for Congress in New York. Sivere was fired by J.P. Morgan for seeking "payment from the SEC to provide documents and information to them outside of the normal scope of their investigation," according to a letter from J.P. Morgan cited in a Washington Post report.
Ex-Moody's executive Eric Kolchinsky called a top official at the SEC in September 2009 to warn him that Moody's might be violating securities law by assigning inflated investment grades to mortgage-backed securities they knew to be dangerous. The SEC official told Kolchinsky that someone from the agency would call him back shortly. But Kolchinsky never heard back. Ultimately, he would go to Congress after losing patience with the SEC, as reported by The Washington Post.
The SEC's investigation of Allied World Capital began almost two full years after David Einhorn provided regulators with detailed evidence of Allied's fraud. Einhorn chronicles his battle with Allied World and the SEC's mishandling of the investigation in his book Fooling Some of the People All of the Time .
In May 2007, former UBS employee Brad Birkenfeld alerted the SEC of offshore tax shelters the Swiss bank was using to help wealthy Americans evade taxes. After cooperating with the IRS and the SEC, appearing before the Senate, and being assured by DOJ officials that he would not be prosecuted, Birkenfeld was arrested in June 2008. The IRS fined UBS $780 million but has since failed to follow up on the 19,000 cases of tax evasion that Birkenfeld exposed, according to Stephen Kohn, Birkenfield's attorney and Director of the National Whistleblowers Center .
In 2003, Leyla Basagoitia, then an employee of Sir Allen Stanford, warned the SEC of an illegal Ponzi scheme involving Stanford's businesses, but regulators brushed off her allegations. Instead the SEC ordered Basagoitia to pay Stanford $107,782 in damages, in repayment of a loan advanced to her while an employee of the company. Not until February 2009 did the SEC finally charge Stanford for running an $8 billion Ponzi scheme, according to a report by The Financial Times.
"The SEC roars like a mouse and bites like a flea," observed Harry Markopolos, a hedge-fund manager and outspoken Madoff whistleblower who repeatedly tried to alert the SEC of the multi-billion dollar Ponzi scheme years before regulators charged Madoff.