September 4, 2009 12:23 PM

Madoff Fraud, SEC Report Continue to Raise Questions

Posted by Brian Baxter

An internal report released by the SEC earlier this week detailing how Bernard Madoff duped regulators for decades is raising questions about the agency's culpability and whether financial fraud whistle-blowers should be compensated.

Earlier this week six whistle-blowers split $102 million in proceeds from Pfizer's record-setting $2.3 billion settlement on charges it illegally marketed drugs and paid kickbacks to doctors.

Now Reuters reports that top securities regulators are thinking it might be time to change federal rules on paying whistle-blowers in different industries.

While the SEC has paid out about $150,000 the past few years for insider trading tips, Reuters notes that tipsters squealing on drug companies have reaped more than $250 million a year from the agency.

Time magazine asks whether the SEC can be held liable by Madoff victims given the disclosures made in an internal investigation of the commission's Madoff-related regulatory failures. Those disclosures were made public by SEC inspector general H. David Kotz on Wednesday.

Herrick, Feinstein partner Howard Elisofan has lodged nearly a dozen civil complaints against the SEC on behalf of Madoff victims, Time reports, hoping to pierce the sovereign-immunity protection traditionally used by government agencies to shield themselves from liability.

But even with Kotz's report in hand, other lawyers, like former Long Term Capital Management general counsel James Rickards, have said "it's extremely unlikely" that the SEC will ever be held liable in court.

Nonetheless, the SEC is redoubling its efforts to catch the next Madoff, if he or she is out there. Last month new SEC enforcement chief Robert Khuzami unveiled his plans for a regulatory shakeup at the agency, and on Thursday, Bloomberg reported on the idea, embraced by SEC chair Mary Schapiro, of sending staffers to a "fraud college" for a crash course in Scheming 101.

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Long Agenda: Catching up with Robert Khuzami, Head of Enforcement for the SEC

From The American Lawyer - September 2009 (registration required)

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