The Whistleblowers Among Us

In the fraud arena, whistleblowers are heroes. Time magazine selected three whistleblowers as its “People of the Year” in 2002.

Harry Markopolos recently became famous for trying, and trying, to blow the whistle on Madoff’s Ponzi scheme. Whistleblowers are crucial to the work of uncovering fraud. The Association of Certified Fraud Examiners’ 2008 Report to the Nation cites tips from whistleblowers as the most common method of fraud detection, a fact that is consistent with its 2006 Report to the Nation.

The term “whistleblower” originates in England, where bobbies — London policemen — blew their whistles when they saw a crime being committed. The whistle alerted other law enforcement officers and innocent bystanders of the potential danger.

A whistleblower reports potential misconduct, and often faces some negative consequences for doing so. The most common consequence is the loss of employment or demotion but, in the Madoff fraud, Harry Markopolos has expressed that he feared for his life. In a recent interview in Fraud Magazine, Markopolos said “Madoff was too dangerous an individual and too powerful a target for me. So my advice is ‘know when to quit.’ But this was my first case and I didn’t know any better.” Markopolos knew there were huge stakes for our economy and for investors.

In the United States, some legal protection for whistleblowers are now in place. The laws are challenging to navigate because they differ depending on the state where it takes place, or on the industry that is subjected to the whistleblowing.

A whistleblower may have as little as 10 days in some states to seek remedies for reprisals related to reporting law violations, fraud or corruption. Those remedies are limited and, while a case works its way through the courts, the whistleblower may be unemployed, demoted or working in a hostile environment. The incentive to simply look the other way usually is very high. Shawn Carpenter was working for Sandia when he realized hackers were breaching computer networks at U.S. defense contractors and military installations. When he reported it at Sandia, he was told not to share the information with the government. Sandia wanted to protect its networks only.

Carpenter reported the problem to the FBI and the U.S. Army, and Sandia terminated his employment. In 2007, a state court in New Mexico awarded him $4.7 million in damages from Sandia. Cynthia Cooper of Worldcom, Sherron Watkins of Enron and Coleen Rowley of the FBI — all whistleblowers — were named Time’s People of the Year in 2002. Cooper and Watkins exposed corporate financial statement frauds that were so large they led to accounting reforms and passage of the Sarbanes-Oxley Act. Rowley disclosed the FBI’s slow reaction prior to the Sept. 11, 2001 attacks.

A Federal Aviation Administration inspector, Christopher Monteleon said he reported issues with the Bombardier Dash 8-Q400s in January 2008 — the plane that crashed in Buffalo in February. After his report, Monteleon was reassigned to desk work. He continued to complain and was transferred or reassigned three more times. He recently filed a complaint with the federal Office of Special Counsel, which investigates whistleblower complaints.

Recently, we’ve learned more about the exploits of Harry Markopolos, whose persistence was remarkable considering SEC officials did not pursue his reports of fraud. He gave the SEC a roadmap to the Madoff fraud beginning in 2000 and tried working with the SEC’s three top offices, but to no avail. Markopolos used his Army Special Forces training in his approach to the investigation and put together a team. He made reports to the SEC without referring to his team in order to minimize the danger to them.

Markopolos and the team tracked Madoff through Europe and North America and put together a pretty accurate picture of the fraud. Markopolos never was able to bring his first investigation to a successful end, and he calls it “the biggest case failure in history.” In fact, when Madoff turned himself in on Dec. 11, 2008, the Madoff file was in Markopolos’s dead case file cabinet, according to the May/June issue of Fraud Magazine.

Markopolos now runs an independent fraud investigation firm. In his interview with Fraud Magazine he said that he “automatically reject[s] cases that try to find me and rarely respond to emails or phone calls from people I don’t already know.” So, in an odd twist, it seems that the famous whistleblower rejects cases brought to him by whistleblowers.

Gina Bliss, CPA, CFE
Gina is a senior manager at EFP Rotenberg who specializes in internal audit, fraud audit, and forensic accounting. Article reprinted courtesy of The Daily Record.