1 00:00:15,370 --> 00:00:28,650 Speaker 1: Pushkin. Ray Dirks was an insurance company. Analyst Equity Funding 2 00:00:28,930 --> 00:00:32,770 Speaker 1: was an insurance company. The year was nineteen seventy three. 3 00:00:33,570 --> 00:00:37,370 Speaker 1: The company's bosses were hosting Dirks to lunch in their boardroom, 4 00:00:37,450 --> 00:00:43,490 Speaker 1: high up in a Los Angeles skyscraper, a mundane everyday event. No, 5 00:00:44,570 --> 00:00:49,330 Speaker 1: the air in the boardroom was thick with tension. Ray, 6 00:00:49,690 --> 00:00:53,130 Speaker 1: it's the twenty eighth floor. But don't worry, the windows 7 00:00:53,130 --> 00:00:57,010 Speaker 1: are locked. If that was a joke, Ray Dirks wasn't laughing. 8 00:00:57,530 --> 00:01:00,610 Speaker 1: He had heard those rumors about his hosts being linked 9 00:01:00,690 --> 00:01:04,330 Speaker 1: to the mafia. They'd have every reason to be glad 10 00:01:04,730 --> 00:01:08,570 Speaker 1: he fell out of a window. Equity Funding's bosses had 11 00:01:08,610 --> 00:01:12,570 Speaker 1: been purple traiting one of the biggest, most audacious frauds 12 00:01:12,610 --> 00:01:16,970 Speaker 1: in corporate history, and Ray Dirks was onto them because 13 00:01:16,970 --> 00:01:21,210 Speaker 1: a few weeks earlier, the company had made a fatal mistake. 14 00:01:22,170 --> 00:01:27,050 Speaker 1: They'd fired an employee who knew all about the scam. 15 00:01:27,130 --> 00:01:31,290 Speaker 1: That employee was called Ron Seacrest, and he was furious. 16 00:01:32,130 --> 00:01:35,530 Speaker 1: He decided to take revenge. But who should he talk to. 17 00:01:36,770 --> 00:01:40,610 Speaker 1: Seacrest knew he had to choose carefully. The fraud was 18 00:01:40,650 --> 00:01:45,650 Speaker 1: so huge, so audacious. He feared that nobody would believe him, 19 00:01:45,770 --> 00:01:53,330 Speaker 1: except perhaps for one man, Ray Dirk's analyzed insurance companies 20 00:01:53,610 --> 00:01:58,890 Speaker 1: and advised investors on choosing stock. But Dirks wasn't your smooth, talking, 21 00:01:59,050 --> 00:02:04,210 Speaker 1: clean cut Wall Street type. Dirks was tubby and disheveled, excitable, cynical, 22 00:02:04,490 --> 00:02:09,010 Speaker 1: and disarmingly candid. He had a reputation for being unconventional 23 00:02:09,410 --> 00:02:16,050 Speaker 1: and the tenacious investigator. Dirk's met Seacrist for lunch. Equity 24 00:02:16,090 --> 00:02:21,290 Speaker 1: funding would soon be in legal trouble. But what's odd 25 00:02:21,410 --> 00:02:25,970 Speaker 1: is that so too would raise Dirks the man who 26 00:02:25,970 --> 00:02:29,890 Speaker 1: would expose the fraud. His fight to clear his own 27 00:02:29,970 --> 00:02:33,290 Speaker 1: name would go all the way to the Supreme Court. 28 00:02:34,530 --> 00:03:00,770 Speaker 1: I'm Tim Harford, and you're listening to cautionary tales. I'm 29 00:03:00,810 --> 00:03:05,570 Speaker 1: going to pose a moral dilemma. The university professor approaches 30 00:03:05,610 --> 00:03:08,210 Speaker 1: a student. He wants to tell the student about a 31 00:03:08,210 --> 00:03:12,770 Speaker 1: research project. It's on the effects of extended sensory deprivation, 32 00:03:13,450 --> 00:03:17,450 Speaker 1: specifically on how it affects brain functioning. He's performed his 33 00:03:17,490 --> 00:03:21,530 Speaker 1: experiment on a few participants already that all panicked and 34 00:03:21,650 --> 00:03:26,930 Speaker 1: their cognition was temporarily impaired. Some had hallucinations too, even 35 00:03:26,970 --> 00:03:30,970 Speaker 1: asked him to stop the experiment, but he didn't. It 36 00:03:31,130 --> 00:03:34,210 Speaker 1: was just too interesting to see what would happen. The 37 00:03:34,290 --> 00:03:37,890 Speaker 1: professor explains that he needs to recruit more participants so 38 00:03:38,010 --> 00:03:41,250 Speaker 1: he can continue his investigation, but he's worried that the 39 00:03:41,330 --> 00:03:45,650 Speaker 1: university's ethics committee isn't going to approve his request, and 40 00:03:45,970 --> 00:03:50,210 Speaker 1: you might well think he's worried with good reason. Now 41 00:03:50,570 --> 00:03:53,770 Speaker 1: put yourself in the shoes of the student hearing this 42 00:03:53,930 --> 00:03:58,770 Speaker 1: rather unnerving story. The professor explains that the committee can 43 00:03:58,810 --> 00:04:02,810 Speaker 1: be swayed by testimonials about the research, So could you 44 00:04:02,930 --> 00:04:06,170 Speaker 1: please do the professor a favor and write a statement 45 00:04:06,290 --> 00:04:09,610 Speaker 1: to convince other students to take part. You'll need to 46 00:04:09,650 --> 00:04:14,250 Speaker 1: sound enthusiastic, be sure to use words like exciting and superb. 47 00:04:14,850 --> 00:04:18,090 Speaker 1: If it goes well, he'll have more opportunities in future. 48 00:04:18,330 --> 00:04:22,730 Speaker 1: He might even be able to pay you. Here's the dilemma. 49 00:04:23,210 --> 00:04:27,250 Speaker 1: Would you contact the university's ethics committee to report the 50 00:04:27,330 --> 00:04:32,050 Speaker 1: professor he's offering you money for a fake testimonial in 51 00:04:32,130 --> 00:04:36,970 Speaker 1: support of a project that's clearly unethical. When researchers asked 52 00:04:36,970 --> 00:04:41,410 Speaker 1: some students in Amsterdam that hypothetical question, nearly two thirds 53 00:04:41,450 --> 00:04:45,970 Speaker 1: said yes, absolutely. They would blow the whistle. But then 54 00:04:46,530 --> 00:04:50,290 Speaker 1: with a different set of students, the researchers staged this 55 00:04:50,410 --> 00:04:55,370 Speaker 1: experiment for real. How many actually blew the whistle? Not 56 00:04:55,570 --> 00:04:59,530 Speaker 1: two thirds, not even close. It wasn't even one in ten. 57 00:05:01,050 --> 00:05:03,890 Speaker 1: The take home message from this research seems to be 58 00:05:03,930 --> 00:05:06,490 Speaker 1: that we talk a big game about our moral standards, 59 00:05:06,770 --> 00:05:10,610 Speaker 1: but we fall short in practice. But there's another way 60 00:05:10,610 --> 00:05:15,530 Speaker 1: of looking at it. Perhaps when it really matters, we're 61 00:05:15,530 --> 00:05:21,290 Speaker 1: not cowards or hypocrites. Perhaps we're wise, because story after 62 00:05:21,370 --> 00:05:25,530 Speaker 1: story tells us that whistleblowing is often far more trouble 63 00:05:25,810 --> 00:05:32,410 Speaker 1: than it's worth. The insurance analyst Ray Dirk's first learned 64 00:05:32,450 --> 00:05:35,570 Speaker 1: the scale of wrongdoing at Equity Funding over lunch with 65 00:05:35,730 --> 00:05:40,450 Speaker 1: disgruntled ron Seacrest in New York. His jaw was soon 66 00:05:40,690 --> 00:05:44,570 Speaker 1: on the floor. The details of the fraud are intricate, 67 00:05:45,090 --> 00:05:47,850 Speaker 1: you can read them in Dirks's book The Great Wall 68 00:05:47,890 --> 00:05:51,290 Speaker 1: Street Scandal, but they boiled down to a simple and 69 00:05:51,410 --> 00:05:57,090 Speaker 1: astonishing fact. Roughly half of Equity Funding's life insurance customers 70 00:05:58,090 --> 00:06:02,610 Speaker 1: were fictional. The company simply invented people and put them 71 00:06:02,610 --> 00:06:06,210 Speaker 1: in their computer system. Then they sold on the future 72 00:06:06,290 --> 00:06:10,490 Speaker 1: income stream from these fake policies to a reinsurance company. 73 00:06:11,330 --> 00:06:14,450 Speaker 1: It didn't cross anyone's mind that the reinsurance company to 74 00:06:14,610 --> 00:06:19,690 Speaker 1: investigate if these policies referred to real people, why would 75 00:06:19,730 --> 00:06:24,810 Speaker 1: it Selling on the policies gave Equity Funding cash today 76 00:06:25,330 --> 00:06:29,530 Speaker 1: in return for promises of payments tomorrow. When tomorrow came, 77 00:06:29,850 --> 00:06:33,810 Speaker 1: Equity covered its bills by inventing yet more customers and 78 00:06:33,930 --> 00:06:38,130 Speaker 1: selling their policies for more upfront payments. It was a 79 00:06:38,130 --> 00:06:42,850 Speaker 1: giant Ponzi scheme. Unlike every other Ponzi scheme, it couldn't 80 00:06:42,850 --> 00:06:46,530 Speaker 1: go on forever, but the bosses knew that, and they 81 00:06:46,570 --> 00:06:49,610 Speaker 1: had a plan, a clever one. Equity Funding was a 82 00:06:49,690 --> 00:06:54,250 Speaker 1: publicly traded company. By mass producing fake customers, the c 83 00:06:54,410 --> 00:06:57,650 Speaker 1: suite suits made it look like the company was growing quickly, 84 00:06:58,010 --> 00:07:02,050 Speaker 1: and that made investors excited. The company's share price went 85 00:07:02,170 --> 00:07:05,930 Speaker 1: up and up. The bosses used Equity Funding shares to 86 00:07:05,970 --> 00:07:10,530 Speaker 1: buy stakes in other companies, genuine companies with real customers. 87 00:07:11,530 --> 00:07:20,130 Speaker 1: Just think about it. The chutzpah is breathtaking. Over lunch, 88 00:07:20,450 --> 00:07:24,610 Speaker 1: Seacrist calmly recounted what he had experienced working at Equity 89 00:07:24,650 --> 00:07:27,970 Speaker 1: Funding late one afternoon. He had been asked by a 90 00:07:28,010 --> 00:07:33,050 Speaker 1: colleague to work late on a project, some filing, special filing. 91 00:07:34,050 --> 00:07:37,410 Speaker 1: Several managers sat around in a conference room inventing fake 92 00:07:37,570 --> 00:07:41,930 Speaker 1: names and giving them fake life insurance. Seacrist was pressed 93 00:07:41,970 --> 00:07:46,370 Speaker 1: into service. He was bewildered. The others laughed at his confusion. 94 00:07:46,610 --> 00:07:49,970 Speaker 1: The new kid who didn't get the joke. Ron Seacrist 95 00:07:50,210 --> 00:07:54,290 Speaker 1: told his story for four hours. He left Ray Dirks 96 00:07:54,530 --> 00:07:59,210 Speaker 1: with a dilemma. Dirks, remember, was a well respected analyst. 97 00:07:59,730 --> 00:08:03,170 Speaker 1: People listened to him, investors paid for his company's advice, 98 00:08:03,610 --> 00:08:06,850 Speaker 1: and some of his company's clients had shares in equity funding, 99 00:08:07,370 --> 00:08:10,210 Speaker 1: shares that would be worth much less if what he'd 100 00:08:10,210 --> 00:08:14,170 Speaker 1: heard was true, perhaps even worth nothing at all. His 101 00:08:14,330 --> 00:08:18,490 Speaker 1: clients deserved to know. But this was just one man's 102 00:08:18,490 --> 00:08:22,650 Speaker 1: story with no real evidence. Should he really pass on rumors? 103 00:08:23,130 --> 00:08:27,690 Speaker 1: Perhaps not, But how else could he investigate? Dirks decided 104 00:08:27,770 --> 00:08:31,490 Speaker 1: to confide in a few trusted contacts. He got very 105 00:08:31,490 --> 00:08:35,730 Speaker 1: different responses. His contact at the Boston Company told him 106 00:08:35,770 --> 00:08:39,130 Speaker 1: they didn't really believe the story, but better safe than sorry. 107 00:08:39,570 --> 00:08:44,250 Speaker 1: They decided to sell all their shares. Another gave him 108 00:08:44,250 --> 00:08:49,490 Speaker 1: a warning, Ray, you could ruin your reputation telling wild stories. 109 00:08:50,050 --> 00:08:53,410 Speaker 1: You need to confirm this first, get on the next 110 00:08:53,450 --> 00:08:57,210 Speaker 1: plain to Los Angeles and confront Stanley Goldblum in person. 111 00:08:58,130 --> 00:09:03,210 Speaker 1: Stanley Goldblum was the boss of equity funding. He was 112 00:09:03,250 --> 00:09:08,130 Speaker 1: a towering weightlifting fanatic. Not a man you want to cross. 113 00:09:09,170 --> 00:09:12,570 Speaker 1: But so it was that the chubby, bespectacled Dirks found 114 00:09:12,650 --> 00:09:15,890 Speaker 1: himself in a Los Angeles hotel breakfast room in his 115 00:09:16,050 --> 00:09:20,290 Speaker 1: dated brown suit, gazing nervously up at a thunder faced 116 00:09:20,570 --> 00:09:26,730 Speaker 1: Stanley Goldblum, neck muscles rippling Stanley, how are you not good? 117 00:09:27,210 --> 00:09:29,770 Speaker 1: Our share price has just gone down seventeen percent on 118 00:09:29,810 --> 00:09:34,690 Speaker 1: a single trade. Oh, that'll be the Boston company selling up. 119 00:09:34,690 --> 00:09:39,250 Speaker 1: I had no idea they owned so many ships. Who 120 00:09:39,290 --> 00:09:46,250 Speaker 1: else did you talk to? These rumors are preposterous, said Goldblum, 121 00:09:47,090 --> 00:09:49,650 Speaker 1: But he made an offer. Come to the office, he said, 122 00:09:49,850 --> 00:09:53,650 Speaker 1: talk to whoever you want. Dirks spent the morning being 123 00:09:53,690 --> 00:09:57,170 Speaker 1: shuffled from meeting to meeting. Over lunch on the twenty 124 00:09:57,170 --> 00:10:01,050 Speaker 1: eighth floor, Goldblum tried to gauge how convincing his colleagues 125 00:10:01,050 --> 00:10:03,810 Speaker 1: had been. What do you think now? Well, do you 126 00:10:03,850 --> 00:10:06,650 Speaker 1: guys certainly seem to make a strong case. What are 127 00:10:06,690 --> 00:10:10,650 Speaker 1: you planning to do next? I don't know. I'm going 128 00:10:10,690 --> 00:10:12,610 Speaker 1: to go back to my hotel room and think about it. 129 00:10:13,770 --> 00:10:17,930 Speaker 1: Dirks did just that. He sat in his hotel room 130 00:10:17,970 --> 00:10:22,170 Speaker 1: and thought. He called a reporter at the Wall Street Journal. 131 00:10:22,730 --> 00:10:25,890 Speaker 1: Then he talked to more ex employees of Equity Funding. 132 00:10:26,210 --> 00:10:29,690 Speaker 1: He talked to more investors. He talked to the Securities 133 00:10:29,690 --> 00:10:33,930 Speaker 1: and Exchange Commission, the industry regulator. He talked to Equity 134 00:10:33,970 --> 00:10:39,090 Speaker 1: Funding's auditor. And he talked to the company's former auditor 135 00:10:39,530 --> 00:10:42,650 Speaker 1: who'd been taken off the job, perhaps for starting to 136 00:10:42,690 --> 00:10:49,050 Speaker 1: suspect too much. That person had an alarming question, where 137 00:10:49,050 --> 00:10:52,370 Speaker 1: are you staying? I met the Bebily Wilshon. Oh yeah, 138 00:10:52,410 --> 00:10:55,570 Speaker 1: how many people know you're there? A lot of people? Okay, 139 00:10:55,650 --> 00:10:58,370 Speaker 1: If I were you, for your own personal safety, I 140 00:10:58,370 --> 00:11:03,290 Speaker 1: would move out right now. Dirks wasn't about to take chances. 141 00:11:04,250 --> 00:11:07,850 Speaker 1: He walked blocked down the street to another hotel and 142 00:11:08,010 --> 00:11:18,170 Speaker 1: checked in under a different name. Cautionary tales will return shortly. 143 00:11:23,690 --> 00:11:28,130 Speaker 1: Cheryl Echard was a quality assurance manager at the pharmaceutical 144 00:11:28,170 --> 00:11:32,050 Speaker 1: company Glaxo smith Kline. In two thousand and two, she 145 00:11:32,210 --> 00:11:35,050 Speaker 1: was sent to check out some worrying reports about a 146 00:11:35,090 --> 00:11:39,330 Speaker 1: factory in Cedra, Puerto Rico. She was shocked by what 147 00:11:39,450 --> 00:11:46,010 Speaker 1: she found. Water sources were contaminated, environments weren't sterile. The 148 00:11:46,090 --> 00:11:51,570 Speaker 1: factories managers were cutting corners all over the place. One morning, 149 00:11:51,650 --> 00:11:56,290 Speaker 1: the factory's director of manufacturing pulled Cheryl Echard aside. He 150 00:11:56,410 --> 00:11:58,930 Speaker 1: wanted to know why she was showing up every morning, 151 00:11:59,010 --> 00:12:04,610 Speaker 1: obviously close to tears, eyes swollen from crying. Could she stop? 152 00:12:04,690 --> 00:12:07,930 Speaker 1: It was making everyone feel awkward. You know what I 153 00:12:08,010 --> 00:12:11,450 Speaker 1: do cry? I cry at night, I cry in the morning. 154 00:12:12,130 --> 00:12:14,530 Speaker 1: And what I don't understand is why I'm the only one. 155 00:12:15,170 --> 00:12:19,490 Speaker 1: Why are you crying? The Cedro factory in Puerto Rico 156 00:12:19,690 --> 00:12:24,730 Speaker 1: felt like a nightmare to Echard. She spent eight painstaking 157 00:12:24,770 --> 00:12:28,010 Speaker 1: months documenting all the problems there. She wrote up a 158 00:12:28,050 --> 00:12:30,850 Speaker 1: comprehensive report and sent it to her bosses at Glaxo 159 00:12:30,930 --> 00:12:34,890 Speaker 1: smith Kline. She expected them to thank her and swiftly 160 00:12:34,930 --> 00:12:40,610 Speaker 1: put things right. Instead, they made her redundant. Nothing personal, 161 00:12:40,650 --> 00:12:45,610 Speaker 1: they said, just downsizing. So Cheryl Echard blew the whistle. 162 00:12:46,210 --> 00:12:48,970 Speaker 1: She went to the FDA, the Food and Drug Administration, 163 00:12:49,370 --> 00:12:54,250 Speaker 1: the US regulator. Armed with Cheryl's information, the FDA raided 164 00:12:54,250 --> 00:12:57,570 Speaker 1: the factory in Cedra and seized millions of dollars worth 165 00:12:57,570 --> 00:13:02,210 Speaker 1: of substandard drugs. Cheryl knew she had done the right thing, 166 00:13:03,490 --> 00:13:06,490 Speaker 1: but now she had another reason for crying at night. 167 00:13:07,010 --> 00:13:10,450 Speaker 1: You lose your friends because your friends or people from work, 168 00:13:11,130 --> 00:13:17,810 Speaker 1: it's difficult to survive financially and emotionally. That's an all 169 00:13:17,930 --> 00:13:22,210 Speaker 1: too typical experience for whistleblowers. According to Kate Kenny, a 170 00:13:22,290 --> 00:13:25,930 Speaker 1: professor at the National University of Ireland in Galway. Professor 171 00:13:26,010 --> 00:13:29,610 Speaker 1: Kenny studied what happened to dozens of whistleblowers. It's common 172 00:13:29,650 --> 00:13:32,330 Speaker 1: for them to be shunned by former friends. They find 173 00:13:32,330 --> 00:13:34,410 Speaker 1: it hard to get another job in the same industry, 174 00:13:34,770 --> 00:13:38,370 Speaker 1: and that can be true even when whistleblowing is basically 175 00:13:38,410 --> 00:13:47,170 Speaker 1: their job description. Martin Woods had worked for the British 176 00:13:47,210 --> 00:13:50,410 Speaker 1: Police for nearly two decades when he decided to move 177 00:13:50,490 --> 00:13:54,970 Speaker 1: into banking. Banks employ anti money laundering officers to look 178 00:13:55,010 --> 00:13:58,530 Speaker 1: for suspicious transactions, and when Woods started work for the 179 00:13:58,570 --> 00:14:02,170 Speaker 1: London branch of Wakovia, an American bank, it didn't take 180 00:14:02,250 --> 00:14:06,650 Speaker 1: him long to find some high value deposits made in 181 00:14:06,770 --> 00:14:11,330 Speaker 1: traveler's checks with sequential numbers. Were the customers really just 182 00:14:11,650 --> 00:14:16,810 Speaker 1: innocent tourists, It seemed unlikely. In fact, they were working 183 00:14:16,850 --> 00:14:21,290 Speaker 1: for a drug cartel. Drugs sell on the streets for cash, 184 00:14:21,730 --> 00:14:24,170 Speaker 1: but it's hard to use big wads of banknotes to 185 00:14:24,210 --> 00:14:27,690 Speaker 1: buy things in the regular economy. The cartels need to 186 00:14:27,770 --> 00:14:31,410 Speaker 1: launder that money into respectable looking entries. In the books 187 00:14:31,410 --> 00:14:35,970 Speaker 1: of the Global Financial System, it turned out they'd laundered 188 00:14:36,050 --> 00:14:41,090 Speaker 1: over three hundred billion dollars through a covire. They'd used 189 00:14:41,090 --> 00:14:44,490 Speaker 1: it to buy things like a McDonald Douglas DC nine airplane, 190 00:14:44,770 --> 00:14:48,250 Speaker 1: which was seized on a Mexican runway carrying five tons 191 00:14:48,290 --> 00:14:52,450 Speaker 1: of cocaine. But when Martin Woods started to report these 192 00:14:52,530 --> 00:14:57,730 Speaker 1: dodgy looking traveler's check transactions were his boss is happy. No, 193 00:14:58,090 --> 00:15:02,050 Speaker 1: he says, they were not. Martin. This is a disaster 194 00:15:02,210 --> 00:15:05,890 Speaker 1: and it's all your fault. Wait, what's my fault. I'm 195 00:15:05,890 --> 00:15:08,850 Speaker 1: not going to get my bonus this year that were 196 00:15:09,450 --> 00:15:12,930 Speaker 1: the boss explained. The departments that make the money give 197 00:15:13,010 --> 00:15:17,210 Speaker 1: scores to the departments that provide support services. Bonuses depend 198 00:15:17,250 --> 00:15:20,690 Speaker 1: on the scores, and the compliance department had topped the 199 00:15:20,810 --> 00:15:25,130 Speaker 1: scorecard for years. It was getting stellar scores, it seems, 200 00:15:25,530 --> 00:15:28,570 Speaker 1: because it was giving the money making department what it wanted, 201 00:15:29,210 --> 00:15:33,610 Speaker 1: and what the moneymakers wanted from compliance was not asking 202 00:15:33,650 --> 00:15:36,410 Speaker 1: too many questions. So now that I've started to do 203 00:15:36,450 --> 00:15:41,250 Speaker 1: a proper job, they're giving the compliance department lower scores. Exactly, 204 00:15:41,370 --> 00:15:47,010 Speaker 1: mordn and their effects my bonus. You see. The bank 205 00:15:47,330 --> 00:15:51,930 Speaker 1: was eventually fined, but for Woods himself, working life soon 206 00:15:52,010 --> 00:15:57,130 Speaker 1: became intolerable. The researcher Kate Kenney says whistleblowers often find 207 00:15:57,170 --> 00:16:01,850 Speaker 1: themselves being targeted for the tiniest breaches of company policy. 208 00:16:01,970 --> 00:16:04,450 Speaker 1: When Woods went to the hospital with a slipped disc 209 00:16:04,890 --> 00:16:07,610 Speaker 1: or Coovia said he hadn't called in sick in the 210 00:16:07,770 --> 00:16:12,730 Speaker 1: precise mannerified in his employee's handbook. They also told him 211 00:16:12,730 --> 00:16:15,730 Speaker 1: off for helping the British police to investigate a corrupt 212 00:16:15,850 --> 00:16:20,690 Speaker 1: African politician. That's a disciplinary offense. Dollar accounts have nothing 213 00:16:20,730 --> 00:16:23,210 Speaker 1: to do with you. They're a US matter. The police 214 00:16:23,210 --> 00:16:25,850 Speaker 1: phoned me from Mauritius. It was mourning in London. They 215 00:16:25,850 --> 00:16:28,410 Speaker 1: needed help right then. The US was still in bed 216 00:16:28,570 --> 00:16:32,170 Speaker 1: fielding their car. Was a disciplinary offense because the police 217 00:16:32,250 --> 00:16:35,250 Speaker 1: rang me up and I answered the phone. Yes. The 218 00:16:35,370 --> 00:16:39,290 Speaker 1: stress drove Woods to the verge of breakdown. He quit 219 00:16:39,450 --> 00:16:44,210 Speaker 1: his job, sued Wakovia and settled out of court. When 220 00:16:44,210 --> 00:16:47,290 Speaker 1: he applied for other jobs, he didn't have much luck. 221 00:16:48,050 --> 00:16:52,090 Speaker 1: When other people see what happens to whistleblowers, it naturally 222 00:16:52,130 --> 00:16:58,170 Speaker 1: makes them more cautious. Woods says he's often had conversations 223 00:16:58,210 --> 00:17:01,690 Speaker 1: like this, you're Martin Woods. Aren't you well done? I 224 00:17:01,770 --> 00:17:05,170 Speaker 1: really admire what you did. Thank you. I'm an antimoney 225 00:17:05,210 --> 00:17:08,090 Speaker 1: laundering officer too. And how does your bank react when 226 00:17:08,130 --> 00:17:13,330 Speaker 1: you flag suspicious activity? When I, oh, don't do that. 227 00:17:13,770 --> 00:17:18,130 Speaker 1: I like my job. I want to keep it. Those 228 00:17:18,170 --> 00:17:22,290 Speaker 1: people didn't go into their anti money laundering career intending 229 00:17:22,330 --> 00:17:25,290 Speaker 1: to turn a blind eye. Like the students in the 230 00:17:25,330 --> 00:17:28,730 Speaker 1: research experiment. They probably thought they would blow the whistle, 231 00:17:29,450 --> 00:17:32,330 Speaker 1: but when faced with the choice for real, they chose 232 00:17:32,330 --> 00:17:37,530 Speaker 1: a quiet life. Lots of employees at Equity Funding had 233 00:17:37,530 --> 00:17:42,090 Speaker 1: wrestled with that dilemma too. Remember, Equity Funding had been 234 00:17:42,130 --> 00:17:45,930 Speaker 1: making up fake clients. Ray Dirk's estimated that about a 235 00:17:46,050 --> 00:17:48,970 Speaker 1: hundred of the company's employees must have known or at 236 00:17:49,010 --> 00:17:53,530 Speaker 1: least had their suspicions. Yet only Ron Seacrest had done 237 00:17:53,570 --> 00:17:56,810 Speaker 1: anything about it, and only because he had been fired. 238 00:17:57,850 --> 00:18:01,170 Speaker 1: Why didn't the others blow the whistle? Some felt they 239 00:18:01,210 --> 00:18:04,370 Speaker 1: didn't know enough to be sure, Some just wanted to 240 00:18:04,450 --> 00:18:08,450 Speaker 1: keep drawing their paychecks. Some were uncomfortable enough to quit 241 00:18:08,490 --> 00:18:12,450 Speaker 1: the company, but not to kick up a fuss. One 242 00:18:12,530 --> 00:18:15,570 Speaker 1: employee told Dirks that he had wrestled with his conscience 243 00:18:15,650 --> 00:18:18,850 Speaker 1: and eventually asked the minister at his church for advice. 244 00:18:19,450 --> 00:18:22,930 Speaker 1: You'll should think of your family, You mean, I should 245 00:18:23,010 --> 00:18:25,650 Speaker 1: keep on working for this company for now, but look 246 00:18:25,730 --> 00:18:29,250 Speaker 1: for another job when you find one, leave. Should I 247 00:18:29,330 --> 00:18:32,490 Speaker 1: report on what I know? You'll should think of your family. 248 00:18:33,530 --> 00:18:36,690 Speaker 1: A handful of employees did try to report their suspicions 249 00:18:36,690 --> 00:18:40,330 Speaker 1: to various regulatory bodies, but it seems the regulators never 250 00:18:40,370 --> 00:18:44,290 Speaker 1: took them seriously. And that's not surprising because the claims 251 00:18:44,330 --> 00:18:48,090 Speaker 1: about the fake insurance policies were so mind boggling. It 252 00:18:48,090 --> 00:18:50,810 Speaker 1: would be like somebody coming to an analyst who follows 253 00:18:50,850 --> 00:18:55,530 Speaker 1: automobile companies and saying, Chrysler doesn't put engines in their automobiles. 254 00:18:55,850 --> 00:18:59,250 Speaker 1: They use big rubber bounds. I would have thrown the 255 00:18:59,330 --> 00:19:01,650 Speaker 1: guy out of my offers if he'd come to see 256 00:19:01,690 --> 00:19:05,930 Speaker 1: me and tell me that it was precisely because he 257 00:19:06,050 --> 00:19:09,290 Speaker 1: expected that kind of brush off from the authorities that 258 00:19:09,410 --> 00:19:14,490 Speaker 1: Ron Seacrest had decided to approach. Ray Dirks Seacrest had 259 00:19:14,490 --> 00:19:18,530 Speaker 1: a strategy. The more that Dirks poked around, he thought, 260 00:19:18,850 --> 00:19:23,650 Speaker 1: the more equity funding shareholders would start to hear the allegations. 261 00:19:23,690 --> 00:19:26,370 Speaker 1: Some would get cold feet and sell, and if the 262 00:19:26,410 --> 00:19:30,210 Speaker 1: share price started to create the regulators would surely have 263 00:19:30,290 --> 00:19:34,490 Speaker 1: to investigate. And that's more or less what happened. But 264 00:19:34,650 --> 00:19:38,130 Speaker 1: if the sec was grateful to Dirks, it shows a 265 00:19:38,210 --> 00:19:42,770 Speaker 1: strange way of showing it. It formally reprimanded him for 266 00:19:42,930 --> 00:20:02,570 Speaker 1: insider trading. Cautionary tales will return shortly. Where does our 267 00:20:02,650 --> 00:20:06,450 Speaker 1: moral sense come from? Why do we instinctively feel that 268 00:20:06,730 --> 00:20:11,090 Speaker 1: some things are right and others are wrong? The psychologists 269 00:20:11,290 --> 00:20:16,450 Speaker 1: Jonathan Hate and Craig Joseph proposed a theory, moral foundations theory. 270 00:20:17,250 --> 00:20:20,010 Speaker 1: They think we can trace our moral instincts to a 271 00:20:20,050 --> 00:20:26,050 Speaker 1: few basic foundations, such as fairness, loyalty, and preventing harm. 272 00:20:26,090 --> 00:20:30,730 Speaker 1: The whistleblower's dilemma arises when loyalty comes into conflict with 273 00:20:30,890 --> 00:20:35,530 Speaker 1: some other moral value. Remember what Cheryl Eckard said about 274 00:20:35,530 --> 00:20:39,730 Speaker 1: blowing the whistle on the substandard pharmaceutical factory. You lose 275 00:20:39,730 --> 00:20:43,170 Speaker 1: your friends because your friends are people from work. The 276 00:20:43,210 --> 00:20:47,450 Speaker 1: whistleblower's dilemma is familiar to everyone who's ever been a child. 277 00:20:48,170 --> 00:20:52,730 Speaker 1: Tattletale or snitch is the worst of playground insults. Martin 278 00:20:52,770 --> 00:20:56,690 Speaker 1: Woods had trouble finding another job after he left Bokovia. 279 00:20:56,770 --> 00:20:59,090 Speaker 1: He thinks you can draw a line straight from the 280 00:20:59,130 --> 00:21:02,850 Speaker 1: playground to our treatment of whistleblowers in the world of work. 281 00:21:03,570 --> 00:21:06,730 Speaker 1: As children, we're told don't tell tales, and we tell 282 00:21:06,730 --> 00:21:10,090 Speaker 1: our kids don't tell tales. Why do we do that. 283 00:21:10,330 --> 00:21:13,170 Speaker 1: We have an anxiety around their social grouping and their 284 00:21:13,170 --> 00:21:16,690 Speaker 1: social acceptance. But we're telling them not to light people 285 00:21:16,730 --> 00:21:20,770 Speaker 1: who tell tales the whistleblower. But there must be something 286 00:21:20,770 --> 00:21:24,530 Speaker 1: else going on, because we admire whistleblowers too. We root 287 00:21:24,610 --> 00:21:28,130 Speaker 1: for Martin Woods and Cheryl Eckard, not the bonus chasing 288 00:21:28,170 --> 00:21:31,770 Speaker 1: boss or the cost conscious factory director. We cheer on 289 00:21:31,890 --> 00:21:36,170 Speaker 1: Ray Dirks. Though I must confess I've stacked the deck. 290 00:21:36,770 --> 00:21:39,770 Speaker 1: I deliberately chose to tell the stories of whistleblowers who 291 00:21:39,810 --> 00:21:42,410 Speaker 1: are easy to warm to. I could easily have picked 292 00:21:42,410 --> 00:21:48,690 Speaker 1: some more difficult characters, more awkward or prickly or priggish. 293 00:21:48,770 --> 00:21:51,330 Speaker 1: When do we praise a whistleblower for doing what's right? 294 00:21:51,770 --> 00:21:53,890 Speaker 1: And when do we worry that someone who snitched on 295 00:21:53,970 --> 00:21:58,610 Speaker 1: others might also snitch on us. It surely comes down 296 00:21:58,650 --> 00:22:01,690 Speaker 1: to how serious we think the transgression was that they 297 00:22:01,770 --> 00:22:05,530 Speaker 1: blew the whistle on. Suppose you were interviewing a candidate 298 00:22:05,570 --> 00:22:08,450 Speaker 1: for a job and you heard they'd called the police 299 00:22:08,490 --> 00:22:11,730 Speaker 1: on their former boss because he was extremely drunk after 300 00:22:11,770 --> 00:22:15,850 Speaker 1: an office party and insisting on driving himself home. I'd 301 00:22:15,890 --> 00:22:18,370 Speaker 1: think more of them for doing that. That's surely a 302 00:22:18,450 --> 00:22:22,250 Speaker 1: case where preventing harm trump's loyalty to the boss. But 303 00:22:22,850 --> 00:22:25,490 Speaker 1: suppose the job candidate had called the police on their 304 00:22:25,530 --> 00:22:28,290 Speaker 1: former boss because he'd jumped a red light on a 305 00:22:28,370 --> 00:22:31,530 Speaker 1: deserted road when late for a meeting. That's someone I 306 00:22:31,650 --> 00:22:34,410 Speaker 1: might not want on my team. And what if the 307 00:22:34,410 --> 00:22:39,370 Speaker 1: whistleblowing case is hard to understand as many are would 308 00:22:39,370 --> 00:22:41,890 Speaker 1: I take a chance on employing the whistleblower if I 309 00:22:41,930 --> 00:22:45,970 Speaker 1: had some other suitable candidate. It's easy to see why 310 00:22:45,970 --> 00:22:54,330 Speaker 1: whistleblowers might struggle to find employment. Remember the students in 311 00:22:54,370 --> 00:22:58,810 Speaker 1: Amsterdam and the experiment with the unethical researcher. When given 312 00:22:58,810 --> 00:23:03,370 Speaker 1: a hypothetical scenario, most said they'd blow the whistle When 313 00:23:03,450 --> 00:23:07,570 Speaker 1: actually put in that position, hardly anyone did we get 314 00:23:07,610 --> 00:23:10,890 Speaker 1: cold feet because we worry about making trouble for ourselves 315 00:23:11,210 --> 00:23:14,730 Speaker 1: or for our families. We don't want to be a tattletale. 316 00:23:15,730 --> 00:23:18,210 Speaker 1: But this is a problem because if we want to 317 00:23:18,210 --> 00:23:21,530 Speaker 1: find out when organizations are doing things wrong, we need 318 00:23:21,730 --> 00:23:24,410 Speaker 1: employees to be brave enough to raise the whistle to 319 00:23:24,450 --> 00:23:29,530 Speaker 1: their lips. The economist luigi's Engalas and his colleagues studied 320 00:23:29,690 --> 00:23:34,050 Speaker 1: all alleged cases of fraud in big US companies over 321 00:23:34,090 --> 00:23:37,090 Speaker 1: an eight year period. There were over two hundred of them, 322 00:23:37,130 --> 00:23:41,690 Speaker 1: including Enron and WorldCom. They wanted to find out who 323 00:23:41,730 --> 00:23:45,610 Speaker 1: brought those frauds to light, and despite the risks, it 324 00:23:45,650 --> 00:23:50,930 Speaker 1: turns out that employees were surprisingly important. They revealed as 325 00:23:51,010 --> 00:23:54,610 Speaker 1: many of the cases as the company auditors and the 326 00:23:54,730 --> 00:24:00,890 Speaker 1: regulators put together. It makes sense employees are the ones 327 00:24:00,890 --> 00:24:04,770 Speaker 1: who have the inside track on corporate malfeasance, and we 328 00:24:04,890 --> 00:24:08,130 Speaker 1: want them to come forward when they have concerns. So 329 00:24:08,450 --> 00:24:13,090 Speaker 1: how could we change the incentives around whistleblowing. One answer, 330 00:24:13,170 --> 00:24:16,450 Speaker 1: say some researchers, is to work with the grain of 331 00:24:16,450 --> 00:24:20,250 Speaker 1: our deep rooted instinct to be loyal. Leaders can choose 332 00:24:20,290 --> 00:24:23,210 Speaker 1: to create a culture in which whistleblowing is seen as 333 00:24:23,290 --> 00:24:27,530 Speaker 1: being loyal to the company, not disloyal to your immediate colleagues. 334 00:24:28,250 --> 00:24:34,290 Speaker 1: There is another obvious way to incentivize people money. Martin Woods, 335 00:24:34,290 --> 00:24:37,890 Speaker 1: remember was a policeman before he worked for banks. He 336 00:24:38,010 --> 00:24:40,690 Speaker 1: was used to paying for tip offs. If we bought 337 00:24:40,730 --> 00:24:43,490 Speaker 1: information on where the drugs are, why are we not 338 00:24:43,530 --> 00:24:46,650 Speaker 1: buying information on where the financial crime is. Why are 339 00:24:46,650 --> 00:24:49,690 Speaker 1: we not buying information about where the tax evasion is. 340 00:24:50,210 --> 00:24:54,530 Speaker 1: Why is that so different? Those are good questions. In fact, 341 00:24:54,930 --> 00:24:58,610 Speaker 1: sometimes we do pay cash rewards to whistleblowers, and the 342 00:24:58,650 --> 00:25:02,650 Speaker 1: evidence suggests that those rewards work. According to the economist 343 00:25:02,730 --> 00:25:06,330 Speaker 1: luigi's Engalis and his big study of alleged corporate fraud, 344 00:25:07,050 --> 00:25:09,890 Speaker 1: in some of those cases there the chance of a 345 00:25:09,930 --> 00:25:14,570 Speaker 1: payoff for information, and employees were three times more likely 346 00:25:14,690 --> 00:25:18,730 Speaker 1: to blow the whistle. But few countries have made concerted 347 00:25:18,770 --> 00:25:22,890 Speaker 1: efforts to reward whistleblowers. South Korea is one that has 348 00:25:23,810 --> 00:25:27,250 Speaker 1: Its government pays millions of dollars a year in rewards 349 00:25:27,290 --> 00:25:31,090 Speaker 1: for tipoffs about everything from tax dodges to unsaved food 350 00:25:31,330 --> 00:25:36,850 Speaker 1: to unlicensed medical products. It seems to work. In other countries, 351 00:25:36,890 --> 00:25:40,250 Speaker 1: the rewards tend to be patchea. They exist in some 352 00:25:40,330 --> 00:25:44,130 Speaker 1: sectors and not in others, and that largely comes down 353 00:25:44,250 --> 00:25:47,890 Speaker 1: to historical luck. The US, for instance, has a law 354 00:25:47,970 --> 00:25:50,650 Speaker 1: called the False Claims Act. It dates back to the 355 00:25:50,730 --> 00:25:53,970 Speaker 1: Civil War, and it rewards people for saving the government 356 00:25:54,010 --> 00:25:57,370 Speaker 1: money by alerting them to suppliers who rip them off. 357 00:25:57,970 --> 00:26:00,170 Speaker 1: So if you work for a company that just happens 358 00:26:00,210 --> 00:26:02,490 Speaker 1: to sell to the government, then you might get a 359 00:26:02,530 --> 00:26:05,770 Speaker 1: reward for blowing the whistle. What kind of companies sell 360 00:26:05,850 --> 00:26:11,090 Speaker 1: to the government. Pharmaceutical companies are wanting example, think of Medicare. 361 00:26:11,490 --> 00:26:14,090 Speaker 1: The government buys lots of drugs, and if some of 362 00:26:14,090 --> 00:26:17,410 Speaker 1: those drugs were made in a factory in Cedra Puerto Rico, 363 00:26:17,570 --> 00:26:23,210 Speaker 1: say in a non sterile environment with contaminated water, well, 364 00:26:23,250 --> 00:26:26,050 Speaker 1: the government might reward you for letting them know about that. 365 00:26:28,010 --> 00:26:31,810 Speaker 1: Seven years after Glaxo Smith Klein made Cheryl Echard redundant, 366 00:26:32,370 --> 00:26:36,610 Speaker 1: the US federal government find the company and gave Cheryl 367 00:26:36,650 --> 00:26:39,930 Speaker 1: Echard the share she was due under the False Claims 368 00:26:39,930 --> 00:26:49,410 Speaker 1: Act ninety six million dollars. Martin Woods wasn't quite so lucky. 369 00:26:50,330 --> 00:26:53,370 Speaker 1: Just two years after he blew the whistle on Wakovia, 370 00:26:53,850 --> 00:26:57,650 Speaker 1: the US introduced new laws to reward whistleblowers in the 371 00:26:57,690 --> 00:27:01,970 Speaker 1: financial sector. Only he'd blown the whistle, then he'd have 372 00:27:02,050 --> 00:27:07,210 Speaker 1: got twelve million dollars. But Wood says he has no regrets. 373 00:27:07,770 --> 00:27:11,130 Speaker 1: Now call me conceited, but I like me. I like 374 00:27:11,250 --> 00:27:14,170 Speaker 1: what I stand for. I like my profile, my brand, 375 00:27:14,650 --> 00:27:18,690 Speaker 1: and most of all, my integrity. Woods now works as 376 00:27:18,690 --> 00:27:22,610 Speaker 1: a consultant, and he discovered why he'd initially found it 377 00:27:22,690 --> 00:27:24,530 Speaker 1: so hard to get his foot in the door with 378 00:27:24,570 --> 00:27:27,570 Speaker 1: a new employer. He was on a database at the 379 00:27:27,610 --> 00:27:32,410 Speaker 1: Financial Conduct Authority, a British regulator. Banks could check the 380 00:27:32,530 --> 00:27:37,690 Speaker 1: database for information on potential employees. Woods was flagged as 381 00:27:38,330 --> 00:27:43,370 Speaker 1: non routine. But why might a regulator seemingly want to 382 00:27:43,370 --> 00:27:48,450 Speaker 1: make life difficult for a whistleblower. Woods had his suspicions, 383 00:27:49,090 --> 00:27:52,090 Speaker 1: when you blow the whistle on a bank indirectly, you're 384 00:27:52,130 --> 00:27:55,850 Speaker 1: also blowing the whistle on regulatory failure. This was certainly 385 00:27:55,890 --> 00:27:59,930 Speaker 1: the case as well with insurance analyst Ray Dirts. When 386 00:27:59,930 --> 00:28:03,850 Speaker 1: the investigation into equity funding had run its course, twenty 387 00:28:03,930 --> 00:28:09,010 Speaker 1: two people faced criminal charges. Six went to jail, including 388 00:28:09,170 --> 00:28:14,850 Speaker 1: the fanatical weightlifter Stanley Goldlum. But everyone knew the SEC 389 00:28:15,090 --> 00:28:18,170 Speaker 1: would never have uncovered the fraud at equity Funding on 390 00:28:18,250 --> 00:28:24,450 Speaker 1: its own. A lone, idiosyncratic sleuth had shown them up. Yes, 391 00:28:24,770 --> 00:28:29,330 Speaker 1: but said the SEC. Dirks had talked through the allegations 392 00:28:29,330 --> 00:28:33,130 Speaker 1: with clients who owned shares in equity funding, and some 393 00:28:33,210 --> 00:28:36,330 Speaker 1: of those clients had then sold their shares. Couldn't you 394 00:28:36,410 --> 00:28:41,930 Speaker 1: say that was inside of trading? Dirks was furious at 395 00:28:41,970 --> 00:28:46,170 Speaker 1: being reprimanded by the SEC. He took them to court 396 00:28:47,410 --> 00:28:52,730 Speaker 1: and lost. He appealed, and after ten years, got his 397 00:28:52,850 --> 00:28:58,050 Speaker 1: day in front of the Supreme Court. The SEC is 398 00:28:58,050 --> 00:29:00,690 Speaker 1: a government body and before it can argue in front 399 00:29:00,690 --> 00:29:03,530 Speaker 1: of the Supreme Court, it needs the approval of the 400 00:29:03,610 --> 00:29:08,050 Speaker 1: United States Solicitor General. There was just one problem. United 401 00:29:08,090 --> 00:29:12,930 Speaker 1: States Solicitor General loved what Ray Dirks had done, so 402 00:29:13,090 --> 00:29:16,170 Speaker 1: he gave the SEC permission to argue their case, but 403 00:29:16,330 --> 00:29:20,090 Speaker 1: added a PostScript telling the judges he disagreed with it. 404 00:29:21,770 --> 00:29:26,290 Speaker 1: Dirks won his case, but the happy endings are exceptions. 405 00:29:27,370 --> 00:29:30,570 Speaker 1: When the economist Luigi's and Galis asked whistleblowers if they'd 406 00:29:30,610 --> 00:29:34,570 Speaker 1: do it all again, most said no, it wasn't worth 407 00:29:34,610 --> 00:29:39,010 Speaker 1: the stress. Like the students in Amsterdam, most of us 408 00:29:39,050 --> 00:29:41,850 Speaker 1: would like to think would blow the whistle. But if 409 00:29:41,850 --> 00:29:44,370 Speaker 1: we want people to have the courage to follow through 410 00:29:45,130 --> 00:29:49,770 Speaker 1: we need to celebrate, protect and reward those who blow 411 00:29:49,770 --> 00:30:05,290 Speaker 1: the whistle key. Sources for this episode include The Great 412 00:30:05,410 --> 00:30:09,610 Speaker 1: Wall Street Scandal by Ray Dirks and Leonard Gross, Kate 413 00:30:09,690 --> 00:30:14,970 Speaker 1: Kenny's book Whistleblowing, and Martin Woods's interview on KYC three sixty. 414 00:30:15,610 --> 00:30:20,170 Speaker 1: For a full list of references, see Tim Harford dot com. 415 00:30:20,330 --> 00:30:24,850 Speaker 1: Cautionary Tales is written by me Tim Harford with Andrew Wright. 416 00:30:25,410 --> 00:30:29,130 Speaker 1: It's produced by Ryan Dilley and Marilyn Rust. The sound 417 00:30:29,170 --> 00:30:32,690 Speaker 1: design and original music are the work of Pascal Wise. 418 00:30:33,370 --> 00:30:37,610 Speaker 1: Julia Barton edited the scripts. Starring in this series of 419 00:30:37,650 --> 00:30:42,890 Speaker 1: Cautionary Tales are Helena Bonham, Carter and Geoffrey Wright, alongside 420 00:30:43,010 --> 00:30:50,330 Speaker 1: Nazar Alderazzi, Ed Gochen, Melanie Gutteridge, Rachel Hanshaw, Cognor Holbrook, Smith, 421 00:30:50,890 --> 00:30:55,770 Speaker 1: Reg Lockett, Siam Unrowe and Rufus Wright. The show would 422 00:30:55,810 --> 00:30:58,410 Speaker 1: not have been possible without the work of Mia La Belle, 423 00:30:58,890 --> 00:31:05,090 Speaker 1: Jacob Weisberg, Hell Fame, John Schnarz, Carlie mcgliori, Eric Sandler, 424 00:31:05,450 --> 00:31:11,570 Speaker 1: Emily Rostock, Maggie Taylor, Daniella Lakhan, and Maya Kanig. Cautionary 425 00:31:11,610 --> 00:31:15,210 Speaker 1: Tales is a production of Pushkin Industries. If you like 426 00:31:15,330 --> 00:31:18,850 Speaker 1: the show, please remember to share, rate, and review.