SEC’s $14M Whistleblower Award May Have Involved Insider: Expert

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On Tuesday the Securities and Exchange Commission announced that it had awarded more than $14 million to a whistleblower whose information led to an enforcement sanction. Today an expert tells ValueWalk that there’s a good chance the case involved an insider, possibly one who is very high profile.

SEC's $14M Whistleblower Award May Have Involved Insider: Expert

SEC releases details on the award

According to the SEC’s press release, the enforcement action “recovered substantial investor funds.” The agency notes that the payment was made out of a separate fund established by Congress through the Dodd-Frank Act and does not come from its annual appropriations or reduce how much harmed investors will receive. The more than $14 million award is the largest made by the whistleblower program to date. It beat the previous record high award by more than $13 million.

The program was established in August 2011, and it rewards “high-quality original information” which results in an enforcement action in which the sanction exceeds $1 million. Awards range from 10 to 30 percent of the amount that was collected in the case. This means that the SEC’s sanction on whoever was prosecuted in the case was between $47 million and $140 million. That’s a whopper of a case for the agency, resulting in a whopper of an award for the person who came forward with information.

Whistleblower’s identity kept a secret

The whistleblower did not wish to have his or her identity released, and the SEC respects the person’s privacy. Therefore the agency will not release any details about who the person is, what he or she has done in the past, or the company or person the whistleblower reported on. Jordan Thomas, a former SEC official who now represents whistleblowers and chairs the Whistleblower Representation Practice at Labaton Sucharow, tells ValueWalk that the secrecy could mean that whoever blew the whistle in the case was an insider.

“Outsiders have less of a concern about their identity being known, but because this whistleblower may have been so important, they maintained their anonymity, so the SEC was sensitive to that.”

He notes that it typically takes two to four years for the SEC to prosecute a case, and not all cases are successful.

The $14 million award is just the tip of the iceberg

Thomas believes that awards for whistleblowers are only going to go up from here. He says the program is good for the SEC and investors because otherwise, in many cases, the agency would never know about the wrongdoing. He says over the last two years, the SEC has secured more than $3 billion each year in enforcement actions, including both whistleblower and non-whistleblower cases. If the number of people coming forward to inform on wrongdoing on Wall Street increases, then that number is just going to get larger and larger.

In the SEC’s press release, the agency references another case in which the award could set another new record. The agency said in August and September of this year, it paid more than $25,000 to three people who helped “halt a sham hedge fund.” After all sanctions are collected in that case, the SEC estimates that that the award will exceed $125,000.

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Thomas also notes that Congress believes the whistleblower program will grow. When it created the fund to pay for all these awards, it created an investor protection fund which replenishes itself if the balance falls below $300 million.

“To get to $300 million, we’d need a lot of sanctions, but Congress believed that was a possibility and wanted to ensure that was an adequate amount there,” he said.

Wall Street executives more likely to come forward

He says the $14 million award, while a new record high, also makes the program more attractive to higher profile executives who may question whether it’s worth the risk to their careers and their livelihoods to come forward. He says the large size of this award may make higher earning net worth Wall Street executives more likely to come forward. In addition, he says the promise of anonymity offers additional cover for those worried about retaliation or black-listing within the industry.

The whistleblower program and government shutdown

Of course the U.S. government is shut down right now, and the SEC is not considered to be one of the essential agencies. As a result, many SEC workers are on furlough right now. However, this won’t keep the agency from investigating what it deems to be emergency cases.

“They said they will continue to triage tips as they come in, so that is a function that will continue during the shutdown,” Thomas told ValueWalk. “The impact of the shutdown will be on open investigations and litigations; those will be delayed during any shutdown period, but the triaging of whistleblower tips and looking for matters that might be emergencies will continue.”

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