SEC whistleblower program – The Securities and Exchange Commission whistleblower program has had a “transformative impact,” the regulator’s Director of the Division of Enforcement Andrew Ceresney said in a speech Tuesday. With numerous regulatory agencies around the world looking to mimic its structure, the secrets to the SEC’s most visible success involve reducing both the cost of prosecuting wrongdoing as well as identifying previously difficult to detect white collar crime. While the SEC is open to all contributions, the regulator has specific criteria that are used to identify cases of interest.
SEC whistleblower program has lowered investigation and prosecution costs, payout is near 1/5th of revenue collected
The most obvious benefit of the SEC whistleblower program is that it assists in identifying illegal conduct that, under many circumstances, would otherwise go undetected. This is particularly true in tricky accounting fraud and valuation issues with complex securities. But a key benefit sometimes overlooked is the ability to move forward quickly, reducing the regulatory cost to prosecute cases.
Considering the whistleblower program from strictly from a financial standpoint, it has resulted in a balance sheet that any regulated financial services firm would appreciate. Since its founding July 21, 2010, 33 whistleblowers have resulted in net revenue to the SEC of nearly $500 million in ordered sanctions. The SEC paid these whistleblowers $107 million that resulted in 114 actions brought against 191 parties involving financial fraud.
The regulator uses 18 staff attorneys, paralegals and support staff responsible for the initial review of 14,000 whistleblower tips, with nearly 4,000 coming in in 2015.
While the number of tips is less than the 30,000 the agency had planned to receive, the quality of information is what leads SEC Chair Mary Jo White to call the system a “game changer.”
SEC whistleblower program – Whistleblowers often faced significant retribution
For an unprotected whistleblower, the consequences can be significant. Based on numerous past cases before the program was launched, those providing information to regulators faced a material shunning from the financial industry, often resulting in job loss and an apparent coordinated blackballing from the industry.
A key point of the SEC program is how whistleblowers are hit it protects those helping uphold the law — and such protections are increasing, Ceresney noted. Whistleblowers are provided nearly 20% “commission” compensation relative to damages recovered, with many whistleblowers walking away with princely sums that affords those risking their careers to retire comfortably. The largest individual whistleblower award was $32 million.
Is the SEC whistleblower program encouraging a confrontational environment at work?
Critics charge that the whistleblower program has resulted in employees actively looking for an opportunity to turn snitch on the firm’s that trust them. Defenders of the system point to encouragement to first work things out with internal compliance before reporting illegal activity to authorities as part of its commitment to keep the program fair to employers.
The most sought after cases involve complex accounting or financial fraud issues that can be best identified and prosecuted with the assistance of insiders. These often include Ponzi schemes, violations of the foreign corrupt practices act, performance reporting issues as well as insider trading.
“Investigations typically involve misconduct that is hard to spot and are typically very document-intensive, involving sophisticated defense counsel,” Ceresney told the Washington DC audience of the “Taxpayers Against Fraud” conference. “Whistleblowers — particularly company insiders — are able to provide us with a roadmap of the potential misconduct that can save us months of sifting through documents and complex accounting records.”
Is the most significant benefit of the whistleblower program deterrence?
While those working inside a company are in the strongest position to provide tips, the agency also considers data analysis from credible third party sources. This has been particularly true in high-frequency trading cases.
Data analysis is one area where outsiders can be useful. The voluntary submission of high-quality analysis by industry experts can be just as valuable as first-hand knowledge of wrongdoing by company insiders. We welcome analytical information from those with in-depth market knowledge and experience that may provide the springboard for an investigation or may supplement an ongoing investigation. For example, earlier this year, the Commission announced an award of more than $700,000 to an individual who was a company outsider and who provided us this type of data analysis, leading to a successful enforcement action.
While Ceresney outlined a strong case for what is likely the agency’s most successful enforcement program to date, he did not address a regulator’s biggest enforcement tool: deterrence. By managing a protective whistleblower program with proper incentives to cover career risk concerns, banks, hedge funds and other market participants now must think through very carefully a crime where the regulator may be looking over the shoulder at all times through wide-eyed employees.