If you have the guts to blow the whistle on a Wall Street investment fraud and approach U.S. regulators with your allegations, beware the case of Kathleen Furey.

Imagine being a whistle-blower, but with the added weight of actually working at the primary Wall Street watchdog.

Not only did Furey, a senior counsel for the SEC for nearly nine years now, work for the U.S. market regulator, but she was punished for bringing attention to the fact that fraud cases against money managers were going nowhere at the agency.

A copy of her amended complaint, filed this month with the U.S. Office of the Special Counsel, an agency that is a watchdog on behalf of federal employees, including those who are whistle-blowers, provides the hair-raising account of how, in 2007, Furey sought out her New York office supervisor and complained that her managers were refusing to advance investigations or file cases under two statutes most directly related to investment managers.

One year later, she alleges, her bosses' indifference would help produce the worst failure in the SEC's history: Bernard Madoff's $65 billion investment scam. In 2008, Madoff confessed to bilking investors out of their savings through a decades-long pyramid scheme.

Search Furey's complaint to the special counsel and you will find Madoff's name appears more than 30 times in the 25-page document.

Kathleen Furey stated in e-mails to the head of the New York office that her entire group (20 lawyers plus staff) was not allowed to bring cases under the Investment Advisors Act of 1940 and the Investment Company Act of 1940, two of the four primary statutes the SEC enforces and uses to indict fraudulent money managers. If you read the SEC's complaint against Madoff (http://www.sec.gov/litigation/complaints/2008/comp-madoff121108.pdf), the primary charge against him is for violating Section 206 of the Investment Advisers Act of 1940.

This is exactly the statute that Furey said was not being enforced by her supervisors, one of whom told her "we don't do IM [investment management] cases." When she took her complaint to a higher-ranking SEC officer, she was told to recant what her direct supervisors had told her.

Furey eventually went directly to the head of the SEC's New York regional office, Mark Schonfeld, who at the time was the head of the agency's New York regional office - the one with jurisdiction over Wall Street. Schonfeld did nothing to fix the problem, and his office decided not to pursue the cases, Furey alleges.

Consequently, the lax enforcement continued until the Madoff case broke in December 2008. After the public flogging of the SEC by Congress, Furey's bosses began to bring these cases to make up for lost time, the next nine being between the end of January 2009 and July 2009, her suit says.

Revolving door

Why was the SEC's supervision of Wall Street cases so lax? Some would say it is because of the revolving door between the agency and Wall Street law firms. Schonfeld left his government job to join the New York office of Gibson, Dunn & Crutcher L.L.P. and direct its securities-enforcement practice group. Three other key officials in Furey's group have also left the agency.

"It is typically those who pass through the revolving door that make decisions beneficial to Wall Street," says Furey's attorney, Gary Aguirre, himself a former SEC attorney and whistle-blower against the agency. He argues that it was her bosses' decisions not to enforce two of the four securities acts entrusted to the SEC by Congress, and not hers.

Aguirre contends that Furey paid the price for her diligence: efforts to demote her and alter her past excellent evaluations.

She asked for an internal audit of her work and in 2011 received a perfect score. The auditor unequivocally recommended "if Ms. Furey continues to perform the advisory duties identified in the audit, that she be promoted." She remains in her current job.

There has been much scrutiny of Mary Jo White, the present head of the SEC, as a Wall Street-friendly lawyer who again passes through the revolving door from a well-regarded law firm.

The added drama of the Furey case could be a litmus test for the new SEC commissioner.

"Will Mary Jo White embrace the message and protect the messenger," Furey's attorney asks, "or protect her colleagues who revolved through the door a little earlier than she did?"