March 12, 2013 · 0 Comments
By Jeffrey R. McCord of The Investor Advocate
March 11, 2013
Within recent months, two media events captured the attention of many Americans: the premier of the Spielberg movie “Lincoln,” showcasing the 19th century federal government’s ability to end our nation’s crime against humanity; and, the airing of the PBS Frontline series “The Untouchables”, showcasing the inability of the twenty-first century federal government to prosecute those responsible for our nation’s largest financial crime spree.
Now, the public watches mindless budgetary slashing of federal regulatory agencies – already underfunded and understaffed – charged with enforcing civil and voting rights and financial laws. And this “sequestration” proceeds at a time of widespread attempts to suppress people of color’s ability to cast ballots in federal elections, and financial fraud and abuse robbing and cutting the savings and assets of tens of millions of Americans.
Half Billion Dollars to be Cut from Fed Investor Protection, Law Enforcement
Aside from federal civil and voting rights programs, investment law enforcement agencies and commissions on the chopping block include the Securities and Exchange Commission (a possible $115 million reduction), Commodity Futures Trading Commission ($17 million), federal courts ($384 million at risk), Public Accounting Oversight Board ($18 million) and the Securities Investor Protection Corporation ($23 million). In sum, $557 million could be cut from investor protection programs, barring Congressional intervention. For more, see Appendix A of the Office of Management and Budget report issued September 15, as required by The Sequestration Transparency Act of 2012.
In this environment of federal inaction and cut-backs, it has never been more important for private citizens and investors to be given the legal tools and authority to protect themselves.
Lincoln Knew How to Deter Fraud: Hit Wrongdoers in their Pocket Books
During the Civil War, Lincoln adroitly dealt with rampant fraud by Union Army contractors by empowering ordinary citizens with knowledge of the crimes to take civil action against wrongdoers on behalf of the government and themselves. Often called the “Lincoln Law,” the federal False Claims Act was modernized in 1987, with Republican Senator Charles Grassley leading the effort. Since then, whistleblowers acting under its authority and protection have recovered more than $40 billion of taxpayer money otherwise lost to fraud and abuse against federal and state governments. For examples, see Taxpayers Against Fraud.
Nine billion dollars was recovered by citizens blowing the whistle during just one year (2012). Compare that with the Securities and Exchange Commission’s total of only $2.6 billion in funds recovered for investors from financial wrongdoers during the past three years during which people on “Main Street” have become painfully aware of their being fleeced by Wall Street (see SEC Enforcement Actions).
What’s good for the taxpaying public would also be good for the investing public whose own personal funds are on the line. Although the withering federal government portion of the nation’s GDP (7 percent in 2012) is surprisingly close to the financial services industry’s contribution (5 percent), citizens can take very effective action against thieving federal contractors, but remain vulnerable against those who rob them of their homes, savings and investments.
Private Class Actions Recovered Three Times More for Investors than SEC
True, citizens can and do band together into class action lawsuits to take action against financial robber barons and such civil actions have won $7.9 billion from wrongdoers in the past three years – three times the amount the SEC recovered during the same period. But, the class action remedy has been under an unremitting attack by corporate and financial lobbyists for almost two decades and has been trimmed and nearly hobbled by Congress and the Courts (see Securities Class Action Settlements—2011 Review and Analysis), with some notable exceptions, during the very period that may best fit Lincoln’s prophesied “era of corruption”:
“I see in the near future a crisis approaching that unnerves me and causes me to tremble for the safety of my country….corporations have been enthroned and an era of corruption in high places will follow, and the money power of the country will endeavor to prolong its reign by working upon the prejudices of the people until all wealth is aggregated in a few hands and the Republic is destroyed.”
So, where are we to turn to recover some of the wealth wrongfully “aggregated” from the many by the hands of the few?
Restore Private Accountability for Aiders and Abettors of Investment Fraud
Certainly, securities class action lawsuits filed by pension funds, retirement plans and individuals against corporate and financial wrongdoers will continue to recover investor losses and nip at the heels of Lincoln’s “money power.” Private class actions could accomplish more to deter fraud and recover investor losses if Congress would overturn a misguided Supreme Court decision by restoring private liability for those who knowingly aid and abet securities fraud.
One early version of the Dodd Frank legislation would have done just that. Banking and accounting industry lobbying, however, killed that provision. Restoring accountability for aiders and abettors is a no-brainer that Congress can still accomplish.
Fortunately, the final Dodd Frank Act did provide an opening for authorizing a “Lincoln Law” providing financial whistleblowers with the policing power to help hold Wall Street accountable and recover ill-gotten gains.
SEC Takes “No Further Action” on Majority of Whistleblower Leads
Congress provided for a “whistleblower” program within the Securities and Exchange Commission enabling people with inside information to contact the Commission. Those providing leads retain anonymity and can win monetary rewards. Despite receiving more than 3,000 leads in 2012, however, only one whistleblower has won an award ($50,000, an amount only equal to an annual bonus for a relatively low level Wall Street employee).
In any event, the SEC takes “no further action” on 69 percent of whistleblower complaints, according to a recent report by the SEC’s Inspector General. The most common leads reported to the SEC relate to fraud and abuse in areas of systemic wrongdoing largely responsible for the financial meltdown: corporate disclosures and financial statements (18.2%); public offerings (15.5%); and, market manipulation (15.2%). See Evaluation of the SEC’s Whistleblower Program.
Powerful Senators (and the Public) Frustrated
The comments of two frustrated Senators during a 2010 hearing demonstrate that some powerful Members of Congress do understand what the public understands: big financial services malefactors are virtually “untouchable”:
Sen. Carl Levin (D-Michigan): “I believe in a free market. But if it’s going to be truly free, it cannot be designed for just a few people. It must be free of deception. It’s got to be free of conflicts of interest. It needs a cop on the beat, and it’s got to get back on Wall Street.”
Sen. Charles Grassley (R-Iowa): “If heads don’t roll, nobody makes any changes. I’m disappointed that in all of the wrongdoing that went on and all the fraud that went on, that there wasn’t an effort to go after bigger fish than the evidence shows they [federal government] went after.” (See The Untouchables.)
Well, heads haven’t rolled Senator Grassley and, Senator Levin, there is still no effective cop on the Wall Street beat.
Congress Should Trust and Empower Lincoln’s “People”
Now, its time for Lincoln’s “government of the people, by the people and for the people” to actually empower the people.
First, Congress should restore the right of people to hold accountable those who knowingly aid and abet frauds that rob them.
Next, Congress should enact a real financial “Lincoln Law” empowering whistleblowers with the tools to catch the “big fish” on Wall Street and make them pay back what they have stolen. And, recoveries should be returned to the investors harmed by the underlying fraud and abuse whistleblowers uncover.
The False Claims Act now on the books authorizes treble damages for those who defraud the government, providing a real deterrent. Moreover, the whistleblowers (termed “relators”) who win their civil actions against fraudsters can be awarded up to 30 percent of funds recovered – a powerful incentive for Wall Street managers who know where the bodies are buried to go after big time wrongdoers.
Time for a Financial False Claims Act
A “Financial False Claims Act” should do the same by authorizing Wall Street whistleblowers to take actions independent of often conflicted government regulators against fraud perpetrators “too big to jail.” Such a law could also authorize the government to intervene in support of such civil actions, if they wish to do so. This is how the False Claims Act works.
Unfortunately, worried that a real whistleblower law could complicate the SEC’s program, the Commission’s inspector general has concluded that it is not the time to:
“[empower] whistleblowers or other individuals . . . to have a private right of action to bring suit . . . on behalf of the government and themselves, against persons who have committed securities fraud.” (See Evaluation of the SEC’s Whistleblower Program.)
If not now, when?
By Jeff McCord