# Whistleblower on the 28th Floor

An episode of [Cautionary Tales with Tim Harford](https://invisiblenetwork.ai/podcast/1484511465), 30 Apr 2021, 32 min.

Audio: https://podtrac.com/pts/redirect.mp3/pdrl.fm/18db03/tracking.swap.fm/track/SxlTEPDY7xDg35RXkASs/traffic.omny.fm/d/clips/e73c998e-6e60-432f-8610-ae210140c5b1/c0ae8c6e-22f0-4e9b-ac1c-ae390037ac53/1381b20b-c5e0-49d0-a761-ae39003b2ae7/audio.mp3?utm_source=Podcast&in_playlist=7f5a4714-6b10-4ccf-a424-ae390037ac70

Financial expert Ray Dirks (played by Jeffrey Wright) exposed one of the biggest corporate crimes of all time - and yet he was the one who ended up in front of the Supreme Court. Whistleblowers often face intimidation from those they bring to justice, but also face hostility from their co-workers, new employers, the authorities and even the public. Why are we suspicious of "tattletales" and what can we do to make vital whistleblowing easier? Read more about Tim's work at http://timharford.com/ Learn more about your ad-choices at https://www.iheartpodcastnetwork.com See omnystudio.com/listener for privacy information.

## Transcript

[0:15] Speaker 1: Pushkin. Ray Dirks was an insurance company. Analyst Equity Funding
[0:28] Speaker 1: was an insurance company. The year was nineteen seventy three.
[0:33] Speaker 1: The company's bosses were hosting Dirks to lunch in their boardroom,
[0:37] Speaker 1: high up in a Los Angeles skyscraper, a mundane everyday event. No,
[0:44] Speaker 1: the air in the boardroom was thick with tension. Ray,
[0:49] Speaker 1: it's the twenty eighth floor. But don't worry, the windows
[0:53] Speaker 1: are locked. If that was a joke, Ray Dirks wasn't laughing.
[0:57] Speaker 1: He had heard those rumors about his hosts being linked
[1:00] Speaker 1: to the mafia. They'd have every reason to be glad
[1:04] Speaker 1: he fell out of a window. Equity Funding's bosses had
[1:08] Speaker 1: been purple traiting one of the biggest, most audacious frauds
[1:12] Speaker 1: in corporate history, and Ray Dirks was onto them because
[1:16] Speaker 1: a few weeks earlier, the company had made a fatal mistake.
[1:22] Speaker 1: They'd fired an employee who knew all about the scam.
[1:27] Speaker 1: That employee was called Ron Seacrest, and he was furious.
[1:32] Speaker 1: He decided to take revenge. But who should he talk to.
[1:36] Speaker 1: Seacrest knew he had to choose carefully. The fraud was
[1:40] Speaker 1: so huge, so audacious. He feared that nobody would believe him,
[1:45] Speaker 1: except perhaps for one man, Ray Dirk's analyzed insurance companies
[1:53] Speaker 1: and advised investors on choosing stock. But Dirks wasn't your smooth, talking,
[1:59] Speaker 1: clean cut Wall Street type. Dirks was tubby and disheveled, excitable, cynical,
[2:04] Speaker 1: and disarmingly candid. He had a reputation for being unconventional
[2:09] Speaker 1: and the tenacious investigator. Dirk's met Seacrist for lunch. Equity
[2:16] Speaker 1: funding would soon be in legal trouble. But what's odd
[2:21] Speaker 1: is that so too would raise Dirks the man who
[2:25] Speaker 1: would expose the fraud. His fight to clear his own
[2:29] Speaker 1: name would go all the way to the Supreme Court.
[2:34] Speaker 1: I'm Tim Harford, and you're listening to cautionary tales. I'm
[3:00] Speaker 1: going to pose a moral dilemma. The university professor approaches
[3:05] Speaker 1: a student. He wants to tell the student about a
[3:08] Speaker 1: research project. It's on the effects of extended sensory deprivation,
[3:13] Speaker 1: specifically on how it affects brain functioning. He's performed his
[3:17] Speaker 1: experiment on a few participants already that all panicked and
[3:21] Speaker 1: their cognition was temporarily impaired. Some had hallucinations too, even
[3:26] Speaker 1: asked him to stop the experiment, but he didn't. It
[3:31] Speaker 1: was just too interesting to see what would happen. The
[3:34] Speaker 1: professor explains that he needs to recruit more participants so
[3:38] Speaker 1: he can continue his investigation, but he's worried that the
[3:41] Speaker 1: university's ethics committee isn't going to approve his request, and
[3:45] Speaker 1: you might well think he's worried with good reason. Now
[3:50] Speaker 1: put yourself in the shoes of the student hearing this
[3:53] Speaker 1: rather unnerving story. The professor explains that the committee can
[3:58] Speaker 1: be swayed by testimonials about the research, So could you
[4:02] Speaker 1: please do the professor a favor and write a statement
[4:06] Speaker 1: to convince other students to take part. You'll need to
[4:09] Speaker 1: sound enthusiastic, be sure to use words like exciting and superb.
[4:14] Speaker 1: If it goes well, he'll have more opportunities in future.
[4:18] Speaker 1: He might even be able to pay you. Here's the dilemma.
[4:23] Speaker 1: Would you contact the university's ethics committee to report the
[4:27] Speaker 1: professor he's offering you money for a fake testimonial in
[4:32] Speaker 1: support of a project that's clearly unethical. When researchers asked
[4:36] Speaker 1: some students in Amsterdam that hypothetical question, nearly two thirds
[4:41] Speaker 1: said yes, absolutely. They would blow the whistle. But then
[4:46] Speaker 1: with a different set of students, the researchers staged this
[4:50] Speaker 1: experiment for real. How many actually blew the whistle? Not
[4:55] Speaker 1: two thirds, not even close. It wasn't even one in ten.
[5:01] Speaker 1: The take home message from this research seems to be
[5:03] Speaker 1: that we talk a big game about our moral standards,
[5:06] Speaker 1: but we fall short in practice. But there's another way
[5:10] Speaker 1: of looking at it. Perhaps when it really matters, we're
[5:15] Speaker 1: not cowards or hypocrites. Perhaps we're wise, because story after
[5:21] Speaker 1: story tells us that whistleblowing is often far more trouble
[5:25] Speaker 1: than it's worth. The insurance analyst Ray Dirk's first learned
[5:32] Speaker 1: the scale of wrongdoing at Equity Funding over lunch with
[5:35] Speaker 1: disgruntled ron Seacrest in New York. His jaw was soon
[5:40] Speaker 1: on the floor. The details of the fraud are intricate,
[5:45] Speaker 1: you can read them in Dirks's book The Great Wall
[5:47] Speaker 1: Street Scandal, but they boiled down to a simple and
[5:51] Speaker 1: astonishing fact. Roughly half of Equity Funding's life insurance customers
[5:58] Speaker 1: were fictional. The company simply invented people and put them
[6:02] Speaker 1: in their computer system. Then they sold on the future
[6:06] Speaker 1: income stream from these fake policies to a reinsurance company.
[6:11] Speaker 1: It didn't cross anyone's mind that the reinsurance company to
[6:14] Speaker 1: investigate if these policies referred to real people, why would
[6:19] Speaker 1: it Selling on the policies gave Equity Funding cash today
[6:25] Speaker 1: in return for promises of payments tomorrow. When tomorrow came,
[6:29] Speaker 1: Equity covered its bills by inventing yet more customers and
[6:33] Speaker 1: selling their policies for more upfront payments. It was a
[6:38] Speaker 1: giant Ponzi scheme. Unlike every other Ponzi scheme, it couldn't
[6:42] Speaker 1: go on forever, but the bosses knew that, and they
[6:46] Speaker 1: had a plan, a clever one. Equity Funding was a
[6:49] Speaker 1: publicly traded company. By mass producing fake customers, the c
[6:54] Speaker 1: suite suits made it look like the company was growing quickly,
[6:58] Speaker 1: and that made investors excited. The company's share price went
[7:02] Speaker 1: up and up. The bosses used Equity Funding shares to
[7:05] Speaker 1: buy stakes in other companies, genuine companies with real customers.
[7:11] Speaker 1: Just think about it. The chutzpah is breathtaking. Over lunch,
[7:20] Speaker 1: Seacrist calmly recounted what he had experienced working at Equity
[7:24] Speaker 1: Funding late one afternoon. He had been asked by a
[7:28] Speaker 1: colleague to work late on a project, some filing, special filing.
[7:34] Speaker 1: Several managers sat around in a conference room inventing fake
[7:37] Speaker 1: names and giving them fake life insurance. Seacrist was pressed
[7:41] Speaker 1: into service. He was bewildered. The others laughed at his confusion.
[7:46] Speaker 1: The new kid who didn't get the joke. Ron Seacrist
[7:50] Speaker 1: told his story for four hours. He left Ray Dirks
[7:54] Speaker 1: with a dilemma. Dirks, remember, was a well respected analyst.
[7:59] Speaker 1: People listened to him, investors paid for his company's advice,
[8:03] Speaker 1: and some of his company's clients had shares in equity funding,
[8:07] Speaker 1: shares that would be worth much less if what he'd
[8:10] Speaker 1: heard was true, perhaps even worth nothing at all. His
[8:14] Speaker 1: clients deserved to know. But this was just one man's
[8:18] Speaker 1: story with no real evidence. Should he really pass on rumors?
[8:23] Speaker 1: Perhaps not, But how else could he investigate? Dirks decided
[8:27] Speaker 1: to confide in a few trusted contacts. He got very
[8:31] Speaker 1: different responses. His contact at the Boston Company told him
[8:35] Speaker 1: they didn't really believe the story, but better safe than sorry.
[8:39] Speaker 1: They decided to sell all their shares. Another gave him
[8:44] Speaker 1: a warning, Ray, you could ruin your reputation telling wild stories.
[8:50] Speaker 1: You need to confirm this first, get on the next
[8:53] Speaker 1: plain to Los Angeles and confront Stanley Goldblum in person.
[8:58] Speaker 1: Stanley Goldblum was the boss of equity funding. He was
[9:03] Speaker 1: a towering weightlifting fanatic. Not a man you want to cross.
[9:09] Speaker 1: But so it was that the chubby, bespectacled Dirks found
[9:12] Speaker 1: himself in a Los Angeles hotel breakfast room in his
[9:16] Speaker 1: dated brown suit, gazing nervously up at a thunder faced
[9:20] Speaker 1: Stanley Goldblum, neck muscles rippling Stanley, how are you not good?
[9:27] Speaker 1: Our share price has just gone down seventeen percent on
[9:29] Speaker 1: a single trade. Oh, that'll be the Boston company selling up.
[9:34] Speaker 1: I had no idea they owned so many ships. Who
[9:39] Speaker 1: else did you talk to? These rumors are preposterous, said Goldblum,
[9:47] Speaker 1: But he made an offer. Come to the office, he said,
[9:49] Speaker 1: talk to whoever you want. Dirks spent the morning being
[9:53] Speaker 1: shuffled from meeting to meeting. Over lunch on the twenty
[9:57] Speaker 1: eighth floor, Goldblum tried to gauge how convincing his colleagues
[10:01] Speaker 1: had been. What do you think now? Well, do you
[10:03] Speaker 1: guys certainly seem to make a strong case. What are
[10:06] Speaker 1: you planning to do next? I don't know. I'm going
[10:10] Speaker 1: to go back to my hotel room and think about it.
[10:13] Speaker 1: Dirks did just that. He sat in his hotel room
[10:17] Speaker 1: and thought. He called a reporter at the Wall Street Journal.
[10:22] Speaker 1: Then he talked to more ex employees of Equity Funding.
[10:26] Speaker 1: He talked to more investors. He talked to the Securities
[10:29] Speaker 1: and Exchange Commission, the industry regulator. He talked to Equity
[10:33] Speaker 1: Funding's auditor. And he talked to the company's former auditor
[10:39] Speaker 1: who'd been taken off the job, perhaps for starting to
[10:42] Speaker 1: suspect too much. That person had an alarming question, where
[10:49] Speaker 1: are you staying? I met the Bebily Wilshon. Oh yeah,
[10:52] Speaker 1: how many people know you're there? A lot of people? Okay,
[10:55] Speaker 1: If I were you, for your own personal safety, I
[10:58] Speaker 1: would move out right now. Dirks wasn't about to take chances.
[11:04] Speaker 1: He walked blocked down the street to another hotel and
[11:08] Speaker 1: checked in under a different name. Cautionary tales will return shortly.
[11:23] Speaker 1: Cheryl Echard was a quality assurance manager at the pharmaceutical
[11:28] Speaker 1: company Glaxo smith Kline. In two thousand and two, she
[11:32] Speaker 1: was sent to check out some worrying reports about a
[11:35] Speaker 1: factory in Cedra, Puerto Rico. She was shocked by what
[11:39] Speaker 1: she found. Water sources were contaminated, environments weren't sterile. The
[11:46] Speaker 1: factories managers were cutting corners all over the place. One morning,
[11:51] Speaker 1: the factory's director of manufacturing pulled Cheryl Echard aside. He
[11:56] Speaker 1: wanted to know why she was showing up every morning,
[11:59] Speaker 1: obviously close to tears, eyes swollen from crying. Could she stop?
[12:04] Speaker 1: It was making everyone feel awkward. You know what I
[12:08] Speaker 1: do cry? I cry at night, I cry in the morning.
[12:12] Speaker 1: And what I don't understand is why I'm the only one.
[12:15] Speaker 1: Why are you crying? The Cedro factory in Puerto Rico
[12:19] Speaker 1: felt like a nightmare to Echard. She spent eight painstaking
[12:24] Speaker 1: months documenting all the problems there. She wrote up a
[12:28] Speaker 1: comprehensive report and sent it to her bosses at Glaxo
[12:30] Speaker 1: smith Kline. She expected them to thank her and swiftly
[12:34] Speaker 1: put things right. Instead, they made her redundant. Nothing personal,
[12:40] Speaker 1: they said, just downsizing. So Cheryl Echard blew the whistle.
[12:46] Speaker 1: She went to the FDA, the Food and Drug Administration,
[12:49] Speaker 1: the US regulator. Armed with Cheryl's information, the FDA raided
[12:54] Speaker 1: the factory in Cedra and seized millions of dollars worth
[12:57] Speaker 1: of substandard drugs. Cheryl knew she had done the right thing,
[13:03] Speaker 1: but now she had another reason for crying at night.
[13:07] Speaker 1: You lose your friends because your friends or people from work,
[13:11] Speaker 1: it's difficult to survive financially and emotionally. That's an all
[13:17] Speaker 1: too typical experience for whistleblowers. According to Kate Kenny, a
[13:22] Speaker 1: professor at the National University of Ireland in Galway. Professor
[13:26] Speaker 1: Kenny studied what happened to dozens of whistleblowers. It's common
[13:29] Speaker 1: for them to be shunned by former friends. They find
[13:32] Speaker 1: it hard to get another job in the same industry,
[13:34] Speaker 1: and that can be true even when whistleblowing is basically
[13:38] Speaker 1: their job description. Martin Woods had worked for the British
[13:47] Speaker 1: Police for nearly two decades when he decided to move
[13:50] Speaker 1: into banking. Banks employ anti money laundering officers to look
[13:55] Speaker 1: for suspicious transactions, and when Woods started work for the
[13:58] Speaker 1: London branch of Wakovia, an American bank, it didn't take
[14:02] Speaker 1: him long to find some high value deposits made in
[14:06] Speaker 1: traveler's checks with sequential numbers. Were the customers really just
[14:11] Speaker 1: innocent tourists, It seemed unlikely. In fact, they were working
[14:16] Speaker 1: for a drug cartel. Drugs sell on the streets for cash,
[14:21] Speaker 1: but it's hard to use big wads of banknotes to
[14:24] Speaker 1: buy things in the regular economy. The cartels need to
[14:27] Speaker 1: launder that money into respectable looking entries. In the books
[14:31] Speaker 1: of the Global Financial System, it turned out they'd laundered
[14:36] Speaker 1: over three hundred billion dollars through a covire. They'd used
[14:41] Speaker 1: it to buy things like a McDonald Douglas DC nine airplane,
[14:44] Speaker 1: which was seized on a Mexican runway carrying five tons
[14:48] Speaker 1: of cocaine. But when Martin Woods started to report these
[14:52] Speaker 1: dodgy looking traveler's check transactions were his boss is happy. No,
[14:58] Speaker 1: he says, they were not. Martin. This is a disaster
[15:02] Speaker 1: and it's all your fault. Wait, what's my fault. I'm
[15:05] Speaker 1: not going to get my bonus this year that were
[15:09] Speaker 1: the boss explained. The departments that make the money give
[15:13] Speaker 1: scores to the departments that provide support services. Bonuses depend
[15:17] Speaker 1: on the scores, and the compliance department had topped the
[15:20] Speaker 1: scorecard for years. It was getting stellar scores, it seems,
[15:25] Speaker 1: because it was giving the money making department what it wanted,
[15:29] Speaker 1: and what the moneymakers wanted from compliance was not asking
[15:33] Speaker 1: too many questions. So now that I've started to do
[15:36] Speaker 1: a proper job, they're giving the compliance department lower scores. Exactly,
[15:41] Speaker 1: mordn and their effects my bonus. You see. The bank
[15:47] Speaker 1: was eventually fined, but for Woods himself, working life soon
[15:52] Speaker 1: became intolerable. The researcher Kate Kenney says whistleblowers often find
[15:57] Speaker 1: themselves being targeted for the tiniest breaches of company policy.
[16:01] Speaker 1: When Woods went to the hospital with a slipped disc
[16:04] Speaker 1: or Coovia said he hadn't called in sick in the
[16:07] Speaker 1: precise mannerified in his employee's handbook. They also told him
[16:12] Speaker 1: off for helping the British police to investigate a corrupt
[16:15] Speaker 1: African politician. That's a disciplinary offense. Dollar accounts have nothing
[16:20] Speaker 1: to do with you. They're a US matter. The police
[16:23] Speaker 1: phoned me from Mauritius. It was mourning in London. They
[16:25] Speaker 1: needed help right then. The US was still in bed
[16:28] Speaker 1: fielding their car. Was a disciplinary offense because the police
[16:32] Speaker 1: rang me up and I answered the phone. Yes. The
[16:35] Speaker 1: stress drove Woods to the verge of breakdown. He quit
[16:39] Speaker 1: his job, sued Wakovia and settled out of court. When
[16:44] Speaker 1: he applied for other jobs, he didn't have much luck.
[16:48] Speaker 1: When other people see what happens to whistleblowers, it naturally
[16:52] Speaker 1: makes them more cautious. Woods says he's often had conversations
[16:58] Speaker 1: like this, you're Martin Woods. Aren't you well done? I
[17:01] Speaker 1: really admire what you did. Thank you. I'm an antimoney
[17:05] Speaker 1: laundering officer too. And how does your bank react when
[17:08] Speaker 1: you flag suspicious activity? When I, oh, don't do that.
[17:13] Speaker 1: I like my job. I want to keep it. Those
[17:18] Speaker 1: people didn't go into their anti money laundering career intending
[17:22] Speaker 1: to turn a blind eye. Like the students in the
[17:25] Speaker 1: research experiment. They probably thought they would blow the whistle,
[17:29] Speaker 1: but when faced with the choice for real, they chose
[17:32] Speaker 1: a quiet life. Lots of employees at Equity Funding had
[17:37] Speaker 1: wrestled with that dilemma too. Remember, Equity Funding had been
[17:42] Speaker 1: making up fake clients. Ray Dirk's estimated that about a
[17:46] Speaker 1: hundred of the company's employees must have known or at
[17:49] Speaker 1: least had their suspicions. Yet only Ron Seacrest had done
[17:53] Speaker 1: anything about it, and only because he had been fired.
[17:57] Speaker 1: Why didn't the others blow the whistle? Some felt they
[18:01] Speaker 1: didn't know enough to be sure, Some just wanted to
[18:04] Speaker 1: keep drawing their paychecks. Some were uncomfortable enough to quit
[18:08] Speaker 1: the company, but not to kick up a fuss. One
[18:12] Speaker 1: employee told Dirks that he had wrestled with his conscience
[18:15] Speaker 1: and eventually asked the minister at his church for advice.
[18:19] Speaker 1: You'll should think of your family, You mean, I should
[18:23] Speaker 1: keep on working for this company for now, but look
[18:25] Speaker 1: for another job when you find one, leave. Should I
[18:29] Speaker 1: report on what I know? You'll should think of your family.
[18:33] Speaker 1: A handful of employees did try to report their suspicions
[18:36] Speaker 1: to various regulatory bodies, but it seems the regulators never
[18:40] Speaker 1: took them seriously. And that's not surprising because the claims
[18:44] Speaker 1: about the fake insurance policies were so mind boggling. It
[18:48] Speaker 1: would be like somebody coming to an analyst who follows
[18:50] Speaker 1: automobile companies and saying, Chrysler doesn't put engines in their automobiles.
[18:55] Speaker 1: They use big rubber bounds. I would have thrown the
[18:59] Speaker 1: guy out of my offers if he'd come to see
[19:01] Speaker 1: me and tell me that it was precisely because he
[19:06] Speaker 1: expected that kind of brush off from the authorities that
[19:09] Speaker 1: Ron Seacrest had decided to approach. Ray Dirks Seacrest had
[19:14] Speaker 1: a strategy. The more that Dirks poked around, he thought,
[19:18] Speaker 1: the more equity funding shareholders would start to hear the allegations.
[19:23] Speaker 1: Some would get cold feet and sell, and if the
[19:26] Speaker 1: share price started to create the regulators would surely have
[19:30] Speaker 1: to investigate. And that's more or less what happened. But
[19:34] Speaker 1: if the sec was grateful to Dirks, it shows a
[19:38] Speaker 1: strange way of showing it. It formally reprimanded him for
[19:42] Speaker 1: insider trading. Cautionary tales will return shortly. Where does our
[20:02] Speaker 1: moral sense come from? Why do we instinctively feel that
[20:06] Speaker 1: some things are right and others are wrong? The psychologists
[20:11] Speaker 1: Jonathan Hate and Craig Joseph proposed a theory, moral foundations theory.
[20:17] Speaker 1: They think we can trace our moral instincts to a
[20:20] Speaker 1: few basic foundations, such as fairness, loyalty, and preventing harm.
[20:26] Speaker 1: The whistleblower's dilemma arises when loyalty comes into conflict with
[20:30] Speaker 1: some other moral value. Remember what Cheryl Eckard said about
[20:35] Speaker 1: blowing the whistle on the substandard pharmaceutical factory. You lose
[20:39] Speaker 1: your friends because your friends are people from work. The
[20:43] Speaker 1: whistleblower's dilemma is familiar to everyone who's ever been a child.
[20:48] Speaker 1: Tattletale or snitch is the worst of playground insults. Martin
[20:52] Speaker 1: Woods had trouble finding another job after he left Bokovia.
[20:56] Speaker 1: He thinks you can draw a line straight from the
[20:59] Speaker 1: playground to our treatment of whistleblowers in the world of work.
[21:03] Speaker 1: As children, we're told don't tell tales, and we tell
[21:06] Speaker 1: our kids don't tell tales. Why do we do that.
[21:10] Speaker 1: We have an anxiety around their social grouping and their
[21:13] Speaker 1: social acceptance. But we're telling them not to light people
[21:16] Speaker 1: who tell tales the whistleblower. But there must be something
[21:20] Speaker 1: else going on, because we admire whistleblowers too. We root
[21:24] Speaker 1: for Martin Woods and Cheryl Eckard, not the bonus chasing
[21:28] Speaker 1: boss or the cost conscious factory director. We cheer on
[21:31] Speaker 1: Ray Dirks. Though I must confess I've stacked the deck.
[21:36] Speaker 1: I deliberately chose to tell the stories of whistleblowers who
[21:39] Speaker 1: are easy to warm to. I could easily have picked
[21:42] Speaker 1: some more difficult characters, more awkward or prickly or priggish.
[21:48] Speaker 1: When do we praise a whistleblower for doing what's right?
[21:51] Speaker 1: And when do we worry that someone who snitched on
[21:53] Speaker 1: others might also snitch on us. It surely comes down
[21:58] Speaker 1: to how serious we think the transgression was that they
[22:01] Speaker 1: blew the whistle on. Suppose you were interviewing a candidate
[22:05] Speaker 1: for a job and you heard they'd called the police
[22:08] Speaker 1: on their former boss because he was extremely drunk after
[22:11] Speaker 1: an office party and insisting on driving himself home. I'd
[22:15] Speaker 1: think more of them for doing that. That's surely a
[22:18] Speaker 1: case where preventing harm trump's loyalty to the boss. But
[22:22] Speaker 1: suppose the job candidate had called the police on their
[22:25] Speaker 1: former boss because he'd jumped a red light on a
[22:28] Speaker 1: deserted road when late for a meeting. That's someone I
[22:31] Speaker 1: might not want on my team. And what if the
[22:34] Speaker 1: whistleblowing case is hard to understand as many are would
[22:39] Speaker 1: I take a chance on employing the whistleblower if I
[22:41] Speaker 1: had some other suitable candidate. It's easy to see why
[22:45] Speaker 1: whistleblowers might struggle to find employment. Remember the students in
[22:54] Speaker 1: Amsterdam and the experiment with the unethical researcher. When given
[22:58] Speaker 1: a hypothetical scenario, most said they'd blow the whistle When
[23:03] Speaker 1: actually put in that position, hardly anyone did we get
[23:07] Speaker 1: cold feet because we worry about making trouble for ourselves
[23:11] Speaker 1: or for our families. We don't want to be a tattletale.
[23:15] Speaker 1: But this is a problem because if we want to
[23:18] Speaker 1: find out when organizations are doing things wrong, we need
[23:21] Speaker 1: employees to be brave enough to raise the whistle to
[23:24] Speaker 1: their lips. The economist luigi's Engalas and his colleagues studied
[23:29] Speaker 1: all alleged cases of fraud in big US companies over
[23:34] Speaker 1: an eight year period. There were over two hundred of them,
[23:37] Speaker 1: including Enron and WorldCom. They wanted to find out who
[23:41] Speaker 1: brought those frauds to light, and despite the risks, it
[23:45] Speaker 1: turns out that employees were surprisingly important. They revealed as
[23:51] Speaker 1: many of the cases as the company auditors and the
[23:54] Speaker 1: regulators put together. It makes sense employees are the ones
[24:00] Speaker 1: who have the inside track on corporate malfeasance, and we
[24:04] Speaker 1: want them to come forward when they have concerns. So
[24:08] Speaker 1: how could we change the incentives around whistleblowing. One answer,
[24:13] Speaker 1: say some researchers, is to work with the grain of
[24:16] Speaker 1: our deep rooted instinct to be loyal. Leaders can choose
[24:20] Speaker 1: to create a culture in which whistleblowing is seen as
[24:23] Speaker 1: being loyal to the company, not disloyal to your immediate colleagues.
[24:28] Speaker 1: There is another obvious way to incentivize people money. Martin Woods,
[24:34] Speaker 1: remember was a policeman before he worked for banks. He
[24:38] Speaker 1: was used to paying for tip offs. If we bought
[24:40] Speaker 1: information on where the drugs are, why are we not
[24:43] Speaker 1: buying information on where the financial crime is. Why are
[24:46] Speaker 1: we not buying information about where the tax evasion is.
[24:50] Speaker 1: Why is that so different? Those are good questions. In fact,
[24:54] Speaker 1: sometimes we do pay cash rewards to whistleblowers, and the
[24:58] Speaker 1: evidence suggests that those rewards work. According to the economist
[25:02] Speaker 1: luigi's Engalis and his big study of alleged corporate fraud,
[25:07] Speaker 1: in some of those cases there the chance of a
[25:09] Speaker 1: payoff for information, and employees were three times more likely
[25:14] Speaker 1: to blow the whistle. But few countries have made concerted
[25:18] Speaker 1: efforts to reward whistleblowers. South Korea is one that has
[25:23] Speaker 1: Its government pays millions of dollars a year in rewards
[25:27] Speaker 1: for tipoffs about everything from tax dodges to unsaved food
[25:31] Speaker 1: to unlicensed medical products. It seems to work. In other countries,
[25:36] Speaker 1: the rewards tend to be patchea. They exist in some
[25:40] Speaker 1: sectors and not in others, and that largely comes down
[25:44] Speaker 1: to historical luck. The US, for instance, has a law
[25:47] Speaker 1: called the False Claims Act. It dates back to the
[25:50] Speaker 1: Civil War, and it rewards people for saving the government
[25:54] Speaker 1: money by alerting them to suppliers who rip them off.
[25:57] Speaker 1: So if you work for a company that just happens
[26:00] Speaker 1: to sell to the government, then you might get a
[26:02] Speaker 1: reward for blowing the whistle. What kind of companies sell
[26:05] Speaker 1: to the government. Pharmaceutical companies are wanting example, think of Medicare.
[26:11] Speaker 1: The government buys lots of drugs, and if some of
[26:14] Speaker 1: those drugs were made in a factory in Cedra Puerto Rico,
[26:17] Speaker 1: say in a non sterile environment with contaminated water, well,
[26:23] Speaker 1: the government might reward you for letting them know about that.
[26:28] Speaker 1: Seven years after Glaxo Smith Klein made Cheryl Echard redundant,
[26:32] Speaker 1: the US federal government find the company and gave Cheryl
[26:36] Speaker 1: Echard the share she was due under the False Claims
[26:39] Speaker 1: Act ninety six million dollars. Martin Woods wasn't quite so lucky.
[26:50] Speaker 1: Just two years after he blew the whistle on Wakovia,
[26:53] Speaker 1: the US introduced new laws to reward whistleblowers in the
[26:57] Speaker 1: financial sector. Only he'd blown the whistle, then he'd have
[27:02] Speaker 1: got twelve million dollars. But Wood says he has no regrets.
[27:07] Speaker 1: Now call me conceited, but I like me. I like
[27:11] Speaker 1: what I stand for. I like my profile, my brand,
[27:14] Speaker 1: and most of all, my integrity. Woods now works as
[27:18] Speaker 1: a consultant, and he discovered why he'd initially found it
[27:22] Speaker 1: so hard to get his foot in the door with
[27:24] Speaker 1: a new employer. He was on a database at the
[27:27] Speaker 1: Financial Conduct Authority, a British regulator. Banks could check the
[27:32] Speaker 1: database for information on potential employees. Woods was flagged as
[27:38] Speaker 1: non routine. But why might a regulator seemingly want to
[27:43] Speaker 1: make life difficult for a whistleblower. Woods had his suspicions,
[27:49] Speaker 1: when you blow the whistle on a bank indirectly, you're
[27:52] Speaker 1: also blowing the whistle on regulatory failure. This was certainly
[27:55] Speaker 1: the case as well with insurance analyst Ray Dirts. When
[27:59] Speaker 1: the investigation into equity funding had run its course, twenty
[28:03] Speaker 1: two people faced criminal charges. Six went to jail, including
[28:09] Speaker 1: the fanatical weightlifter Stanley Goldlum. But everyone knew the SEC
[28:15] Speaker 1: would never have uncovered the fraud at equity Funding on
[28:18] Speaker 1: its own. A lone, idiosyncratic sleuth had shown them up. Yes,
[28:24] Speaker 1: but said the SEC. Dirks had talked through the allegations
[28:29] Speaker 1: with clients who owned shares in equity funding, and some
[28:33] Speaker 1: of those clients had then sold their shares. Couldn't you
[28:36] Speaker 1: say that was inside of trading? Dirks was furious at
[28:41] Speaker 1: being reprimanded by the SEC. He took them to court
[28:47] Speaker 1: and lost. He appealed, and after ten years, got his
[28:52] Speaker 1: day in front of the Supreme Court. The SEC is
[28:58] Speaker 1: a government body and before it can argue in front
[29:00] Speaker 1: of the Supreme Court, it needs the approval of the
[29:03] Speaker 1: United States Solicitor General. There was just one problem. United
[29:08] Speaker 1: States Solicitor General loved what Ray Dirks had done, so
[29:13] Speaker 1: he gave the SEC permission to argue their case, but
[29:16] Speaker 1: added a PostScript telling the judges he disagreed with it.
[29:21] Speaker 1: Dirks won his case, but the happy endings are exceptions.
[29:27] Speaker 1: When the economist Luigi's and Galis asked whistleblowers if they'd
[29:30] Speaker 1: do it all again, most said no, it wasn't worth
[29:34] Speaker 1: the stress. Like the students in Amsterdam, most of us
[29:39] Speaker 1: would like to think would blow the whistle. But if
[29:41] Speaker 1: we want people to have the courage to follow through
[29:45] Speaker 1: we need to celebrate, protect and reward those who blow
[29:49] Speaker 1: the whistle key. Sources for this episode include The Great
[30:05] Speaker 1: Wall Street Scandal by Ray Dirks and Leonard Gross, Kate
[30:09] Speaker 1: Kenny's book Whistleblowing, and Martin Woods's interview on KYC three sixty.
[30:15] Speaker 1: For a full list of references, see Tim Harford dot com.
[30:20] Speaker 1: Cautionary Tales is written by me Tim Harford with Andrew Wright.
[30:25] Speaker 1: It's produced by Ryan Dilley and Marilyn Rust. The sound
[30:29] Speaker 1: design and original music are the work of Pascal Wise.
[30:33] Speaker 1: Julia Barton edited the scripts. Starring in this series of
[30:37] Speaker 1: Cautionary Tales are Helena Bonham, Carter and Geoffrey Wright, alongside
[30:43] Speaker 1: Nazar Alderazzi, Ed Gochen, Melanie Gutteridge, Rachel Hanshaw, Cognor Holbrook, Smith,
[30:50] Speaker 1: Reg Lockett, Siam Unrowe and Rufus Wright. The show would
[30:55] Speaker 1: not have been possible without the work of Mia La Belle,
[30:58] Speaker 1: Jacob Weisberg, Hell Fame, John Schnarz, Carlie mcgliori, Eric Sandler,
[31:05] Speaker 1: Emily Rostock, Maggie Taylor, Daniella Lakhan, and Maya Kanig. Cautionary
[31:11] Speaker 1: Tales is a production of Pushkin Industries. If you like
[31:15] Speaker 1: the show, please remember to share, rate, and review.

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