For over a month I have been calling SEC officials, including former colleagues, on behalf of whistleblowers who have contacted me for guidance regarding the Commission’s widely touted new Whistleblower Office.
As a mutual fund industry whistleblower from decades ago and well-known industry investigator, over the years I have occasionally heard from employees of investment firms engaged in wrongdoing who want to come clean. But recently lots of industry insiders - would be reformers if you will – have called excited about the prospects of the SEC’s new whistleblower program.
How will it work? Who’s in charge? What is the procedure to follow? These are some of the questions I was asked by whistleblowers to pursue with SEC officials.
While corporate lobbyists would have you believe money is the great motivator for whistleblowers, that’s simply not true. Take my word for it as a former whistleblower: the prospect of an improbable, distant financial reward rarely will cause an individual to risk almost certain and immediate unemployment, intense hostility and potential lifetime career damage.
It is indisputable that the tsunami of corporate misconduct in decades past has resulted in a mere trickle of whistleblower cases. For example, in the entire history of the Investment Company Act (the federal statute applicable to mutual funds) only one Compliance Director to a mutual fund adviser has ever blown the whistle on his employer—since 1940. Either mutual fund advisers have been remarkably diligent or Compliance Directors, who are on advisers’ payrolls, have been busy looking the other way for decades. None of the whistleblowers who contacted me recently asked me how much money they might gain from blowing the whistle on their current or former employers.
The few officials at the Commission who would speak to me about the whistleblower office said they too were in the dark as to its status. I was told that corporate opposition to the initiative was tremendous and the rules governing the program were being hastily re-drawn behind the scenes.
The Securities and Exchange Commission now publicly says it will delay plans to set up its new whistleblower office, supposedly due to a lack of funding. The whistleblower office will not be staffed for now and its functions will be carried out by existing enforcement staff, the SEC said on its website.
Don’t believe a word of it. This is yet another example of the SEC misleading the public by appearing to embrace investor protection while it spectacularly fails to deliver results.
There is no more cost effective means for deterring corporate malfeasance than embracing whistleblowers. The former Attorney General of New York, Elliot Spitzer, with limited resources and a miniscule staff was able to swiftly ferret out investment wrongdoing that the SEC allowed to endure for decades; Spitzer’s success was in large part due to encouraging whistleblowers to come forward and committing to investigate their allegations. As the SEC knows well, whistleblowers won’t come forward if they believe they will not, at a minimum, be taken seriously.
The SEC’s actions to date clearly evidence a lack of commitment to whistleblowers. The trouble with whistleblowers, for the SEC, is that the agency cannot control them. The Commission cannot feign ignorance when inundated with information of malfeasance from industry insiders. The only solution for the SEC is to slow or eliminate the flow of information from whistleblowers to it. By delaying plans and conditioning development upon unnecessary additional funding, the Commission has very publicly effectively stemmed the flow. The Commission does not want a highly effective Whistleblower Office anymore than the corporate world does.
I promise you, there will be no effective Whistleblower Office at the SEC in the foreseeable future because ethically driven industry insiders severely threaten the manner in which this captive regulator has historically operated. Ironically, at this very moment governments around the world are reeling from the most powerful, cost-effective whistleblower program ever created—WikiLeaks. Our government will spend more money this month combating WikiLeaks’ than it would cost to fund an effective SEC whistleblower program for the next decade. Which do you believe is more harmful to America—investment scammers than destroy hundreds of billions of investor wealth annually and undermine investor confidence or a website that may be politically embarrassing? My advice to would-be whistleblowers: contact WikiLeaks.