“Whistleblowers” and Tipsters at the SEC
We were thinking our disgorgement post would be the last one of the year but, you know, it’s hard to stop. On Christmas Eve, the Boston Globe published a nice profile of Paul Levenson, the newly installed head of the SEC’s Boston Regional Office. He’s a former Assistant U.S. Attorney in the District of Massachusetts, apparently a hard worker and smart. And he seems to recognize the special place the Boston office has in regulating the investment management industry in the area. So, pretty much the kind of lawyer you’d want running that office, it appears.
The article discusses – as it must, I guess – that office’s role in the SEC’s failure to catch Bernie Madoff before his epic Ponzi scheme vaporized billions in investors’ funds. In this telling, “Boston SEC regulators could not persuade their New York counterparts to pick up the case.” The full story is a lot more complicated than that, but in any event, the recounting gives the article the chance to discuss the Commission’s handling of tips of securities violations that come into the agency, and Levenson’s take on that.
Though resources are tight, we learn,
[T]he SEC isn’t skimping on its commitment to sort through 3,000 tips that come in nationwide over the phone, via e-mail, and by regular mail. In Boston, two attorneys and a paralegal are assigned to the tips, complaints, and referrals program. That’s good by Levenson, who’s a big believer “you always take the call,” so that no leads are missed.
Two related things here. First, “3,000” tips each year is only the beginning. In a sense, it’s an accurate number, but it refers only to tips reported by those who qualify as “whistleblowers” under the Dodd-Frank Act. It’s a relatively restrictive definition. The SEC receives many, many more complaints alleging potential violations of the securities laws each year that are not strictly “whistleblower” tips. The current numbers aren’t public, but it could easily be 30,000 complaints each year. Obviously, the SEC has to deal with all of them.
Second, I’d like to unpack Levenson’s comment that “you always take the call” from these many thousands of tipsters. Look, if I were in his position I would probably say the same thing, but let me tell you something: You absolutely do not “always take the call.” If that were the plan, you’d literally never stop taking calls. I think what he really means is, you:
build a strong database that includes all tips coming into the agency;
link those tips with future tips involving the same players together in that database;
write policies to compel staff at the agency to have emailed or telephoned tips entered into the database; and
dedicate staff to analyzing those tips and make the hard calls about what to pursue as an enforcement matter and what to leave alone for the time being.
The last part is critical. The difficult truth here is the Commission cannot pursue everything it’s confronted with. There is more securities fraud in the world than the SEC can address. And, given the numbers involved, that last piece is very hard to do, especially given the consequences of getting it wrong. Most tips that lead to successful enforcement actions are easy to read in retrospect. They’re much less clear when hidden in a stack of 30,000 similar ones. But you can’t “always take the call,” and you can’t even treat all tips equally. Some of them are truly insane; others are clear and easily verifiable. The vast majority lie somewhere in the middle, and it takes a lot of talent and hard work to figure which is which.