To help regulators, a posse of citizen bounty hunters?

To help regulators, a posse of citizen bounty hunters?
By Bruce Kelly

Securities regulators need help, and these extraordinary times are seeing unusual ideas come to the fore.

Jeffrey Sonn, a plaintiff’s attorney, dreams of a day when the government creates a white-shoe “bounty program” in which the hundreds of thousands of lawyers in the United States can get paid for helping nab more potential Bernard Madoff types.

Former FBI agent Ken Springer wants the Department of Justice to “deputize” his retired cohorts so that they can help root out financial crime.

And the Financial Industry Regulatory Authority Inc., which has caught its share of criticism for its inability to detect and shut down alleged scam artists such as R. Allen Stanford, is also getting in on the act. This month, the New York- and Washington-based self-regulator of the brokerage industry said that it had created a whistle-blower office to speed the review of high-risk tips by Finra senior staff members.

Finra wants to “ensure a rapid response for tips believed to have merit,” it said in a statement.

“This new initiative will ensure that individuals with significant information will reach senior staff who can quickly assess the level of risk involved and make sure that each tip is properly evaluated,” Stephen Luparello, Finra’s interim chief executive, said in the statement.

As for the bounty program, Mr. Sonn and others hope that crooked brokers and advisers have been put on notice.

The attorney said that he has recently spoken with congressional lawmakers about the need to have more eyes and ears in the investment community in order to catch scamsters.

The government could start a bounty program to bring in bad brokers, relying on practicing attorneys, said Mr. Sonn, who is based in Fort Lauderdale, Fla.

Local attorneys often work with regulators when they are building investigations into potentially fraudulent sales of investment products.

But securities regulators at Finra and the SEC simply need more assistance, said Mr. Sonn, a former member of the board of the Public Investors Arbitration Bar Association of Norman, Okla.

“The self-regulation model doesn’t work; the system is broken,” he said. “We need fundamental change.”

Such concepts and programs shouldn’t come as a surprise.

In the aftermath of such calamities as the Securities and Exchange Commission’s failure to act on credible tips about Bernard Madoff’s $65 billion Ponzi scheme, reforming regulation of the financial services business and its various types of institutions is front and center.

A regulatory overhaul is clearly on the agenda of the most powerful people in Washington, including Treasury Secretary Timothy Geithner.

Last Thursday, he said that regulations need to be made over to protect the financial system from the shock of the collapse of any single institution.

“We do not want to put this country in the position in the future where we are vulnerable again, where the weakness in one institution causes the risk of great damage to the fabric of the American financial system,” Mr. Geithner told the Senate Budget Committee. “That basic objective has to underpin everything we do on the reform agenda, and we have to get it right.”

In New York the same day, Mr. Madoff, considered a “broker’s broker” by some who know him, admitted to years of deceiving clients to keep his multibillion-dollar fraud up and running.

And clients weren’t the only people that he said he persuasively duped.

In his statement to the court, Mr. Madoff said that he lied to the SEC in 2006 when the regulator investigated his investment advisory business. He said he misled regulators at the time about stock and options trades for his clients.

Mr. Madoff said that he also lied when he told the SEC that his firm had custody of the phantom assets in his investment advisory business.



Mr. Sonn said he was on Capitol Hill last month speaking to a senator about his “bounty hunter” idea, but he declined to name the lawmaker.

Meanwhile, Mr. Springer, the former FBI agent, wants to put those with knowledge and experience on the hunt for financial fraud.

The regulators “clearly need help. It’s not a slam on them; it’s crime of epidemic proportions,” said Mr. Springer, president of Corporate Resolutions Inc., a private-investigation-services company for law firms, corporations, private-equity firms, merchant banks and alternative-asset managers.

“I think [the government] ought to deputize former federal agents” to help investigate financial fraud, he said.

Mr. Springer noted that former Internal Revenue Service agents are assisting the FBI in investigations of fraud in the subprime-mortgage market.

“Why not do this in the hedge fund area or wherever?” he asked. “Pay [the former agents] an hourly rate; they’ll love it.”