Madoff whistleblower could get a cut of awards tied to State
Street, BNY cases
By Justin Baer, Gregory Zuckerman and Aruna Viswanatha
After his warnings about Bernard Madoff's Ponzi scheme went
ignored for years, Harry Markopolos urged U.S. regulators to
encourage tipsters. Now, the forensic accountant and a team he put
together are in position to benefit from those new incentives.
U.S. government settlements with State Street Corp. and Bank of
New York Mellon Corp. could produce a windfall for three former
employees who blew the whistle on the banks' alleged mistreatment
of foreign-currency-trading clients. Mr. Markopolos, who assembled
the group and advised them, could reap a slice of any payouts
awarded to the whistleblowers, according to people familiar with
the matter.
Those awards could exceed a combined $100 million, the largest
such awards on record, according to an analysis by The Wall Street
Journal.
The currency investigations have changed the way trust banks
operate, crimping what had been a profitable corner for the banks
as the markups in currency trades have fallen, analysts said. The
potential payouts also could encourage more tips to regulators
about possible improprieties.
"Whenever there's a big award...there's an uptick of filings and
submissions," said Erika Kelton, an attorney who has represented
whistleblowers. "Those large awards show these programs work, and
that the risk of stepping forward may be a risk worth taking."
Last month, State Street agreed to pay $530 million to settle
civil claims it misled mutual funds and other custody clients with
hidden markups to foreign-currency trades. A big chunk of the
payout will go to government agencies, including the Securities and
Exchange Commission and Justice Department.
The agreement follows a $714 million civil settlement BNY Mellon
reached last year to resolve accusations it cheated government
pension funds and other investors on currency trades for more than
a decade. Late last month, the SEC filed a notice opening the
90-day window for whistleblower claims on the BNY Mellon
agreement.
Both banks admitted to wrongdoing in the settlements. Custody
banks provide accounting services and administrative functions for
other banks, corporations and money managers.
The federal and state investigations stemmed from information
provided by a trio of employees -- Grant Wilson, Peter Cera and
Ryan Gagne -- who were recruited or aided by Mr. Markopolos.
Though it could take months before payouts are made, Messrs.
Wilson, Cera and Gagne each is in line to receive tens of millions
of dollars, thanks to a program the SEC enacted in 2011 as part of
the Dodd-Frank financial-overhaul law.
Mr. Wilson, a trader at BNY Mellon's Pittsburgh office who
remained in his job for two years even after he secretly began to
provide information to the government, could receive an award
approaching $60 million, based on the Journal analysis of the SEC
program's rules and the bank's 2015 settlement.
Two former State Street employees, Messrs. Cera and Gagne, could
claim more than $90 million combined, according to the Journal
analysis. The SEC granted its largest award, $30 million, in
September 2014. The next largest was $17 million in June 2016
followed by $5 million in May this year.
It is unclear what stake Mr. Markopolos might have in these
claims. While technically not a whistleblower himself, he worked to
recruit those who came forward and was instrumental in setting in
motion the government's cases.
The SEC's program allows whistleblowers to collect between 10%
and 30% of penalties the government collects. It has granted a
handful of awards, but the agency provides few details on
payouts.
The SEC declined to comment on the State Street or BNY Mellon
cases or the Journal analysis. Mr. Markoplos declined to comment.
Mr. Wilson declined to comment through his attorney. Messrs. Cera
and Gagne didn't return calls seeking comment.
For years, the SEC had a limited whistleblower program that
resulted in few useful tips and regulatory actions. Mr. Markopolos,
who began warning the SEC about Mr. Madoff in 2000 after he heard
about his remarkable returns and concluded they likely were
fictitious, was among those who encouraged the SEC to provide
greater incentives for those reporting potential wrongdoing.
A cottage industry has sprung up around the SEC's program, with
eager whistleblowers and their lawyers contacting the agency
regarding potential trading improprieties and other behavior. In
the year that ended in September 2015, the agency said it received
about 4,000 tips compared with 3,000 in the first year of the
program. Thirty-two whistleblowers have collected roughly $85
million since 2011, according to an SEC report.
The agency issued 150 decisions on claims in fiscal 2015, though
only eight resulted in awards. Few tipsters can count on a quick
payout. Last year, the Journal reported the agency had an extensive
backlog in processing claims for awards.
After Mr. Madoff's arrest in December 2008, Mr. Markopolos won
acclaim for his early warnings. But he was miserable, he said at
the time, haunted by the investor losses and the apparent suicide
of a French money manager Mr. Markopolos said he had warned.
As chronicled in a 2011 story in the Journal, Mr. Markopolos
became intrigued about the possibility that trust banks were
overcharging clients in currency markets after reading a book by
Yale University's chief investment officer that pointed to
unpredictable "foreign exchange translations."
Mr. Markopolos asked a friend who had worked with State Street
who said custody banks typically charge pension funds unfavorable
foreign-exchange, or FX, prices. "No one ever checks FX," the
friend said.
Mr. Markopolos set out in search of bank employees to prove his
case, persuading Messrs. Cera, Gagne and Wilson to help.
The group organized Delaware partnerships, with the
whistleblowers as the partners, to keep their identities out of
public view. Mr. Markopolos served as a litigation consultant to
the lawyers.
Mr. Markopolos and his team spent years digging up evidence of
the currency manipulations, much as he worked to accumulate
evidence on Mr. Madoff.
Write to Justin Baer at justin.baer@wsj.com, Gregory Zuckerman
at gregory.zuckerman@wsj.com and Aruna Viswanatha at
Aruna.Viswanatha@wsj.com
(END) Dow Jones Newswires
August 10, 2016 02:47 ET (06:47 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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