Whistleblower thought he would get a big payout, but got nothing and went broke
wsj.com
wsj.com
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?
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.
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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.
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.
Not 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.
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.
:-)
> 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.
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.
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.