When Harry Markopolos initially provided the US Securities and Exchange Commission a then ignored tip about the “politically powerful” Bernie Madoff and his Ponzi scheme, he might have thought that his forensic accounting background and industry insider status would have been considered. After all, those deep inside the financial services industry are typically the best to understand how the system works behind the scenes – and where the dead bodies of Wall Street’s questionable behavior lie. Unfortunately for Madoff investors, prior to 2011 it can be documented a wide-range of market damaging behavior was occurring mostly unchecked.
Markopolos was the spark that launched regulators on perhaps one of its most successful programs to combat Wall Street wrongdoing
Little did Markopolos know at the time that more than seven years after testifying before Congress on the Madoff and more than a decade after initially providing regulatory investigators the ignored tip about the Bernie Madoff Ponzi scheme that he would be in line to receive part of a $100 million whistleblowing reward. Not for his Madoff work, but for a resulting regulatory program that he inspired.
This time he and a small group of bank employees identified big banks mistreating their foreign exchange customers stand to benefit, a Wall Street Journal report first revealed. But even more profound is that Markopolos was the spark that ignited a creative and successful government enforcement program that actually used the free market system to do the work of regulators.
Major change: Regulators are no longer ignoring tips from industry insiders
Fast forward from the point regulators ignored tips about high level wrongdoing on Wall Street to today, when Markopolos, a Certified Fraud Examiner, stands to make a small fortune. Notice an incremental system of governance that turns up the heat slowly and now is perhaps one of US regulator’s most effective weapons to fight Wall Street crime. While regulators didn’t initially listen to the industry insider, now he is in line to receive a pay-off from his recent work. In 2000, when Markopolos submitted his information on Madoff, this whistleblower incentive program was not in place.
A US government settlement with State Street Corp. and Bank of New York Mellon, which resulted in a $530 million bank payment to settle civil claims it misled institutional investing clients, is now in a position to pay Markopolos and a small group of industry insiders, including those working in the bank. This settlement came in the wake of a $714 million civil settlement that BNY Mellon paid.
This past February Markopolos told the media he had three new Ponzi schemes, one of which is “bigger than Madoff.” The fruits of his diligent labor to hold Wall Street accountable were colliding with regulator efforts to use a free market system to encourage whistleblowers to come forward.
Wall Street whistleblowers can be documented to have difficulty finding jobs on Wall Street after they blow the whistle.
Before the whistleblowing program, the uncomfortable truth was industry insiders who worked with Markopolos on the current awards would have faced a bleak future for blowing the whistle. The undocumented reality that whistleblowers working with Markopolos like Grant Wilson, Peter Cera and Ryan Gagne likely feared was that revealing inside information about potentially illegal behavior inside a major bank they would be blacklisted from the industry forever.
There is, of course, no formal documentation regarding a Wall Street blacklist, just a look at how whistleblowers have been treated in the past. While correlation is not causation, combining the fact that whistleblowers and Wall Street do-gooders are faced with the prospect of being shut out from many Wall Street jobs – a whisper topic that is generally accepted in some circles behind the scenes – and you can see how the whistleblowing program is so genius in its free market approach. A whistleblower doesn’t have to worry about jeopardizing their generally comfortable Wall Street life to do the right thing.
The government set up a program in 2011 where they have little risk. They only payout a percentage of the fines they receive. So while $60 million might find its way to Wilson might seem excessive, from the government’s standpoint it is only a finder’s fee percentage. Likewise Cera and Gangne claiming $60 million is likewise a small percentage of the total revenue generated for the US government, it is nonetheless double the government’s previous award of $30 million. Not only is this program profitable, but it has created a system where insiders are willing to talk, a key hurdle investigators once faced.
With SEC whistleblower tips now approaching 4,000 on an annual basis, it could be said a regulatory investigators job has significantly changed. No longer do they have to uncover the wrongdoing – industry insiders, the one’s best positioned to do this, are doing the work for regulators and working on straight commission.
Also see the biggest ponzi schemes ever below via BestAccountingDegrees.Net
Photo by Abode of Chaos