Would a Fraud Bounty Have Exposed Madoff Years Ago?

Laura Goldman is a money manager who claims to have figured out back in the 1990’s, in the space of about 45 minutes, that Bernie Madoff was a fraud.

In this Fox Business interview, she discusses (very entertainingly) her encounters with Madoff. At the time, Goldman worked for Paine Webber (remember them?):

He was buying stocks and also trading options against the stocks, O.K.? And the thing is, my previous office had been in the Philadelphia Stock Exchange. I’m from Philadelphia, so I knew many of the market players in options in Philly. It’s too hard to track the trading of Microsoft, but it’s much easier for me to track the trading of the options. So I talked to the president of the Philadelphia Stock Exchange at that time, his name was Nick Giordano; I talked to big market makers like Susquehana, and none of them were doing business with Bernie Madoff. So I was a little curious about it. And then Bernie came back and told me that he was trading the options in Europe. Well, that didn’t really make sense to me, because trading in Europe is usually much more expensive than trading in the United States, especially for American stocks. So I said to myself, I don’t need this headache now. It basically took me 45 minutes to figure out something was wrong.

Now Goldman is agitating for regulatory change to lessen the chances of future frauds. “I am working with the S.E.C. to prevent another one,” she says. “One of my ideas is to pay a bounty for those that detect fraud. They already have one for insider trading. People on Wall Street are not Mother Teresas. They are not going to the S.E.C. unless there is something in it for them. Your friend James Altucher even says that in his Tech Ticker interview.”

Goldman is cited in this TIME article about fraud whistleblowing:

Goldman, who blew whistles on such notable investment frauds as First Jersey Securities, Bayou Hedge Fund, and Lydia Capital, among others, now has the full attention of S.E.C. Inspector Kotz‘s office. In all, Goldman says she has alerted the S.E.C. over 30 times and, despite its cold shoulder, through one means or another she has seen 25 of those tips lead to fraud charges being filed.

An S.E.C. whistleblower bounty is hardly a pipe dream; the I.R.S., among others, already pays for good info on frauds.

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  1. PaulK says:

    Note that competitors will turn in suspected frauds because it makes their good numbers look not as good (as Madoff did). The problem in the Madoff case is that people did tell the SEC, which managed to ignore the tips and/or not find anything – at least 4 times! So, paying for tips only works if the SEC will actually do its job. If they will do their job, you likely do not have to pay.
    But, I agree that if there is a reward for high stakes and real fraud (not just some minor violation) that actually hurts the investors.
    I think there are rewards for whistle blowers within companies that commit fraud in SEC filings, so the model exists.

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  2. Hunter says:

    Nope. The SEC got the information for free and they ignored it. Multiple times. The argument could be made that since the SEC considered such tips “worth-less” (i.e., having no readily ascertainable value), they were justified in ignoring them.

    However, offering a bounty would result in the opposite problem: they would be required to scrutinize each tip to find the ones that are “worth-while.” And I can think of no better way to tie a regulator up than having them continuously chasing down tips from people with skin in the game.

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  3. Drumz says:

    A fraud bounty exposing the incompetence at the SEC would generate more jobs. At what point does ignorance become criminal?

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  4. PaulK says:

    Hunter makes a good point. If people can get a reward, then a lot of them will just keep turning in all funds at the top of the lists on recent returns (sort of opposite of sleazy lawyers that sue when a stock drops) – basically fishing. Unless you have to pay some money to file these petitions, there is no reason not to if you have a chance at a reward.
    I say that instead, you tie complaints to the SEC to intrade. So, you setup bets on whether a particular company is committing fraud (and intrade can set the level of fraud necessary). This would also push the SEC to investigate any where the betting exceeds some threshold.

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  5. Neil (SM) says:

    Is that IRS link correct at the end? It goes to the same Time article as the link above it.

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  6. Hunter says:

    #1 PaulK

    The trouble with narrowing the “CrimeStoppers” model to only “high stakes and real fraud” in this arena is twofold:

    1) It’s a disincentive to potential whistleblowers who now have to contend with two sets of people who might think that the reported behavior is “no big deal” – the fraudulent manager and the regulator.

    2) The size of the reward for the tip would have to compensate for all the externalities that go along with “high stakes and real fraud.” For every Markopoulos who has the guts to speak up for free, there will be ten who won’t squeal at any price and twenty who will sing for their supper, retraining for another career and relocation expenses.

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  7. 'stina says:

    Most of the massive fraud recoveries in healthcare are the result of qui tam lawsuits. Anyone can be a qui tam realtor, and the reward is quite substantial.

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  8. Jeff says:

    Instead of blaming the SEC, maybe we should be blaming the Congress that didn’t fund the SEC. What good are laws if we don’t have the manpower to enforce them.

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