Whistleblower thought he would get a big payout, but got nothing and went broke

https://www.wsj.com/articles/whistleblower-thought-he-would-get-a-big-payout-instead-he-got-nothing-and-went-broke-11624791602

by psim1 • 5 years ago

163 140 5 years ago

wsj.com

oefrha4• 5 years ago

https://archive.is/KAY41

oefrha4• 5 years ago

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.

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.

jedberg• 5 years ago

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.

gruez3• 5 years ago

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?

mcguire6• 5 years ago

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.

shadilay2• 5 years ago

So if you are going to blow the whistle it ought to be a large company unlikely to declare bankruptcy. Not sure how that helps the investors.

drewcoo• 5 years ago

WSJ prints scare piece to dissuade future SEC whistle blowers. Who expected that?

jtbayly• 5 years ago

WSJ advocates changing SEC rules to better support whistleblowers.

LanceH• 5 years ago

And if they don't print it, they are covering up the ineffectiveness of the SEC's whistleblowing program. What exactly should they print?

bidirectional2• 5 years ago

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.

teddyh• 5 years ago

“Undank ist der Welten Lohn”.

SilasX2• 5 years ago

I couldn't find a common translation or appearance of this saying's equivalent in English. Ungratefulness is the world's wage?

ggsp• 5 years ago

I‘d say “reward” instead of “wage.”

bigwavedave• 5 years ago

> “Undank ist der Welten Lohn”.
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.

krylon• 5 years ago

Yes, that fits. The best English equivalent, I think is the saying that "no good deed goes unpunished".

uvesten• 5 years ago

Otack är världens lön.

londons_explore2• 5 years ago

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.

That seems right to me...

sombremesa2• 5 years ago

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.

milesvp2• 5 years ago

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.

mcguire6• 5 years ago

"...it's in the whistleblowers' best interest to get in on the scam and enrich themselves..."

That has always been the case.

mandmandam• 5 years ago

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?

... Really?

Like, do you know how big a billion :is:?

cobookman• 5 years ago

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.

ivalm2• 5 years ago

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.

irjustin• 5 years ago

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.

Seems more fair.

3pt14159• 5 years ago

You surely must be joking!

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.

jeltz• 5 years ago

I am prerty sure he was sarcastic. Obviously investors should be last.

fastball3• 5 years ago

The investors weren't operating the fraud, they were being defrauded...

AbrahamParangi• 5 years ago

Government should collect before investors, otherwise you create a perverse incentive on the part of investors to ignore malfeasance.

Spooky23• 5 years ago

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.

shadilay2• 5 years ago

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.

engineer_222• 5 years ago

Was he doing the right thing for the sake of it?

Or was he snitching so he could make money?

ivalm2• 5 years ago

Who cares? I strongly prefer that people snitch to make money rather than keep quiet.

mabbo• 5 years ago

That's the entire point.

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.

sokoloff• 5 years ago

Why can’t it be do the right thing and make money doing it?

It seems like such a structure would give us broadly/consistently better results than relying only on one factor or the other.

xwdv• 5 years ago

Relying on people to do the right thing isn't really scalable or efficient.

hyperbovine• 5 years ago

The number of people in this world doing the right thing for the sake of it is laughably small.

ARandomerDude• 5 years ago

Why did you go to work today?

wccrawford• 5 years ago

If we could rely on people doing the right thing, we wouldn't be in this position in the first place.

engineer_222• 5 years ago

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?

romwell• 5 years ago

Yes.

smabie• 5 years ago

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.

gowld4• 5 years ago

"Doing well by doing good."

clipradiowallet• 5 years ago

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".

mariogintili• 5 years ago

it is literally how the world works these days

explorigin• 5 years ago

If you take this route, have a life-insurance policy.

navierstokes2• 5 years ago

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.

navierstokes2• 5 years ago

When you know you're going to be alone and homeless, it's really hard to find the strength to keep on living. What's the point?

duxup• 5 years ago

I don't think this guy is just some rando whistleblower.

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.

wsc981• 5 years ago

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.

---

[0] https://en.wikipedia.org/wiki/Paul_van_Buitenen

ClumsyPilot• 5 years ago

It seems whitleblowing is more dangerous than fraud these days

jacquesm• 5 years ago

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.

snarf21• 5 years ago

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.

fieldcny• 5 years ago

Knowing the WSJ, that’s probably the point, it’s almost like the white collar version of snitches get stitches

WheelsAtLarge2• 5 years ago

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.

fastball3• 5 years ago

I guess the problem is that if you're not collecting a fine what exactly is the bar for this minimum payout?

WheelsAtLarge2• 5 years ago

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.

paulpauper3• 5 years ago

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.

stuff4ben• 5 years ago

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.

yellow_lead• 5 years ago

You would think that if he were so invested in the whistleblower program he would do his due diligence to understand the fine print.

matthewdgreen2• 5 years ago

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.

gowld4• 5 years ago

This is Y Combinator's Hacker News.

Investing in a new business is not "stupid things".

Taking out a personal loan instead of using an LLC is "stupid things".

_e• 5 years ago

Even if the loan was taken out under a LLC, lenders would require a personal guarantee for a new and unproven venture.

newacct583• 5 years ago

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?

bombcar• 5 years ago

Eggs were counted before they hatched. News at 11.

Rapzid• 5 years ago

Chickens.

modeless3• 5 years ago

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.

TheRealPomax3• 5 years ago

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.

hammock• 5 years ago

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.

Is that something different than what the title says?

hackettma• 5 years ago

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.

fivestarman• 5 years ago

* "this is a cautionary tale about not counting on something before it’s done." *

The story, to me, is about a flaw in the whistleblower program that disincentivizes people from using it, and thus makes it less effective.

mcguire6• 5 years ago

Is it a flaw that, in bankruptcy, fines come after other classes of debts?

AlbertCory4• 5 years ago

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.

baybal2• 5 years ago

The legal system should not protect ponzi schemes investors, or just any investors.

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.

lallysingh• 5 years ago

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.

mcguire6• 5 years ago

"Ponzi schemes investors" are technically known as victims.

gowld4• 5 years ago

This is the fundamental cost and benefit of the LLC -- investors get to profit from the risk assumed by counterparties.

Never extend credit to an LLC unless you have a good risk model for default.

matthewdgreen2• 5 years ago

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.

crazygringo• 5 years ago

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?

AlbertCory4• 5 years ago

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.

paulpauper3• 5 years ago

This is why you should not try to save the world. It is not your job to save others. Focus on your own life.

knodi1232• 5 years ago

I don't think you'll get a lot of traction with a heartfelt argument against the concepts of heroism and personal sacrifice.

paulpauper3• 5 years ago

I made the opposite argument in an earlier reply which was also downvoted. Can someone tell me what opinion is the correct one?

fmajid• 5 years ago

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.

Zachsa999• 5 years ago

I wanted to read it, but I didn't want to sign in.

neonate• 5 years ago

https://archive.is/KAY41

Whistleblower thought he would get a big payout, but got nothing and went broke

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