SEC's solution to fraud: Pay informants

The SEC figures it is having trouble catching the bad guys. It has taken a lot of blame for missing signs of Bernie Madoff's schemes. Two of its own lawyers may have been involved in insider trading.

The solution, according to the agency's inspector general, is to aggressively offer incentives to people who turn in law breakers. According to the Financial Times, David Kotz, SEC inspector-general, in letter to Paul Kanjorski, chairman of the House financial services subcommittee on capital markets, suggested that "Although the bounty system has been in place at the SEC for more than 20 years, there have been relatively few awards made."

The obvious question the SEC is raising is why it is not doing its own job. On at least four occasions the agency received credible information about Madoff's actions, and some concern was even voiced in a piece in Barron's. Would offering bounties have helped? Apparently not, since a lot of information on concerns about Madoff was available for free.

Offering payments for "spying" on people in the financial industry is hardly the answer to fraud detection. People skilled enough to steal huge amounts of money are skilled enough to find ways around most detection programs. How was Allen Stanford able to avoid the law for so long? Probably by being sophisticated in the way he built his system for stealing huge sums of money. Probably by paying his best people sum large sums that they would not turn him in because it was in their best interests to keep the fraud a secret.

If the SEC will not respond to the reasonable claims it gets now, paying people is not going to make the system more vigilant. Only a strong SEC chairman and commissioners can do that.

Douglas A. McIntyre is an editor at 24/7 Wall St.

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