NewsNotables – Issue 82

SEC whistle-blower program is starting to pay off
Los Angeles Times, August 23, 2012

They’ve called from pay phones. They’ve had secret meetings at hotels and even at a church. For the past year, whistle-blowers deep inside corporate America have been dishing dirt on their employers under a U.S. Securities and Exchange Commission program that could give them a cut of multimillion dollar penalties won by financial regulators. A new bounty program has been a boon to the securities industry regulator to redeem itself after failing to stop Bernard Madoff’s epic Ponzi scheme and rein in on Wall Street.

Motivated by cash and the chance to rat out wrongdoers, tipsters are dropping more than names. Whistle-blowers and their attorneys are turning over boxes of documents, copies of emails and even audio recordings of alleged fraud or illegal overseas bribery. “We are getting very, very high-quality information from whistle-blowers,” said Sean McKessy, director of the SEC’s whistle-blower office.

In the programs’ first year, 2,870 tips, or about eight a day, were reported. One of them led to the agency’s first payout, $50,000 to an informant who alerted regulators to an investment fraud. The flood of information doesn’t necessarily mean the SEC will be more effective. In the case of Madoff, one whistle-blower repeatedly sounded the alarm years before the scheme came to light.

Under the program, tipsters whose information prove crucial to a case could get 10 to 30 percent of penalties over $1 million. The SEC has set aside $452 million from past penalties and fines in an investor protection fund. It’s not just insiders who are eligible, short sellers who bet against stocks or other outsiders using publicly available information in their analysis can profit too. Even senior executives have divulged internal secrets. Many want to keep their jobs but have suffered retaliation after coming forward.

The SEC has tried to attract tipsters before. A previous bounty program was aimed only at insider trading. But in two decades, only a handful of claimants received awards totaling nearly $1.2 million. Now the agency has expanded the program and received tips on alleged market manipulation, stock offering frauds and misleading corporate disclosures and financial statements.

Comment: I applaud the program that is supported by monies received from past penalties and fines. I do find it interesting that fraud most often is “rewarded” financially. Whistle-blowers are also often “rewarded” financially by tipping off the SEC. The almighty dollar can be the cause of fraud and help curtail fraud. I don’t think it’s a coincidence that the dramatic increase in tips has a financial impact for the tipster.

Big-Bank Pioneer Now Seeks Breakup

The Wall Street Journal, July 26, 2012

Sanford Weill built Citigroup Inc. through repeated acquisitions, including the 1988 mega deal that prompted Congress to strike down a six-decade-old ban on commercial banks doing investment banking, and vice versa. He recently called for the breakup of huge U.S. financial conglomerates. “I am suggesting that they be broken up so that the taxpayer will never be at risk, and the depositors won’t be at risk,” Mr. Weill said in a TV interview on CNBC. “Mistakes were made,” he added.

Mr. Weill was once considered banking’s greatest living empire builder, powering Citigroup’s ascent to the top of the U.S. banking industry, and then watched from retirement as Citigroup nearly collapsed in the 2008 financial crisis. After years of silence, he joined the ranks of big bank critics who contend that smaller is better. Mr. Weill had spent years working for the repeal of federal laws that prevented banks from branching into investment banking and stock brokerage. One of the last laws that stood in his way was the Glass-Steagell Act, which was repealed in 1999. Weill was the repeal bill’s chief lobbyist, even calling President Bill Clinton for his support. Once passed, it was dubbed the “Citigroup Authorization Act.” William Issac, a former chairman of the Federal Deposit Insurance Corp. stated, “Mr. Weill probably had a larger role than any other person in bringing down Glass-Steagall.”

Mr. Weill defended his role in helping create the conglomerate. “I think the earlier model was right for that time,” he said. “I think the world changed with the collapse of the real estate market and the housing bubble and what that did because of leverage in certain institutions. So I don’t think it’s right anymore.”

John Reed, who ran Citicorp before it was merged with Travelers Group in the 1998 mega deal creating Citigroup and recently retired Citgroup chairman Richard Parsons have said it was a mistake to allow the creation of the big financial conglomerates.

Comment: I watched Sandy Weill build his empire prior to Citigroup, merging company after company and always coming out on top. I believe the Glass-Steagall Act got in his way to building the largest and most powerful financial conglomerate. He was very persuasive and usually got his way, which he did in 1999. Now looking back at the financial crisis beginning in 2008, he can see the effect of removing the prohibition of merging commercial banking with investment banking. Of course he wasn’t wrong because “the earlier model was right for that time.” The world changed.

By Roger Eigsti
Board President,
Institute for Business, Technology, and Ethics