Why Aren't Regulators Co-opting Whistleblowers?

What do America and Hong Kong have in common these days? Perhaps it is a scandal-ridden corporate and financial scene highlighted by wanton pursuit of money by big shots at the expense of schools of small fry. The only silver lining in both places appears to lie in outspoken, ethical and knowledgeable people who are motivated by their own scruples to speak out against corrupt or illegal conduct, even though regulators routinely ignore them. There is no question that both places are in need of more of such people. The problem is: co-opting such talents does not seem to be on the respective authorities’ agenda, at least not yet.

An interesting article at Marketwatch.com tells how Harry Markopolos, a finance sector professional, tried in vain to take on Madoff, alleged creator of the largest Ponzi-scheme in American history, years before the big scandal blew off its lid.

"Just when you thought the financial crisis has created nothing but villains, along comes Markopolos, the bookish, humble whistleblower who courageously fought in vain for nearly a decade to get regulators to take a close look at Madoff.

He took Capitol Hill by storm Wednesday, unleashing a double blow of written and spoken testimony that painted a devastating picture of the alleged Ponzi schemer Madoff and unleashed withering criticism of the Securities and Exchange Commission and Financial Industry Regulatory Authority."

Markopolos’ scathing criticism of the SFC drew more than the audience’s applause – it impressed David Weidner, author of the article, so much that the latter wonders why the Obama administration is not offering the whistleblower a senior post at the SFC.

In retrospect, had the SFC acted on Markopolos’ initial alert of a suspected ongoing commercial crime, or better still, had someone like him on their staff, Madoff would not have been allowed to thrive for so many years and far fewer investors would have fallen victim to his scheme.

In Hong Kong, a highly suspicious scene unrolled before our eyes when the PCCW board successfully rammed through a privatization motion at an Extraordinary General Meeting a couple of weeks after David Webb reported to the ICAC and the SFC of suspected vote-rigging activities (see Webb’s full report).

As reported in The Standard, the SFC has received a formal petition from the pro-Beijing party DAB as well as a “handful” of enquiries and complaints from others regarding the Feb. 4 PCCW shareholder vote.

At this moment, it is impossible to predict whether the SFC will take the right step of requesting the High Court to delay approving the privatization scheme until sufficient evidence can be found either affirming or negating the allegations, although for obvious reasons the odds stack against such a move being in the cards.

But if Hong Kong is serious about upholding her international reputation on the regulatory front, which reputation has already been tarnished by the Lehman Brothers mini-bond scandal and the Citic Pacific management misdeed, and which will definitely not be helped by this PCCW incident, is it not time for the authorities to seriously consider overhauling the regulatory framework governing the financial markets and the corporate arena? Fundamental to any such framework restructuring is without question the hiring of the right people to do the right job. And who are more qualified to do the policing job than those who know the trade well and thus have a keen eye for anomalies, and who, out of sheer ethics and a sense of responsibility, have taken upon themselves to blow the whistle on malfeasants?

Just as the US SFC has urgent need for scrupulous and knowledgeable senior personnel who are the likes of Markopolos, the Hong Kong SFC may also be in desperate need of straight-shooting and shrewd professionals like Webb. The irony though is that Webb, once on the board of HKEx, the other regulatory body (with obvious conflict of interests) supposedly charged with corporate governance duties, found his well-meaning mission so unappreciated (or even detested) by the authorities that he threw in the towel last year. Besides, his solitary voice of justice appears too weak a match for the selfish growl of the tycoons-cum-officials cabal.

Related readings:-

Unlucky Shareholders

Hong Kong Bourse Needs Stronger Watchdog

Is HKEx a Public Body or Private Club?