Janet Tavakoli: SEC Needs to Wake Up, Make Bad Money Managers Pay Up

Tavakoli cites the vaunted revolving door between Washington and Wall Street, to which SEC personnel look for their next jobs–as a possible reason for lethargy in pursuing the SAC case, where allegations of insider trading have swirled for at least a decade. "The SEC itself should be investigated for not prosecuting alleged crimes during the financial crisis," she says.

Tavakoli says the SEC should be asking if sophisticated investors like Blackstone, Morgan Stanley and HSBC were enabling a criminal enterprise by not being skeptical enough.

"We have gone so far beyond the pale about having appropriate outrage to the point where alleged criminal activity is the norm," she worries, emphasizing that a government failure to actively claw back unjust gains implies that insider trading is a victimless crime, while rewarding bad actors and punishing those who do due diligence.

"Is it just too hard to calculate what the excess gains are? [The SEC is] enabling [cheating] managers intentionally or otherwise by putting their brains in neutral. They're disadvantaging honest investors and honest managers who raise issues and are skeptical [who] tell investors: 'The returns look great but we're not going in because we have due dilligence questions.' By punishing the diligent ones, you'd be creating an incentive for investors and managers to cheat," she says.

That is why the expert in financial shenanigans warns the SEC not to simply "declare victory" should it collect a lot of cash in the case. The government needs to make cheaters and go-along money managers cough up any ill-gotten gains.

Her warning to financial advisors:

"Don't do business with criminal enterprises or ones that look suspicious. Because the day will come when you get tapped on the shoulder for clawbacks. Companies that did business with Madoff got the tap."

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Check out this story about Tavakoli, Finding the Culprits of the Crisis, in Research magazine.