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SEC Issues $14 Million Whistleblower Reward

An unidentified tipster has received a $14 million federal reward for aiding an “enforcement action that recovered substantial investor funds,” according to a Securities and Exchange Commission (SEC) announcement last week.

The SEC’s reward program is part of Congress’s effort to stamp out corporate and Wall Street fraud in the aftermath of the 2008 financial crisis. Adopted in the face of fierce opposition by corporate lobbyists, the program attempts to turn insiders into informants by making it more worthwhile for them to blow the whistle than to participate in the wrongdoing. If a tip leads to an SEC enforcement action with sanctions of $1 million or more, the informant can receive a reward ranging from 10 percent to 30 percent of the money collected.

The $14 million reward—the largest ever issued by the SEC—comes several years after the agency found itself in hot water for failing to act on tips pointing to a massive Ponzi scheme orchestrated by Bernie Madoff. The SEC’s reward program at the time was limited to tips on insider trading, and had led to only seven rewards for a total of $159,537 over a twenty-year period, according to a report by the agency’s Inspector General (IG). Congress revamped the program in the 2010 Dodd-Frank Act.

Prior to last week’s announcement, the agency had paid out about $170,000 in total to four whistleblowers under the new program.

SEC officials say that tips received under the new program have bolstered the agency’s enforcement work. The SEC received more than 3,000 tips in Fiscal Year (FY) 2012 on alleged problems ranging from stock offering fraud to violations of the Foreign Corrupt Practices Act, according to an agency report. There have also been hints that additional rewards will be issued in the coming months and years, as the agency continues to pursue tips and file charges.

“Our whistleblower program already has had a big impact on our investigations by providing us with high quality, meaningful tips,” SEC Chair Mary Jo White said in last week’s statement. “We hope an award like this encourages more individuals with information to come forward.”

In June, an SEC enforcement official, speaking at a conference hosted by Corporate Crime Reporter, predicted the whistleblower program would soon lead to “incredibly impactful cases” and “some extremely significant whistleblower awards.” The head of the whistleblower office told Reuters last week he expects “more frequent and continuous payments on a rolling basis.” The office says a typical SEC investigation “can take months or even years to be concluded.”

Few details about the $14 million reward have been released, since the SEC is required to maintain the confidentiality of its informants. (Previous whistleblowers were identified in an April report by DealBook.)

As a result, the public may not be able to learn more about the whistleblower or the fraud he or she helped to expose. Keeping this information behind closed doors is supposed to protect whistleblowers from personal or professional retaliation.

The agency hasn’t always done its job in protecting informants. Several years ago, an SEC enforcement attorney revealed non-public information about a JPMorgan whistleblower, and even encouraged the bank’s lawyers to use the information against the whistleblower in a retaliation proceeding. Despite the SEC IG recommending disciplinary action, the attorney left the agency unscathed and ended up running for Congress, according to a 2010 POGO report published in Politics Daily.

The SEC isn’t the only financial regulator that can reward informants for tips. The Commodity Futures Trading Commission (CFTC) got its own program under the Dodd-Frank Act, but has yet to issue its first reward. The agency received 137 tips in FY 2013 and is planning to further publicize the program, a CFTC official told Reuters.

The 10 percent minimum payout is a key feature of both the SEC and CFTC programs. In 2009 testimony, Harry Markopolos—who sent multiple tips warning the SEC about the Madoff Ponzi scheme—pointed out that, under the old whistleblower program, tipsters might not receive anything. “Unfortunately, unlike the IRS’s Whistleblower Program and the False Claims Act, the SEC’s reward payments are not mandatory and the SEC can refuse to pay these rewards without explanation,” he testified.

POGO strongly supported the Dodd-Frank-mandated changes to the whistleblower programs, including the 10 percent minimum payout, and has opposed legislative attempts to remove this incentive. “Whistleblowers often put their livelihoods at great risk in order to provide regulators with evidence of wrongdoing,” POGO wrote in a 2011 letter opposing one such bill. “It is imperative that Congress maintain this 10 percent minimum.”

 

 

By: Michael Smallberg
Investigator, POGO

Michael Smallberg, Investigator Michael Smallberg is an investigator for the Project On Government Oversight. Michael's investigations center on oversight of the financial sector.

By: Jamie Neikrie
Intern, POGO

Photograph of Jamie Neikrie Jamie Neikrie is an intern with the Project On Government Oversight.

Topics: Whistleblower Protections, Financial Sector

Related Content: Financial Oversight, Securities and Exchange Commission

Authors: Jamie Neikrie, Michael Smallberg

Submitted by Leon Bard at: October 8, 2013
Good work, Michael and Jamie.

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