In 2009, with the wounds of Bernie Madoff's financial fraud still fresh, a forensic accountant named Harry Markopolos told a congressional committee that he “gift wrapped and delivered” damning evidence of the scheme to securities regulators—only to be ignored.

The U.S. Securities and Exchange Commission soon would go on to create a whistleblower program, part of the Dodd-Frank Wall Street reform overhaul. Markopolos had recommended such a program, one that has generated tens of millions of dollars in award bounty for tipsters.

A decade later, Markopolos now worries that proposed changes to the SEC's whistleblower program could undercut the agency's efforts to attract tipsters cut in his mold: outside analysts who pull together a puzzle of publicly available information to give regulators an eye-opening picture of fraud.

Although most awards have gone to company insiders, the SEC has trumpeted the bounties paid to outside analysts. Announcing a more than $700,000 award in 2016, the SEC's enforcement director at the time, Andrew Ceresney, said “high-quality analysis by industry experts can be every bit as valuable as firsthand knowledge of wrongdoing by company insiders.”

The SEC has received dozens of comment letters—including one from Markopolos—on the agency's proposed changes, which would give the commissioners more power to set whistleblower awards, reducing some of the largest payouts and boosting some of the lowest.

Markopolos, representing himself, voiced concern about proposed “interpretive guidance” that says independent analysis must go “beyond what would be reasonably apparent to the commission from publicly available information” in order to be worthy of a whistleblower award.

That proposed change, Markopolos said, could allow the SEC, with the benefit of “20/20 hindsight,” to stiff an outside analyst on the grounds that the agency could or would have detected the fraud itself based on publicly available information.

“Under the proposed rule, it would be far too easy for the commission, in hindsight, to claim that it could have or would have learned of a fraud on its own. Instituting a sensible objective standard would both protect the SEC Whistleblower Program from paying out unearned awards, while also protecting the whistleblower from having a misguided SEC employee say, 'we would have caught that on our next exam anyway, so why pay the whistleblower?'” Markopolos wrote.

Markopolos wrote in his comment:

“Every securities fraud is obvious when looking in the rear-view mirror. In real-time, however, the schemes are always opaque and seem plausible on the surface. So, in my view, it would be unjust and against the spirit of the whistleblower program to adopt language allowing the commission to deny a whistleblower award, in essence, because it 'could have' used publicly available information to identify a fraud when it did not and the whistleblower did.”

When the SEC outlined its proposed changes to the whistleblower program in late June, the “interpretive guidance” affecting outside analysts was overshadowed by a separate proposal that would give commissioners wider discretion to lower the highest awards. The SEC voted 3-2 to push the proposal package out for public comment, with the Democratic commissioners dissenting over concerns that the changes would undermine the program and bring improper considerations into future award decisions.

Phillips & Cohen partner Sean McKessy, the first director of the SEC's whistleblower program, said the guidance affecting outside analysts stood out as the most concerning portion of the proposed changes.

“This is the most dangerous in the long term for the program,” he told the National Law Journal. “It's injecting in the opportunity for human beings, well after the fact, to make subjective determinations that I don't think were intended by Congress.”

Markopolos had a suggestion for protecting outside analysts from such subjective determinations: Before rejecting a whistleblower's award, he said, the commission should have to show that it had already commenced an investigation or exam for the issues raised by the whistleblower before the tip was submitted.

The SEC, in the proposed rule, specified that Markopolos would have been in line to receive a whistleblower award under the commission's current standards. Markopolos, in his letter, said he enjoyed reading that his team's work would have “made the cut.”

Under the proposed guidance, however, Markopolos said “even my team could not have been certain of recovering a whistleblower award because of the '20/20 hindsight' nature of the guidance.” He said he wasn't sure he would “resubmit that same level of work product going forward if the 'independent analysis' rule is amended as proposed.”

While he focused on the provision for outside analysis, Markopolos also came out in opposition to a proposed change that would allow the SEC to effectively set a $30 million cap on whistleblower awards. Under the whistleblower program rules, tipsters are entitled to between 10 percent and 30 percent of the total sanctions from enforcement actions. The proposal would give the SEC discretion to lower awards to $30 million in cases where whistleblowers would otherwise be entitled to larger bounties under the formula.

“Although well-intentioned, this provision would be a gift to the major investment banks and other large public companies, as it would deter high-ranking officers at those entities from turning whistleblower,” Markopolos wrote.

Capping awards, he said, “would all but ensure that the elephant never walks through the Commission's doors—only rabbits and the occasional zebra.”

 

Markopolos's comment to the SEC is posted below:

 

 

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