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Whistleblower Program Is Flawed: SEC Watchdog

A new audit report by the Securities and Exchange Commission's Inspector General reveals what whistleblowers like Harry Markopolos of Madoff fame already knew: the SEC's program for rewarding tipsters is badly flawed.

David Kotz
AP
David Kotz

The agency has already asked Congress for authority to expand its bounty program for whistleblowers, and Inspector General H. David Kotz suggests it's about time.

"The current SEC bounty program is not fundamentally well-designed to be successful," Kotz writes.

The SEC launched its program for rewarding tipsters in 1989, but since then, the audit found, "the SEC has paid a total of $159,537 to five claimants." The Commission denied five other applications, and failed to take action on another 30 requests.

The report notes that the agency has no policies in place to determine what types of rewards to give to whistleblowers. In fact, the report says, the bounty program "is not widely recognized inside or outside the Commission."

Markopolos, who tried for years to alert SEC staffers to the Madoff fraud, initially hoped to claim a bounty from the agency for exposing improper trading in Madoff's hedge fund, only to find the fraud went much deeper. But Markopolos' warnings fell on deaf ears until it was too late, prompting a top-to-bottom review at the SEC, including the latest Inspector General's report.

While the report notes the SEC is seeking to expand its bounty program and legislation is pending in Congress, Kotz calls on the agency to better communicate the program to the public—and the Commission staff. In addition, the report recommends better procedures to track tips and applications for rewards.

In a written response to the report, SEC enforcement chief Robert Khuzami notes that the agency is working to establish a "world-class" whistleblower program. Khuzami says that while SEC staff concurs with Kotz's recommendations, the hope is that the legislation pending in Congress will lead to a new whistleblower program "wholly replacing the current one."

The current bounty program applies only to information leading to the recovery of penalties for insider trading. The new proposal would allow rewards for tips involving any violations that lead to penalties of more than $1 million.