September 4, 2009 / 12:13 AM / 10 years ago

Madoff case may bring new whistleblower bounties

BOSTON (Reuters) - U.S. government rewards for whistleblowers: $102 million for exposing Pfizer Inc’s improper drug marketing tactics, zero for warning about Bernard Madoff’s global scam.

The gaping discrepancy arises from federal rules on paying whistleblowers in different industries, and top securities regulators think it’s time for a change.

“We have sought legislation to enable us to compensate whistleblowers for providing substantial evidence of wrongdoing,” U.S. Securities and Exchange Commission Chair Mary Schapiro said in a statement on Wednesday.

So far the SEC — which had brushed off Harry Markopolos’ warnings about Madoff’s firm for years — has paid out only about $150,000 in the past few years for tips on insider trading. Meanwhile, tipsters on wrongdoing by drug companies reap estimated rewards of more than $250 million a year from the agency.

Former Pfizer sales rep John Kopchinski stands to collect more than $51.5 million out of a $102 million total payout after winning a whistleblower lawsuit against the world’s largest drugmaker.

Schapiro’s statement came after she released a scathing internal report condemning the agency for fumbling years of warnings about Madoff. In March he pleaded guilty to running a $65 billion global Ponzi scheme.

Markopolos — now a Massachusetts fraud investigator but formerly an executive at Rampart Investment Management, a rival firm to Madoff’s — once hoped to cash in for reporting the fraud. But would-be whistleblowers find it doesn’t pay, their attorneys say.

“The rewards are just not there,” said Boston lawyer Suzanne Durrell.

Financial wrongdoing laws like the Sarbanes-Oxley Act of 2002 were written to protect insiders from retaliation, not to pay outsiders for tips.

Things could change with fresh lessons on how tipsters should have helped the SEC.

A downside is that rewards could spawn bogus tips.

“When people blow the whistle for money, there’s a tendency to bring out of the woodwork people who make false allegations to enrich themselves,” said Michael Perlis, an SEC enforcement official in the 1970s.

Some of the best-known insiders in financial fraud cases weren’t classic whistleblowers. One-time Enron Corp Vice President Sherron Watkins warned Chairman Ken Lay of accounting problems but never went to outsiders.

Even those who speak out can get zip. Complaints from former call-center employee Peter Scannell led Putnam Investments to pay $194 million in fines over trading practices. But in 2006 a state court turned down Scannell’s suit seeking a share of the recovery, on technical grounds.

Philadelphia attorney Brian Kenney said an improved reward structure would benefit people like Markopolos.

“The guy did go through a lot, so I’d like to see him compensated in some way,” said Kenney, one of several attorneys for plaintiffs in the Pfizer case who have worked with Markopolos.

Markopolos didn’t return messages for this article. But he should reap from the Madoff affair in another way: his book, “Army of One: The Untold Story of the Harry Markopolos Investigation,” will be published next month.

Reporting by Ross Kerber; Editing by Richard Chang

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