A big reason why financial crimes are so hard to prosecute is that authorities often lack witnesses who can testify in detail about such crimes. That means prosecutors must rely on others forms of evidence -- like documents and emails. But even a pretty damning paper trail just doesn't have the punch of an individual pointing their finger and unloading all the sordid details. Also, without an insider to explain the labryinth of a typical securites fraud, it can be hard for prosecutors to ever even assemble such a trail.
All this helps explain why not a single high-level executive has been prosecuted for all the criminality that surrounded the subprime mortgage bubble -- even though there are plenty of indications that investors were routinely misled about the risks associated with mortgage backed securities.
But starting tomorrow, the government is going to have a powerful weapon in the fight against financial crime when new whistleblower rules take effect. As I wrote here earlier, these rules were mandated by Dodd-Frank and Wall Street fought for nearly a year to stop the SEC from actually adopting them.
The rules are written in a language that Wall Streeters can understand, offering money -- piles of it -- to those who report financial crimes. Whistleblowers will be entitled to between 10 and 30 percent of any settlement that results from their information. So, for instance, if the last year's $550 million SEC settlement with Goldman Sachs was made possible by a whistleblower, that individual could possibly have walked away with a $165 million bounty. That's big money, even for the guys at Goldman Sachs.
Earlier this week, I met with Jordan Thomas, who helped develop the new rules as an Assistant Director at the SEC. In the wake of the SEC's crucial vote in May to adopt the rules, Thomas completed work on one of the most important assignments of his career. His next move? Actually making the rules work by representing whistleblowers. Last month, Thomas joined the New York law firm of Labaton Sucharow to establish a whistleblower program there focused exclusively on securities fraud. Thomas decided to come to New York, he says, because this is the epicenter of financial crime.
But, as Thomas also noted, securities fraud takes many forms. We are not just talking about big crimes by the likes of Goldman Sachs; there is a long history of securites fraud among smaller public companies that misstate their earnings to please investors. And such companies are all over the country. During the last tech boom, for instance, earnings fraud was common in Silicon Valley.
Is all happening again? Who knows, but one thing is for sure: the new whistleblower rules create an incentive for insiders to expose these crimes that has never existed before.