October 3, 2013

SEC Puts Its Money Where Its Mouth Is With $14M Whistleblower Award

By Gordon Schnell

It has been more than two years since the SEC Whistleblower Office officially opened its doors.  Born out of the Dodd-Frank Act, it was created to help usher in a new day of more aggressive enforcement at an agency that up until recently many believed was very much asleep at the switch.  But with all of the fanfare surrounding the new office, and the flood of whistleblower tips that have poured in (more than 3,000 last year), there has been little in the way of whistleblower awards.  This is the touchstone of the program, designed to encourage would-be whistleblowers to suffer through what is typically a long, lonely and tiresome ordeal.  Some were beginning to wonder if the agency was ever going to tap into the $450 million reserve it has squirreled away for whistleblowers.

Not anymore.  With its $14 million award this week, the SEC has put some money behind its talk on the importance of whistleblower enforcement.  It is only the fifth award to date but by far the largest (the others not even crossing the $50,000 mark).  By all accounts, it is just the beginning with equally (and likely more) sizeable awards on the horizon.  As SEC whistleblower chief Sean McKessy explained in an interview with the Wall Street Journal last week: “the longer we get away from the statute that created the program . . . , the more time we have for whistleblower tips to actually ripen into investigations, and those investigations to ripen into litigation and litigation to ripen into successful actions.”  And the list of such ripe actions continues to pile up.  The SEC has already identified 85 of them this year which are eligible for a whistleblower award, (8 of them from the last two weeks alone).   No doubt, some of them will result in some “very big numbers.”  That is just what McKessy predicted in another interview he gave last week with Reuters.

Surely, no one at this point can still question the SEC’s commitment to making whistleblowers a major piece of its enforcement scheme.  Nor can anyone be all that surprised by this most recent award and the prospect of bigger and better ones to come.  Like it did with its prior awards, modest as they were, the SEC has heavily promoted this new award and the critical role this whistleblower—whose identity the SEC has kept secret—played in uncovering fraud.  Not only was the award the exclusive subject of an SEC press release.  It was also trumpeted by the most senior officials at the agency and dangled as a major inducement to future whistleblowers to follow suit.  SEC chief Mary Jo White could not have been clearer: “We hope an award like this encourages more individuals with information to come forward.”  McKessy was equally strong in his messaging that the SEC wants more whistleblowers:

While it is certainly gratifying to make this significant award payout, the even better news for investors is that whistleblowers are coming forward to assist us in stopping potential fraud in its tracks . . . . That ultimately is what the whistleblower program is all about.

The SEC’s ardent embrace of whistleblowers (through its words and now its wallet) differs sharply from the approach taken by the other enforcement agencies.  The CFTC has remained virtually silent on the whistleblower front with little to no news or promotion of its whistleblower program.  The IRS has been equally muted in its whistleblower efforts.  It did make a whopper of an award last year ($104 million to former UBS banker Bradley Birkenfeld), but the agency did nothing to promote it or use it to encourage other whistleblowers to step forward.  And while the DOJ has made plenty of hefty awards, it gives relatively little attention to whistleblowers in its press releases reporting on the government’s successful fraud-busting efforts.  In many of them, there is no indication that a whistleblower was involved at all.

With its first multi-million dollar whistleblower award and many more to come, the SEC Whistleblower Office is declaring even louder and clearer than before that it is open for business and ready to put its money where its mouth is.  It is also demonstrating its recognition that only through a strong whistleblower program will it be able to address the frenzy of financial fraud that continues to plague us.  This from an agency that only a few years ago cast aside Harry Markopolos and his revelations of the Madoff Ponzi scheme, the biggest financial fraud of our time.

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