Is paying bounties the way to better protect U.S. investors?
The inspector general of the Securities and Exchange Commission thinks so. And while a certain vague distate arises from the notion of paying people to turn other people in, it’s probably a good idea.
With all the talk in the air about new regulations and “behavioral economics,” the direct appeal of cold cash for information does cut through the clutter and appeal to our basic (and possibly baser) instincts.
If it works and gets securities law violators off the figurative streets faster, why not? With the downturn and market decline for a time exposing what seemed like a Ponzi scheme du jour, the need for faster and more effective enforcement is certainly there.
All this relates back to Bernard Madoff, the just-sentenced king of the Ponzi, who avoided for so many years being apprehended by the SEC. In that case, the watchdog agency apparently got some leads even without bounties as inducements.
The SEC’s failure to uncover the $65 billion Madoff fraud has led the inspector general of the SEC, H. David Kotz, to try to find out why this happened. He is, in esssence, the watchdog of the watchdog.
As Kotz has investigated the SEC and the Madoff affair, he’s been urged by Rep. Paul Kanjorski, D-PA., the chair of the House Financial Services Subcommittee on Capital Markets, to provide updates on this probe. Kotz was also asked specifically for some ideas on modifying securities laws to avoid a Madoff recurrence as Congress prepares to debate regulatory reform legislation.
Kotz replied on June 30 with some ideas, one of which was about bounties. (The Financial Times wrote a news article about the inspector general’s bounty idea.)
“Bounty programs are an effective tool to encourage whistleblowers to come forward and would provide necessary incentives for outside entities to bring complaints about possible illegal activity,” Kotz wrote. He said there’s some evidence that bounty programs run by the Department of Justice and the Internal Revenue Service have borne the desired fruit.
The SEC already does have a bounty system, Kotz noted, which is 20 years old. But few awards are paid, he said, because it’s limited to insider trading cases “and the stated criteria for judging bounty applications are broad, somewhat vague and not subject to judicial review.”
Kotz’s recommendation: authorize the SEC to “award a bounty for information leading to the recovery of a civil penalty from any violator of federal securities laws, not simply insider trading violations.”
There seems no harm in trying a broader distribution of bounties. If nothing else, the Madoff scandal made clear enforcement help is needed.