Whistleblowers Can Help Stop Financial Fraud

In very good news for investors, including anyone with money in a pension or other retirement fund, the Securities and Exchange Commission (SEC) backed off an earlier strategy and this week approved rules to implement stronger protections for those who blow the whistle on financial fraud.

I helped to write the law passed last year to strengthen these whistleblower protections.  So I weighed in pretty hard, with a detailed letter to the Commissioner, against the agency’s first version of its rules to implement the law, which would have undone all the good of the legislation that got passed for whistleblowers. The fact that the SEC responded by doing a lot more to back whistleblowers is a hopeful sign that the SEC can move away from its past of resisting whistleblower information.

Whistleblowers need to be taken seriously.  Their complaints can help prevent and stop fraud, including financial fraud.  In fact, had whistleblowers been taken seriously, the biggest Ponzi scheme in U.S. history in the Madoff case might have been stopped.  The value of whistleblowers should not be understated.  The value has been confirmed by independent studies such as a 2007 study of economic crime, which found that 43 percent of corporate fraud was uncovered by whistleblower-related activities.  A separate report in 2008, by the Association of Certified Fraud Examiners, found that the vast majority of fraud in both large and small businesses was identified by way of tips from individuals.

These studies validate my own experience in working with and on behalf of whistleblowers.  If we make sure strong protections and fair-minded incentives are in place, the tips will come.  My goal with the SEC whistleblower office is to establish an environment that takes whistleblowers seriously, so they’ll come forward and help to stop the next Madoff, before the damage is done.