> The company sold more than 20,000 individual investors fractional shares in life settlements—the right to collect on a stranger’s life insurance policy when the insured person dies. Mr. McPherson suspected the company was overcharging clients by providing misleading estimates of how quickly the insured person was likely to die.
It's disturbing but makes sense in a lot of business contexts. Imagine I own a business and I have a key employee who has a unique skill. And if they were to die, my business would have serious problems. It makes sense to take out a life insurance policy on that person to protect my lost revenue.
Or let's say I have a business partner, we own the business 50/50. It makes a lot of sense for each of us to have a life insurance policy on the other person to make up for the fact that the business might likely die if the person does.
Where it's kind of screwed up is when Walmart takes out policies on their front line retail employees and doesn't tell them as a way of diversifying revenue.
Is there any evidence they're doing that? Moreover, if they would do that, wouldn't that be already be priced in by the insurance company, wiping out any potential gains?
There may be evidence but I don't know about it. If we were talking about insurance for property damage, I could almost agree with the "priced-in" idea, [EDIT:] although that assumes a very efficient torts system for the third parties who suffer damage to their property. There is an inherent asymmetry when we're talking about the health and lives of third parties, however. If anything firms should be encouraged to care more about not killing their employees.
Walmart isn't some disinterested third party; they enact policies that directly affect their employees' health and longevity. It's a pretty perverse incentive for the party responsible for negotiating and administering your health insurance to have a financial interest in you dying younger than expected.
Life insurance makes total sense and is a good thing in general for the family and possibly the business involved. The part I find disturbing is investing in the life insurance policies of complete strangers where the return on investment depends on the demise of said strangers.
This is baffling. Is this supposed to provide above market returns (after adjusting for risk)? If not, what's the point? If yes, how's the counterparty to this (insurance companies) coming up with the returns? After all, they're just investing the money so they can pay out a few decades later; it's not like they can print money to do the payouts. Are they just betting on the insurance companies mispricing their insurance products?
According to the Forbes article I linked, they selectively invest in policies that will likely see a payout (old people with health issues) and ignore the rest. They then pay the premiums to keep the policies alive until they can cash out.
Either the person who bought the policy wants to sell or the insurer who wrote the policy wants to sell. The person selling wants cash today, and the person buying wants cash tomorrow. Same as anything else.
EDIT: I will add, there is a lot of this kind of thing going on in insurance now because no-one expected rates to stay this low for so long. This drives cash out of insurers who, often, have a massive stream of liabilities and no way to generate cash to pay them. And this specific market is driven more by individuals who took out huge life insurance policies, lived longer than they expected, and are now stuck paying huge premiums they can't afford (so they sell the policy to someone else, who pays the premiums, and collects the final value). Again, this is basically how financial markets work. Risk is shifted towards those who are most able to bear it. The alternative here is a bunch of old people having to declare bankruptcy and being stripped of all their assets because there is no-one who will cash their policy.
> Are they just betting on the insurance companies mispricing their insurance products?
Sort of. First, the investors are betting that the information they have now (when the insured wants to sell) is better than what the insurance company had then (when the insured purchased the policy). Second, life insurance policies have a “cash surrender” value, basically an amount of money that the insurance company will pay to the insured to give up the policy. These days those cash surrender values are extremely low, as the insurance companies rely on the difference to boost profits; they can do this because many policyholders don’t know there are alternatives to surrendering the policy if they can’t make the payments.
What’s attractive about this from an investor’s perspective is not outsized returns, but returns that are uncorrelated with the market.
I was pretty grossed out when I first heard of this kind of investment but then learned that it first became popular during the AIDS epidemic. Selling their life insurance policies was a way for the terminally ill to benefit from an asset that was not going to have any value to them after death (if they had no family to benefit from the payout). Without investors providing a market for these policies, they’d have to settle for the cash surrender value.
My understanding is that they became common during the AIDS epidemic, with people selling their life insurance proceeds early in order to get money for their current living expenses. It's a little disturbing, but it makes sense.
Individual goes bankrupt and implodes his career due to little known fact, and somehow it's bad practice to report on that? The SEC are a big organisation, they can take a knock.
> I couldn't find a common translation or appearance of this saying's equivalent in English. Ungratefulness is the world's wage?
I believe it means something akin to "nothing is so hard as man's ingratitude." It's an expression that's not dissimilar to "no good deed goes unpunished." They're not quite the same, but they're tandem in the general principle of ingratitude.
Or... to look at it another way, when there isn't enough money left in a company, harmed investors are paid first, then whistleblowers/government fines.
It's not right, because now it's in the whistleblowers' best interest to get in on the scam and enrich themselves instead of reporting anything, since the act of whistleblowing is equivalent to shooting yourself in the foot while biting the hand that's feeding you.
I suppose it is right depending on who's side you're on.
It’s not in the best interest of a whistleblower to get in on the scam. The trope of “incentives” is overblown. People don’t directly respond only to a single incentive. It’s in the best interest of the whistleblower to keep his head low instead of report.
I think you are in agreement with the parent post. There was an implied /s in the tone.
Systemically it’s a huge problem to favor investors over whistleblowers and fines. You want incentives to be aligned wherever possible, and being able to declare bankruptcy in order to protect the very people benefiting from unscrupulous acts just leads to more unscrupulous behavior.
I strongly disagree with this, because the GP has used the term "harmed investors". I think it's a dangerous practice to go around claiming other people's posts are tongue in cheek. That's how we come to allow 'locker room talk'.
The heavy use of ellipses is a common giveaway for sarcasm in casual writing in the US. But I agree, part of what makes "good" sarcasm is that it's easy to interpret as being either for or against something depending on the audience, and this leads to issues like "locker room talk", allowing some unfortunate ideas to persist because it appears people agree with them. I also think sarcasm should be used sparingly on this particular forum, it's important to try to limit the possibility of ambiguity in order to foster better discussions.
It seems right to you that investors in a company caught running a $1.4 billion scam should receive a billion dollars - while the whistleblower loses his career and gets nothing?
The investors ONLY saw a 28.5% loss (1B/1.4B). In the scheme of things it could have been way worse if the whistleblower didn't speak up. If they gave say 1% of the assets to the whistleblower (10 Million), it wouldn't have really changed the investor payout all that much. BUT it would encourage future whistleblowers. Especially when the whistleblower speaking up earlier prevent further losses to impacted investors.
I wonder what the expected change in the loss to investors is compared to the delay in a whistleblower coming forward.
I suspect a lot of companies which have illegally covered up losses have later managed to recoup losses to make investors whole again, and have never been discovered. In these cases, investors end up better off without a whistleblower.
I guess seems partially wrong to me. While I agree government should collect after aggrieved investors, I think whistleblowers should come first as they are the ones enabling fraud detection.
I think there's something to be said that investors who recouped funds should have a portion allocated to the whistleblower program if that's how investors got their money back.
Harmed investors are the ones that should have done the due diligence in the first place. That they got anything back at all was due to the diligence of the whistle blower. People should be rewarded for calling out white collar crime and the fees should extend to the people actually operating the fraud.
Why? It doesn't read as sarcastic to me -- investors are the ones being harmed by the scam. Obviously the current system needs to support whistleblowers more, but I don't get why one would make a sarcastic comment about helping the victims.
Investors got their compensationin advance -- their loses are limited to the amount invested, regardless of liability incurred. Thus additional compensation should be below the rights of creditors who performed work on their behalf.
If it's the other way around, then you could go around investing in companies that never pay their bills, ripping off everyone you do business with.
The problem is the government made a policy decision to use whistleblowers as a tool to police malfeasance, rather than hire and pay civil servants to do the same.
As implemented, the law takes away the financial incentive for whistleblowers to take action on the most egregious cases. If a fraudster being uncovered will put the offending entity out of business, there’s no incentive to risk getting blackballed.
Assuming an investor wants a maximum payout and that the % of money recovered decreases as the fraud perpetuates, the early recovery-whistleblower cut could be greater than a late recovery.
If you rely only on people doing the right thing, turns out that most of Wall Street won't help you. If you offer financial payouts, then suddenly you have a lineup of people ready to spill the dirt.
Now, you can take the moral high ground of 'Well we don't want the help of greedy people', but it seems that when you do that, you don't get a lot of convictions, and the financial crimes continue to happen.
OK, I understand you all are being utilitarian about this, and I appreciate the perspective.
And it's unfortunate that this guy lost his job, and he might also have a hard time finding new work because he's a snitch.
Now, this is a bit tangential to the article, but I'm having a hard time accepting that our financial system is so blatantly corrupt that individuals within the system are expected to behave poorly, and we rely on cash payments to root out crimes. It doesn't sit well. Am I being naive?
We rely on cash payments for other things to, like info about criminals and such.
Why should we expect people to do hard things unless they are in their best interest? Regardless of morality, that's just how people are.
This isn't about finance being rotten, it's about that to get people to do what you want, you have to reward them. This is what bonuses are about, what giving treats to dogs for good behavior is about, etc.
This sends a bad message to would-be whistleblowers. I read it as... "next time, take your evidence, make contingency plans, and finally blackmail the criminals - you're more likely to get paid".
A lesson they teach in $IVY_LEAGUE, "you all know whistle blowers don't end up well." Direct quote from $INFLUENTIAL_DUDE in response to $PUBLIC_THING.
Trust your gut. When it says leave, leave. Even if others encourage the opposite. Even if your extended family depends on your income.
Make the effort to build and maintain a strong social circle. Filter for integrity. Assiduously avoid those who distort truth for personal advantage.
In The Netherlands and the EU there are quite a few well-known whistleblowers who received the short-end of the stick. One example would be Paul van Buitenen [0].
It's really risky to become a whistleblower and if you do, you better be able to live the rest of your life on your finances, because it might become very hard after becoming a whistleblower to receive another well-paying job. Also be prepared to deal with a lot of stress that might impact your health and mental wellbeing.
To receive another job, never mind the 'well-paying' bit. Companies would be scared shitless to hire someone that might expose their dirty laundry, especially if they already have a track record of doing so.
If there is one thing that is pretty certain then it is that whistleblowers get to blow the whistle exactly once.
I personally think that we need to combine significant whistleblowers with witness protection. They need the same protections and compensation to give up their current life. This is why people don't come forward know. Someone is likely married to the child traffickers and corporate fraudsters off the world but you have to convince them to give up their life and be in a media circus and potentially risk the lives of them and their family. You have to reward them as such.
I get that there is no money from the penalty so he can't get paid from that but he should at least get paid for his expenses and time. After all, his help was invaluable to the case. There needs to be a minimum payout. I bet all the lawyers got paid from the recovered funds so he should get his share from that.
Yes, but there was $1 billion recovered for the victims. I guarantee the lawyers that did the work got a share of that money. I think the whistleblower should have gotten, at the very least, his expenses covered.
That's how bankruptcy works. There's an amount of money recovered then all interested parties tell the court how much they are owed. An finally, a judge decides who gets what. Like I said, the lawyers got their share. I think he should too.
3 trillion for covid relief like nothing. Why not set aside just a miniscule amount for whistle-blowers? Getting the govt. To geta payout is like prying open a bear trap.
This is a bit of a click-baity article title. He went broke because he assumed he was getting a payout and did stupid things.
From the bottom of article:
Early in the Life Partners saga, Mr. McPherson was so beguiled by the lure of whistleblower millions that he essentially quit his day job to become a full-time whistleblower, using his accounting and life-insurance knowledge to spot potential miscreants...In 2018, he took out a $1 million litigation-funding loan at very high interest rates, secured by the Life Partners whistleblower claims, to pay back taxes and continue to pursue his cases.
The fine print seems to be that the bankruptcy process privileges investors, rather than requiring companies to pay fines (which pay for the whistleblower program.) I don't know if this is good or bad, but it's the important substance of the article -- not the silly detail about this particular person's finances.
Well the crime the company committed was fraud against their investors... shouldn't the victims get their money back?
Paying out the whistleblower before the victims would be like if someone stole your bike, then the cops arrest the guy and recover your bike because of a tip... and then the cops give your bike to the guy who called in the tip
wow, that would be like having a bounty program that paid whistleblowers 10% of value of the theft for encouragement and was catching enough perps to act as a deterrent and lowered the overall crime rate and got victims 90% of their losses back, kind of an ex post insurance pool...
...and then figuring you could get victims 100% of their losses back by taking that 10% from the whistleblowers and sending them to the back of the line, and then coming back a year later and seeing that...
...while victims were getting 100% of their losses back when these crimes were discovered, very few of these crimes were being discovered, and using your impeccable logic concluding that the crime rate must have gone down! who needs whistleblowers!?
We do not have a justice system in which the victim pays for the cost of investigating, prosecuting, and punishing offenders. All of that is paid by the general public. That does not mean there are no bounties -- there are, but the bounties are never paid by subtracting out amounts due victims. Changing that, so that victims would not be entitled to full restitution in order to help finance law enforcement would require changing a lot of laws, not just adding a whistleblower law. It would also overturn a lot of precedent. It would be a big change that a large majority of the public would oppose.
Not having a whistleblower would be like if someone stole your bike, got away with it, then went on to have a long, successful career in stealing bikes.
The crime has already been committed. The whistleblower is the reason you're getting anything back.
That's a "he was no angel" argument, and like all such it's really an attempt to deflect. The reason to reward whistleblowers isn't to make sure the money goes to Objectively Good and Unimpeachably Moral individuals, it's to incentivize enforcement of laws and norms.
The guy could be a raging narcissist with a gambling problem (which would be quite a bit worse than trying to be a "full-time whistleblower") and we would STILL want him to blow the whistle on wrongdoing he witnesses, right?
> he essentially quit his day job to become a full-time whistleblower
It sounds like you're criticizing him here, but this is a good thing, right? We incentivize whistleblowing because we want more whistleblowing. He was successful in bringing frauds to justice. We got exactly what we wanted. This is exactly how it should work.
> 2018, he took out a $1 million litigation-funding loan at very high interest rates, secured by the Life Partners whistleblower claims
This isn't necessarily stupid either. If it was a secured loan, then as I understand it he probably won't have to pay the million back. He transferred the risk to the lender and they lost. He paid his back taxes and should emerge from bankruptcy without the debt.
Not if you turn it into a career, no. Then you should have signed up for an undercover investigator position, drawing a normal salary, instead of assuming your reporting will net you an income.
Should whistleblowers be rewarded? Absolutely. Should that come from a pool allocated and managed by the SEC? Most certainly, because we want folks to be secure in their whistleblowing. Is it the American way to go "there's money here, I can probably take repeat-advantage of that"? You bet your star spangled butt it is. But is that last part also on you, and not anyone else? In most American fashion: boy howdy yes.
> Then you should have signed up for an undercover investigator position
Why though? Is this a moral judgement against whistleblowing as a profession, or something? I expect that offering whistleblower rewards is a much more scalable and effective way to discover frauds than employing a standing army of investigators.
The problem here is that he leveraged himself and pursued a case which resulted in bankruptcy which makes it hard for the SEC to collect a fine that they can disburse part of to the whistleblower.
Whistleblower rewards are great, but they must have limits, and he bumped into them here (while highly leveraging himself).
No, the problem here is that the whistleblower reward program is less effective than it should be because payouts are divorced from the effectiveness of the whistleblowing. If you set up a program that is supposed to reward a specific behavior, and then you don't actually reward that behavior, that is a problem.
As I said, the leveraging he did is mainly a problem for the lender, who is now out $1m, not him.
One reason being that then you have a strong financial incentive to "whistleblow" on things that are less clear-cut, making it likely that (a) you'll eventually harm innocent people in the process, and (b) you'll inject too much noise/unnecessary work into the system.
As a rough analogy, imagine someone calling to report an impaired driver they encountered by pure happenstance, vs. someone who made it their personal full-time career to just go around on roads finding people he can report. I'm not sure if you see a difference but I certainly do.
Was he harming innocent people? Was he injecting too much noise/unnecessary work into the system?
I don't see how him doing it as more of a freelance thing rather than an undercover position guarantees a different outcome. It seems like we have to look at the actual outcome and we can't paint with such broad strokes about how one model or the other is better.
> One reason being that then you have a strong financial incentive to "whistleblow" on things that are less clear-cut, making it likely that (a) you'll eventually harm innocent people in the process, and (b) you'll inject too much noise/unnecessary work into the system.
It's not like a whistle blowing claim just results in enforcement action without investigation. The claim gets investigated by the relevant agency first, and then if and only if it is found to be justified is an enforcement action taken. That enforcement action can then be challenged in the courts, too, if the entity in question perceives the agency to be in the wrong.
I don't think there's much risk of whistle blowers significantly harming innocent companies here.
Do you see any difference with the impaired driving analogy? Or with someone spending 40h/week just walking around calling the cops every time they see some dude do something that looks appears illegal to them? If we don't even agree on those it's going to be too much effort to argue...
Exactly. Or imagine people spending their time finding security flaws and collecting bug bounties as a career instead of just reporting security issues whenever they occasionally happened upon them.
What's the point of whistleblowing? I thought it was to provide a framework for people who've come across shady behavior on the part of their employer in the execution of their day-to-day work. So, I guess it is more scalable because it is operating under the assumption that the whistleblowers were receiving their normal paycheck while "investigating."
Certainly no negative moral judgement on people intentionally going for those bounties, fighting corruption is admirable. But the system is probably not calibrated to provide for their their day-to-day expenses or the cases where their investigations aren't successful. If it were, it would be equivalent to just employing that army of investigators (just, without any official organization, so it'd miss out on any benefits from legal authority or economies of scale).
> Then you should have signed up for an undercover investigator position, drawing a normal salary, instead of assuming your reporting will net you an income.
That's your opinion.
> It sounds like you're criticizing him here, but this is a good thing,
It _is_ a good thing, even if it wasn't great for him. Lots of people do things that are ultimately less optimal than other paths. That being said, more scrutiny is better, regardless of the participation in specific programs that some people think is better suited.
...why? Why is this any different than the spreadsheet-based version of being a bounty Hunter? Why, in involving stock trades/financial instruments, does it somehow become wrong for someone to specialize in a very niche skill, and then choose contract work instead of a salaried position? Is this a moral judgment about a particular person's greed? You might be misunderstanding US-style "capitalism" if you truly find that distasteful.
What is less clear to me is why he borrowed so much money to setup this business? The debt had as much or more to do with his going broke than the flawed whistleblower process. As with many things in life this is a cautionary tale about not counting on something before it’s done.
I read the original WSJ. I guess the tricky moral question is: were the investors partially culpable for the crime, or blameless victims? You can say "they should have been more diligent" but are you equally willing to apply that standard to ALL fraud victims? Example:
You moved into an unsafe apartment building that collapsed snd killed you -- "too bad, you should have checked it out better! The signs were there."
Bernie Madoff ran a Ponzi scheme and paid early investors with the funds of later ones. The early people who benefited from the fraud were forced to disgorge their "investment returns" and some of that money was returned to the later ones. So was that "justice?" Should the whistleblower have gotten some of that?
Not easy questions. Don't be too quick to take sides.
The system protects investors who were lied to. Yes that includes lies that are a bit obvious, but the result is a very, very healthy investment economy in the US. Investing is safer from flat-out fraud in the US, and that makes for more investment.
Correct. You don't want to reward the people who are exceptionally good liars, like Madoff: the ones who can con those who normally can't be conned.
There are actually people who believe a message that their Social Security number has been compromised, and they have to pay money to avoid going to prison. The stupid deserve fraud protection, too.
> the result is a very, very healthy investment economy in the US.
There were some recent examples of this system creating perverse incentives for US investments that are worth considering. For instance, the repackaging of mortgage-backed securities in the 2007 financial crisis took advantage of multiple transfers to place all risks on consumers and allow brokers to evade nearly all risk.
I think that we need to think very carefully about what risks we protect against (and how) to avoid situations where middle-men capture down-side protections as alpha and gain an incentive to seek out investments that are priced lower because they will often fail. A model that imagines an investment market where the only two parties are the investment originator and the final owner are too simplistic now.
Protecting investors from being lied to incentivizes investors to spend less resources on discerning whether representations made to them are true. "More investment" isn't a definite good if it leads to investment in the wrong places.
If we're going to have mechanisms like fines and penalties, and we're going to use those fines to support whistleblower reward programs, then we're going to have to resolve these questions. Because what we have now is a whistleblower reward program that does not work, at least in certain circumstances.
To me, this doesn't seem like a tricky moral question at all.
Investors are always supposed to be paid out last in bankruptcy proceedings, after whoever a company owes debt to. That's the "risk" part of being an investor. It's part of law. Everyone knows this up front, and the likelihood of it is built into stock prices.
There's zero analogy to leasing an apartment, where a tenant isn't expected to take on risk of the building collapsing -- that's handled by government-mandated inspections, insurance, etc etc.
And one would reasonably expect penalties and fines to be treated similarly to debt. How are they not a debt to the government? They should get paid off, and investors are left with whatever remains, if anything remains.
It can be trickier to apportion losses between people owed debt, or between investors owed in Madoff's case. But paying off debt should always come before paying off investors, full stop.
However, I'm genuinely confused as to why, in this case, SEC fines didn't get precedence in bankruptcy. Why on earth did lawmakers decide something else?
You have some good points there, and IANAL although I've sure spent enough time with lawyers. SEC fines possibly should be the same seniority as the guy who sold them desks. I'd be interested to hear the rationale.
On the other hand, are you considering "investors" in a fund that has a fiduciary duty to them on the same level as common stock holders in a cement company? It seems to me they are different.
> I made the opposite argument in an earlier reply which was also downvoted.
Yeesh. Don't change your positions just to try and win votes.
But if you want a palatable position that doesn't offend anybody, how about "each person should decide for themselves how much sacrifice they're willing to make"? We don't need a society of all heroes or of all pragmatic cowards.
I would think the SEC fines would be senior to investors, but it seems the SEC never filed to recover them in bankruptcy court. As noted pedophile Woody Allen once said, 80% of success in life is showing up.
Greetings,
We are offering Loan/Investment funds to Companies and Individuals with profitable projects in any area of specialization at 2% for a duration of 2 to 20 years with a one year interest grace period. Also, we pay 1% commission to Intermediaries, Consultants and Brokers who introduce project owners for finance or other opportunities. We offer Loan/Investment funds from ONE MILLION to ONE BILLION for business owners (Companies and Individuals). If you are interested kindly send a message via Email: dynamicfinancialloanfirm@gmail.com
Regards.
148 comments
[ 3.9 ms ] story [ 216 ms ] threadNot directly related to the whistleblowing case, but this life settlement investment concept is new to me, and apparently it’s a well-established market: https://www.forbes.com/sites/forbesfinancecouncil/2021/03/09...
Honestly, I find this concept rather disturbing.
Or let's say I have a business partner, we own the business 50/50. It makes a lot of sense for each of us to have a life insurance policy on the other person to make up for the fact that the business might likely die if the person does.
Where it's kind of screwed up is when Walmart takes out policies on their front line retail employees and doesn't tell them as a way of diversifying revenue.
Why is that screwed up? It doesn't affect them in any way.
EDIT: I will add, there is a lot of this kind of thing going on in insurance now because no-one expected rates to stay this low for so long. This drives cash out of insurers who, often, have a massive stream of liabilities and no way to generate cash to pay them. And this specific market is driven more by individuals who took out huge life insurance policies, lived longer than they expected, and are now stuck paying huge premiums they can't afford (so they sell the policy to someone else, who pays the premiums, and collects the final value). Again, this is basically how financial markets work. Risk is shifted towards those who are most able to bear it. The alternative here is a bunch of old people having to declare bankruptcy and being stripped of all their assets because there is no-one who will cash their policy.
Sort of. First, the investors are betting that the information they have now (when the insured wants to sell) is better than what the insurance company had then (when the insured purchased the policy). Second, life insurance policies have a “cash surrender” value, basically an amount of money that the insurance company will pay to the insured to give up the policy. These days those cash surrender values are extremely low, as the insurance companies rely on the difference to boost profits; they can do this because many policyholders don’t know there are alternatives to surrendering the policy if they can’t make the payments.
What’s attractive about this from an investor’s perspective is not outsized returns, but returns that are uncorrelated with the market.
I was pretty grossed out when I first heard of this kind of investment but then learned that it first became popular during the AIDS epidemic. Selling their life insurance policies was a way for the terminally ill to benefit from an asset that was not going to have any value to them after death (if they had no family to benefit from the payout). Without investors providing a market for these policies, they’d have to settle for the cash surrender value.
:-)
> I couldn't find a common translation or appearance of this saying's equivalent in English. Ungratefulness is the world's wage?
I believe it means something akin to "nothing is so hard as man's ingratitude." It's an expression that's not dissimilar to "no good deed goes unpunished." They're not quite the same, but they're tandem in the general principle of ingratitude.
That seems right to me...
I suppose it is right depending on who's side you're on.
Systemically it’s a huge problem to favor investors over whistleblowers and fines. You want incentives to be aligned wherever possible, and being able to declare bankruptcy in order to protect the very people benefiting from unscrupulous acts just leads to more unscrupulous behavior.
I strongly disagree with this, because the GP has used the term "harmed investors". I think it's a dangerous practice to go around claiming other people's posts are tongue in cheek. That's how we come to allow 'locker room talk'.
That has always been the case.
... Really?
Like, do you know how big a billion :is:?
I suspect a lot of companies which have illegally covered up losses have later managed to recoup losses to make investors whole again, and have never been discovered. In these cases, investors end up better off without a whistleblower.
Seems more fair.
Harmed investors are the ones that should have done the due diligence in the first place. That they got anything back at all was due to the diligence of the whistle blower. People should be rewarded for calling out white collar crime and the fees should extend to the people actually operating the fraud.
If it's the other way around, then you could go around investing in companies that never pay their bills, ripping off everyone you do business with.
As implemented, the law takes away the financial incentive for whistleblowers to take action on the most egregious cases. If a fraudster being uncovered will put the offending entity out of business, there’s no incentive to risk getting blackballed.
Or was he snitching so he could make money?
If you rely only on people doing the right thing, turns out that most of Wall Street won't help you. If you offer financial payouts, then suddenly you have a lineup of people ready to spill the dirt.
Now, you can take the moral high ground of 'Well we don't want the help of greedy people', but it seems that when you do that, you don't get a lot of convictions, and the financial crimes continue to happen.
It seems like such a structure would give us broadly/consistently better results than relying only on one factor or the other.
And it's unfortunate that this guy lost his job, and he might also have a hard time finding new work because he's a snitch.
Now, this is a bit tangential to the article, but I'm having a hard time accepting that our financial system is so blatantly corrupt that individuals within the system are expected to behave poorly, and we rely on cash payments to root out crimes. It doesn't sit well. Am I being naive?
Why should we expect people to do hard things unless they are in their best interest? Regardless of morality, that's just how people are.
This isn't about finance being rotten, it's about that to get people to do what you want, you have to reward them. This is what bonuses are about, what giving treats to dogs for good behavior is about, etc.
Trust your gut. When it says leave, leave. Even if others encourage the opposite. Even if your extended family depends on your income.
Make the effort to build and maintain a strong social circle. Filter for integrity. Assiduously avoid those who distort truth for personal advantage.
He tried to make it a full time job, it's not clear why but he took out loans to do it ... it just was a bad "business" choice.
It's really risky to become a whistleblower and if you do, you better be able to live the rest of your life on your finances, because it might become very hard after becoming a whistleblower to receive another well-paying job. Also be prepared to deal with a lot of stress that might impact your health and mental wellbeing.
---
[0]: https://en.wikipedia.org/wiki/Paul_van_Buitenen
If there is one thing that is pretty certain then it is that whistleblowers get to blow the whistle exactly once.
That's how bankruptcy works. There's an amount of money recovered then all interested parties tell the court how much they are owed. An finally, a judge decides who gets what. Like I said, the lawyers got their share. I think he should too.
From the bottom of article:
Early in the Life Partners saga, Mr. McPherson was so beguiled by the lure of whistleblower millions that he essentially quit his day job to become a full-time whistleblower, using his accounting and life-insurance knowledge to spot potential miscreants...In 2018, he took out a $1 million litigation-funding loan at very high interest rates, secured by the Life Partners whistleblower claims, to pay back taxes and continue to pursue his cases.
Paying out the whistleblower before the victims would be like if someone stole your bike, then the cops arrest the guy and recover your bike because of a tip... and then the cops give your bike to the guy who called in the tip
...and then figuring you could get victims 100% of their losses back by taking that 10% from the whistleblowers and sending them to the back of the line, and then coming back a year later and seeing that...
...while victims were getting 100% of their losses back when these crimes were discovered, very few of these crimes were being discovered, and using your impeccable logic concluding that the crime rate must have gone down! who needs whistleblowers!?
We do not have a justice system in which the victim pays for the cost of investigating, prosecuting, and punishing offenders. All of that is paid by the general public. That does not mean there are no bounties -- there are, but the bounties are never paid by subtracting out amounts due victims. Changing that, so that victims would not be entitled to full restitution in order to help finance law enforcement would require changing a lot of laws, not just adding a whistleblower law. It would also overturn a lot of precedent. It would be a big change that a large majority of the public would oppose.
source?
The crime has already been committed. The whistleblower is the reason you're getting anything back.
Investing in a new business is not "stupid things".
Taking out a personal loan instead of using an LLC is "stupid things".
The guy could be a raging narcissist with a gambling problem (which would be quite a bit worse than trying to be a "full-time whistleblower") and we would STILL want him to blow the whistle on wrongdoing he witnesses, right?
It sounds like you're criticizing him here, but this is a good thing, right? We incentivize whistleblowing because we want more whistleblowing. He was successful in bringing frauds to justice. We got exactly what we wanted. This is exactly how it should work.
> 2018, he took out a $1 million litigation-funding loan at very high interest rates, secured by the Life Partners whistleblower claims
This isn't necessarily stupid either. If it was a secured loan, then as I understand it he probably won't have to pay the million back. He transferred the risk to the lender and they lost. He paid his back taxes and should emerge from bankruptcy without the debt.
Should whistleblowers be rewarded? Absolutely. Should that come from a pool allocated and managed by the SEC? Most certainly, because we want folks to be secure in their whistleblowing. Is it the American way to go "there's money here, I can probably take repeat-advantage of that"? You bet your star spangled butt it is. But is that last part also on you, and not anyone else? In most American fashion: boy howdy yes.
Why though? Is this a moral judgement against whistleblowing as a profession, or something? I expect that offering whistleblower rewards is a much more scalable and effective way to discover frauds than employing a standing army of investigators.
Whistleblower rewards are great, but they must have limits, and he bumped into them here (while highly leveraging himself).
As I said, the leveraging he did is mainly a problem for the lender, who is now out $1m, not him.
One reason being that then you have a strong financial incentive to "whistleblow" on things that are less clear-cut, making it likely that (a) you'll eventually harm innocent people in the process, and (b) you'll inject too much noise/unnecessary work into the system.
As a rough analogy, imagine someone calling to report an impaired driver they encountered by pure happenstance, vs. someone who made it their personal full-time career to just go around on roads finding people he can report. I'm not sure if you see a difference but I certainly do.
I don't see how him doing it as more of a freelance thing rather than an undercover position guarantees a different outcome. It seems like we have to look at the actual outcome and we can't paint with such broad strokes about how one model or the other is better.
It doesn't matter because we don't base societal incentives on 1 guy.
It's not like a whistle blowing claim just results in enforcement action without investigation. The claim gets investigated by the relevant agency first, and then if and only if it is found to be justified is an enforcement action taken. That enforcement action can then be challenged in the courts, too, if the entity in question perceives the agency to be in the wrong.
I don't think there's much risk of whistle blowers significantly harming innocent companies here.
Certainly no negative moral judgement on people intentionally going for those bounties, fighting corruption is admirable. But the system is probably not calibrated to provide for their their day-to-day expenses or the cases where their investigations aren't successful. If it were, it would be equivalent to just employing that army of investigators (just, without any official organization, so it'd miss out on any benefits from legal authority or economies of scale).
If you expect to make a living at anything, you have to be prepared to manage the risks that go along with it.
People are not. I'd advise against it in almost all circumstances, unless you're 5 minutes from retiring anyway.
> Then you should have signed up for an undercover investigator position, drawing a normal salary, instead of assuming your reporting will net you an income.
That's your opinion.
> It sounds like you're criticizing him here, but this is a good thing,
It _is_ a good thing, even if it wasn't great for him. Lots of people do things that are ultimately less optimal than other paths. That being said, more scrutiny is better, regardless of the participation in specific programs that some people think is better suited.
Is that something different than what the title says?
The story, to me, is about a flaw in the whistleblower program that disincentivizes people from using it, and thus makes it less effective.
You moved into an unsafe apartment building that collapsed snd killed you -- "too bad, you should have checked it out better! The signs were there."
Bernie Madoff ran a Ponzi scheme and paid early investors with the funds of later ones. The early people who benefited from the fraud were forced to disgorge their "investment returns" and some of that money was returned to the later ones. So was that "justice?" Should the whistleblower have gotten some of that?
Not easy questions. Don't be too quick to take sides.
Somebody's lack of commercial sense, and financial stupidity should not be rewarded with such "insurance" by the public.
American ultralitigious banker/investor culture effectively rewards people going completely casino with their, or, more often, somebody's else money.
There are actually people who believe a message that their Social Security number has been compromised, and they have to pay money to avoid going to prison. The stupid deserve fraud protection, too.
There were some recent examples of this system creating perverse incentives for US investments that are worth considering. For instance, the repackaging of mortgage-backed securities in the 2007 financial crisis took advantage of multiple transfers to place all risks on consumers and allow brokers to evade nearly all risk.
I think that we need to think very carefully about what risks we protect against (and how) to avoid situations where middle-men capture down-side protections as alpha and gain an incentive to seek out investments that are priced lower because they will often fail. A model that imagines an investment market where the only two parties are the investment originator and the final owner are too simplistic now.
Never extend credit to an LLC unless you have a good risk model for default.
Investors are always supposed to be paid out last in bankruptcy proceedings, after whoever a company owes debt to. That's the "risk" part of being an investor. It's part of law. Everyone knows this up front, and the likelihood of it is built into stock prices.
There's zero analogy to leasing an apartment, where a tenant isn't expected to take on risk of the building collapsing -- that's handled by government-mandated inspections, insurance, etc etc.
And one would reasonably expect penalties and fines to be treated similarly to debt. How are they not a debt to the government? They should get paid off, and investors are left with whatever remains, if anything remains.
It can be trickier to apportion losses between people owed debt, or between investors owed in Madoff's case. But paying off debt should always come before paying off investors, full stop.
However, I'm genuinely confused as to why, in this case, SEC fines didn't get precedence in bankruptcy. Why on earth did lawmakers decide something else?
On the other hand, are you considering "investors" in a fund that has a fiduciary duty to them on the same level as common stock holders in a cement company? It seems to me they are different.
Yeesh. Don't change your positions just to try and win votes.
But if you want a palatable position that doesn't offend anybody, how about "each person should decide for themselves how much sacrifice they're willing to make"? We don't need a society of all heroes or of all pragmatic cowards.