SEC: We need more money to stop fraud

NEW YORK (CNNMoney) -- Will the Securities and Exchange Commission be able to stop the next Bernie Madoff?

The office set up to do exactly that -- by chasing down leads from whistleblowers -- isn't being funded.

The 2010 Wall Street reform targeted the SEC for a huge funding boost. But Congress has failed to pass a budget, leaving the agency scrambling to fulfill its expanded regulatory role.

The whistleblower office, which was set up by Dodd-Frank, is suffering as a result, the SEC says.

"We not only can't hire, but we can't even fill the positions that become vacant," Robert Khuzami, SEC director of enforcement told CNNMoney's Poppy Harlow. "We're staffing it through borrowing resources from other parts of the enforcement division."

And that's not ideal. Stephen Kohn, director of the National Whistleblower Center, likens the strategy to filling a baseball club's roster with hockey and football stars.

"Let's be for real," Kohn said. "Whistle blowing is a critical function. It needs people with expertise."

That real expertise might have given the agency a fighting chance to stop Madoff. The SEC was warned about his scheme numerous times over 16 years, but failed to follow up.

Under Dodd-Frank, the SEC was supposed to get $1.3 billion in 2011. But Republican lawmakers want to deny the agency that funding, and even slash money from the agency's current budget.

"It's the Republicans who deliberately underfunded them [the SEC] because they don't like these new financial rules," said Rep. Barney Frank, a fierce defender of the law. "The message it sends is things aren't going to change and you can go back to your old ways."

But Republican Rep. Ed Royce argued that more money is not the answer.

"If more money meant a more effective SEC, then this would be a legitimate concern," Royce said. "Unfortunately, over the last decade the SEC's budget has nearly tripled, yet it has repeatedly failed to stop the most egregious cases of fraud."

Royce said the problem is one of structure and culture.

"It is an over-lawyered, overly-bureaucratic agency that needs fundamental reform," he said. "While Dodd-Frank failed to take that step, it is my hope that this Congress will deliver."

Kohn says that without action, another Madoff-like scandal is a real possibility.

"It's the nature of cheating on Wall Street. Fraud pays. Liars can make money. It's only if the liars and cheaters can be detected are the investors going to be safe," Kohn said.

--Charles Riley is a staff reporter at CNNMoney and Poppy Harlow is anchor.