FAYETTEVILLE — For nine years, Harry Markopolos tried to tell the Securities and Exchange Commission (SEC) that Bernie Madoff was running a $50 billion Ponzi scheme. Markopolos tried to alert SEC investigators in both Boston and New York, each of which dismissed, transferred, or simply failed to understand his advanced financial analysis. He even tried getting The Wall Street Journal to investigate.
But no one listened to Markopolos. Instead, Madoff continued to swindle billions from his investors until his arrest last December. Only in the aftermath did Markopolos' reports emerge. Then people finally began to listen.
The House Financial Services Committee in particular began to listen. During a hearing in February, Markopolos denounced the "ineptitude" and "illiteracy" of the SEC. Stressing the importance of industry whistleblowers, he stated "complaints from within industry or by investors have got to be the cheapest, most effective way to identify fraudsters."
One would think that the federal government would be interested in taking steps to insure that a Madoff-ish scheme never happens again, and that a prime objective to achieve this goal would be to signal that financial employees could safely blow the whistle on witnessed wrongdoing. Tragically, the Department of Justice (DoJ) has done the opposite.
Former international private banker Brad Birkenfeld was certainly an effective financial whistleblower against the Swiss-based banking behemoth UBS. While working in Geneva, he discovered a document hidden deep within the company intranet that articulated UBS's official "policy," barring the exact practices that employees were encouraged and paid to execute. Birkenfeld demanded an explanation, and after being stonewalled by UBS officials for three months, resigned. Then he contacted virtually all UBS departments, only to be told that the matter had already been investigated.
Birkenfeld wasn't satisfied. He traveled to the United States on his own initiative and registered as a whistleblower with the IRS. Birkenfeld's attorney contacted the Department of Justice in 2007, and he began to meet with officials from the DoJ, IRS, SEC, and a Senate subcommittee. Birkenfeld gave them everything: details on what UBS had done, how they did it, and how they had concealed their activities. In return, the DoJ successfully instituted a $780 million fine from UBS,and an agreement to turn over information on 4,450 American clients who are suspected of using Swiss accounts to evade taxes. This single action is being credited with ushering in a new era of transparency in offshore banking.
To express its gratitude, the Department of Justice arrested Birkenfeld.
Birkenfeld was on the way to meet with the SEC and Senate when the DoJ made its first - and only - arrest in this case and booked its own whistleblowing partner. He was recently sentenced to three years for one charge of defrauding. In comparison, his biggest client - who may have hidden as much as $200 million from the IRS - got a $52 million fine and probation. Birkenfeld's boss - who ran the global tax-fraud initiative - was released back to Switzerland.
It's true that Birkenfeld participated in illegal activity. But the government, by prosecuting its sole informant, has shown potential whistleblowers that a more viable option for them is to stay silent.
In the aftermath of the Madoff disaster, the SEC tried to save face, claiming to be set to improve their handling of whistleblower cases. In a press release, the new SEC Chair Mary L. Schapiro stated: "It's vitally important that we move very aggressively to improve staff's use of tips and complaints from investors and whistleblowers." An SEC spokesman, however, later admitted that there were no plans in the works.
Over 50 percent of Ponzi schemes and other fraud are reported by financial insiders and whistleblowers, according to the Commodity Futures Trading Commission, a sister agency to the SEC. Insiders may not be Boy Scouts, but they are vital to bringing down financial fraud. The government needs to do more to protect potential whistleblowers so that in the future, people like Birkenfeld and Markopolos can continue to come forward, without fear of jail time or reprisal in any form.
President Barack Obama argued in a recent speech that it was "a collective failure of responsibility," that led to the financial collapse, and that greater oversight of the financial sector is still needed. But if the government only ignores or punishes citizens for reporting financial fraud, can anything change?
Dylan Blaylock and Beth Adelson work for the Government Accountability Project, the leading United States whistleblower protection organization.
Opinion, Pages 5 on 09/27/2009