Heard Off the Street: SEC reforms encourage whistle-blower rewards

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One whistle-blower was handsomely compensated recently -- to the tune of more than $14 million -- for helping the Securities and Exchange Commission recover what the agency said were "substantial investor funds" from an unidentified investment scheme.

The reward, announced Oct. 1, is the largest of six payments the agency has made to tipsters since instituting the whistle-blowing program in August 2011. The incentives were authorized under the landmark Dodd-Frank legislation enacted by Congress in 2010. The law imposes new regulations designed to prevent fraud in the financial services industry and to protect investors.

Whistle-blowers submitted more than 3,200 tips to the SEC in the fiscal year ended Sept. 30, according to the agency's annual report. That's an increase of 8 percent from the previous fiscal year. Over that period, the SEC paid out $14.8 million in four cases where whistle-blowers helped investigators.

"The SEC has said they believe it is a game changer, and I believe it has that potential," said Gregory G. Little, a former SEC attorney who handles securities cases for the law firm White & Case. "The potential of the program is very, very significant."

Securities lawyers say it will take three to five years to determine the success of the program.

Under Dodd-Frank and the regulations the SEC adopted to implement the whistle-blower provision, persons who voluntarily provide original, substantial information that helps an SEC investigation that leads to sanctions of more than $1 million are entitled to a monetary reward equal to 10 to 30 percent of the money the agency recovers.

For more information on the program, go to: www.sec.gov/whistleblower.

The money is paid out of a separate fund, not from whatever the SEC recovers from the perpetrator. That way, whistle-blowers won't take money out of the pockets of investors and others victims. The fund had $439.2 million at the end of the most recent fiscal year, according to the SEC report.

The three most common offenses cited in the 3,238 tips the SEC received in its last fiscal year were corporate disclosures and financial statements, fraud related to securities offerings, and manipulation.

California (375), New York (215) and Florida (187) were the biggest sources of the tips. Pennsylvania whistle-blowers provided 62. The agency also received tips from 55 foreign countries.

"The fact that they have over 3,000 tips generated indicates it is off to a very strong start," Mr. Little said.

One of the biggest challengers whistle-blowers pose to the SEC is checking the credibility of their stories and separating those who have genuine information about serious offenses from disgruntled employees with an ax to grind.

Some tipsters "view this as just another Powerball exercise," said attorney Ernest E. Badway of Fox Rothschild in New York. "Everybody believes they are a whistle-blower, and the day they believe they are a whistle-blower is the day they are terminated."

Mr. Badway said that whistle-blowers who provide credible, significant information do not have to know everything, just enough to put SEC investigators on the right track.

Teresa N. Cavenagh, an attorney in Duane Morris' Philadelphia office, said whistle-blowers should provide as much detailed information as possible in order to get the SEC's attention.

"Usually, an insider will be taken more seriously than someone who is speculating from the outside," Ms. Cavenagh said.

Even tipsters who stand a chance to collect should realize that this is not easy money. Their employers may fire them or impose other sanctions. And their motives and their past may be called into question. On a more practical matter, they may need help applying for their reward after the SEC wraps up the case.

"A whistle-blower should have legal representation because there are always ramifications," Mr. Badway said.

Ms. Cavenagh noted that it took some time for other whistle-blower programs to gain traction, including the rewards available under the False Claims Act. That law allows individuals with knowledge of fraud against the federal government to sue on behalf of the government and to share in whatever the government collects.

"As the government got bigger and bigger rewards, more people started filing," she said, adding that she expects that will happen with the SEC program.

Many public companies opposed Dodd-Frank's provision for whistle-blowing, saying they already had internal programs that allowed employers to report fraud and corruption without fear of reprisal. However, now that the SEC program is up and running, companies are strengthening their internal programs.

"Companies are taking these complaints more seriously. They want the opportunity to [rectify] things before the government comes in and says something is wrong," Mr. Badway said.

To the extent that companies are working harder to encourage employees with valuable information about fraud and other crimes to come forward, "I think the whistle-blowing program has already had a positive effect," Mr. Little said.


Len Boselovic: lboselovic@post-gazette.com or 412-263-1941.

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