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Hedge Funds Face Regulation & Oversight by SEC–Will There Be Another Compliance Tool in Addition to IRS Whistleblower Program?

February 1, 2009
Michael Sullivan

When improprieties occur with hedge funds, the hedge funds’ lack of transparency and dearth of disclosure obligations make violations of the law difficult to uncover. Sometimes, persons in the hedge fund industry report those abuses through the IRS Whistleblower Program, as some of our IRS Whistleblower clients have done.

Nonetheless, the hedge fund industry remains cloaked in secrecy, frustrating experts who now seek to gauge the impact of hedge funds on the current financial crisis.

A new bill just introduced in the Senate, the “Hedge Fund Transparency Act,” would lift that cloak and create disclosure requirements for hedge funds and oversight of hedge funds by the SEC. This bipartisan bill sponsored by Senators Chuck Grassley and Carl Levin modifies a prior approach to hedge fund scrutiny pressed by Sen. Grassley, after a whistleblower complained that SEC supervisors were impeding an investigation into a major hedge fund.

According to Sen. Grassley, “The bill contains four basic requirements to make hedge funds subject to SEC regulation and oversight. It requires them to register with the SEC, to file an annual disclosure form with basic information that will be made publicly available, to maintain books and records required by the SEC, and to cooperate with any SEC information request or examination.”

Until the Bear Stearns debacle, there seemed little political will for any serious oversight of hedge funds. The SEC in 2004 had issued a rule requiring hedge funds to register under the Investment Advisers Act, to comply with related regulations, and to provide basic information through a public disclosure form. In June 2006, however, the U.S. Court of Appeals for the District of Columbia Circuit declared the rule invalid as incompatible with the Investment Advisers Act.

In hindsight, that absence of scrutiny may be seen as a grave error, one which may have helped create the current financial meltdown.

Since 1998, when the Federal Reserve acted to rescue Long-Term Capital Management (LTCM), a hedge fund with more than $125 billion in assets under management and a total market position of approximately $1.3 trillion, investments in hedge funds have grown dramatically.
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Whistleblower Protections Added to Economic Stimulus Bill Passed by House

January 28, 2009
Michael Sullivan

When the Wall Street “bailout” grew with Congress’ creation of the Troubled Asset Relief Program (TARP), Sen. Chuck Grassley emphasized the importance of “whistleblowers” and the False Claims Act to protecting these taxpayer funds from fraud and abuse.

Tonight, the House added to the bailout by passing the economic stimulus package, HR 1, and approved an amendment adding whistleblower protection for federal employees.

The stimulus bill reportedly provides for $523 billion in spending, and $275 billion in tax cuts. It originally lacked protection for federal employees who are whistleblowers. An amendment by Reps. Todd Platts, R-Pa., and Chris Van Hollen, D-Md. added those protections from last year’s thwarted Whistleblower Protection Enhancement Act, which cleared the House but not the Senate.

The history of government spending programs proves beyond doubt that the vast majority of fraud and abuse can only be revealed by whistleblowers. Protecting taxpayer dollars means protecting and rewarding whistleblowers. As Sen. Grassley observed in a November 17, 2008 letter about TARP:

As a longtime supporter of whistleblowers, I can attest to the fact that whistleblowers are often the key to uncovering schemes to defraud the government. With their inside knowledge of how businesses, corporations, or government agencies operate they are often privy to information that is often the necessary component to piece together how a fraud is perpetrated.

Both the False Claims Act and the IRS Whistleblower Program will be important in stopping fraud and misuse of taxpayer funds. When there is fraud, there is often an IRS violation as well.
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With TARP and Wall Street Bailout, Securities Fraud and Accounting Fraud Are Targeted by New Supplemental Anti-Fraud Enforcement (“SAFE”) Markets Act

January 27, 2009
Michael Sullivan

Financial fraud is a frequent topic of whistleblower cases and of this whistleblower lawyer blog, especially with TARP and the Wall Street “bailout” dominating headlines.

Senators Chuck Shumer and Richard Shelby have proposed a bipartisan bill to bolster federal resources to combat securities fraud and accounting fraud, the Supplemental Anti-Fraud Enforcement (“SAFE”) Markets Act.

Here are excerpts from the Senators’ announcement:

“Our white collar crime divisions are under-staffed, under-funded, and overwhelmed,” Schumer said. “When a wave of violent crime sweeps through a city,
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Will Wall Street Bailout Help Firms That Are “Tax Dodgers” and Hide Income in Offshore Tax “Havens”? And Will the IRS Whistleblower Program Provide a Remedy?

January 18, 2009
Michael Sullivan

As our government hemorrhages its taxpayers’ funds to “bail out” firms that made poor decisions–such as American International Group (AIG), Bank of America, Citigroup, Goldman Sachs, and American Express–a just-issued report from the Government Accountability Office (GAO) raises a disturbing question: have many of the same firms already been avoiding paying their “fair share” of U.S. taxes by using offshore tax “havens”?

If so, whistleblowers will be performing a civic duty by reporting any tax evasion and noncompliance through the IRS Whistleblower Program.

“This report shows that some of our country’s largest companies and federal contractors, many of which are household names, continue to use offshore tax havens to avoid paying their fair share of taxes to the U.S. And some of those companies have even received emergency economic funds from the government,” said Sen. Byron Dorgan. “I think we should take action to shut down these tax dodgers and we will be introducing legislation to do just that.”

GAO’s findings included that:

Eighty-three of the 100 largest publicly traded U.S. corporations in terms of 2007 revenue reported having subsidiaries in jurisdictions listed as tax havens or financial privacy jurisdictions and 74 of the 83 had federal contracts in fiscal year 2007. For the 74 corporations, the amount of the federal contract obligations ranged from $12,000 to over $23 billion.

Several insurance companies, including American International Group Inc., Hartford Financial Services Group, Travelers Cos. Inc., Allstate Corp. and Berkshire Hathaway Inc. reportedly have subsidiaries in tax havens or financial privacy jurisdictions such as Bermuda and Switzerland.

With a “tax gap” of more than $350 billion each year–the amount owed but not paid in federal taxes–it is galling to most taxpayers to see any company that avoids paying its fair share now receive billions more in a “bailout” through the TARP program.

The GAO report did not state that any of the listed firms utilizing tax “havens” were necessarily violating current law. Sen. Dorgan did say that he planned to introduce legislation to “shut down these tax dodgers.”
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Offshore Tax Evasion Case: Former UBS AG’s Raoul Weil Declared a Fugitive

January 16, 2009
Michael Sullivan

Offshore tax evasion and international tax avoidance schemes have been priorities of the IRS and its IRS Whistleblower Program, as our whistleblower lawyer blog has followed repeatedly.

This week, the U.S. prosecution of the former head of UBS AG’s wealth management business, Raoul Weil, took a strange turn as he failed to surrender himself and was declared a fugitive. Weil allegedly conspired to help 17,000 American taxpayers conceal approximately $20 billion of assets in Swiss accounts, to avoid payment of U.S. taxes.

Weil is not the only person to try to conceal himself from the many ongoing DOJ and IRS investigations into tax fraud, tax evasion, and other tax cheating and fraud. In June, former hedge fund manager Samuel Israel III reportedly tried to fake his own death, rather than face a 20-year prison sentence for defrauding investors out of $400 million. (He later turned himself in to authorities.)

Of course, these disappearances raise questions about Bernard Madoff’s actions while not incarcerated as he faces the music for what is apparently perhaps the largest known fraud scheme in history.
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Treasury Department Announces $14 Billion in TARP Funds to More Than 40 “Local” Banks

January 13, 2009
Michael Sullivan

Continuing the “bailout,” the Treasury Department has just announced the release of $14.77 billion in TARP funds to what it refers to as 43 “local” banks (listed below).

“Local” may be a misnomer, as the list includes $10 billion to Bank of America Corp., and more than $3 billion to American Express Company.

Let’s hope that Congress and the Treasury Department make good on the promise to protect these taxpayer funds through effective oversight, meaningful restrictions, and whistleblower protections, and that Sen. Grassley’s prediction that the qui tam whistleblower provisions of the False Claims Act will be used vigorously to redress any fraud or abuse with TARP funds comes true.

Below are today’s announced recipients of the funds:
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More IRS Whistleblower Procedures Announced by IRS Large and Midsize Business Division (LMSB)

January 13, 2009
Michael Sullivan

The IRS Large and Midsize Business Division (LMSB) has published a new memorandum on how it will handle IRS Whistleblower claims, the process for citizens to report tax fraud, tax evasion, and other tax noncompliance–and share in the government’s recovery of money. (https://www.irs.gov/pub/foia/ig/lmsb/lmsb-4-1108-052.pdf).

The LMSB Division has responsibility over corporations, subchapter S corporations, and partnerships with assets greater than $10 million. This IRS Division is divided by industry groups, including (1) Communications, Technology, and Media; (2) Financial Services; (3) Heavy Manufacturing and Transportation;
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Fraud and Abuse in Underpayment of Royalties from Oil and Gas Leases–The False Claims Act Provides A Solution

January 11, 2009
Michael Sullivan

As hundreds of billions in taxpayer funds flow to TARP bailout recipients, the government must make doubly sure to stop or minimize fraud and abuse in every federal program.

One area that cries out for attention is the underpayment of royalties owed to the government under oil and gas leases. The qui tam whistleblower provisions of the False Claims Act provide a basis for taxpayers to recover damages–and the whistleblower to receive a share of the recovery–when obligations to the government are underpaid.
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TARP Fund Restrictions Are Proposed in New Legislation

January 10, 2009
Michael Sullivan

Much criticism has flowed from how the first $350 billion in TARP “bailout” funds are being used. Thus far, the need for additional restrictions to prevent and penalize fraud and abuse of TARP money remains unmet.

In response, yesterday House Financial Services Committee Chairman Barney Frank proposed legislation establishing greater limits on use of TARP funds, among other things.

The “TARP Reform and Accountability Act of 2009” (HR 384) would require quarterly reports from recipients on their use of TARP funds, restrict the use of
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IRS on Tax Preparer Fraud: Report Illegal Tax Schemes to IRS Whistleblower Office

January 7, 2009
Michael Sullivan

With tax season approaching, the IRS has alerted the public to “tax preparer fraud” by issuing issued a “fact sheet” (at https://www.irs.gov/newsroom/article/0,,id=202123,00.html). The IRS also has attached information about reporting abusive tax schemes through the IRS Whistleblower Program, which provides rewards to whistleblowers.

Interestingly, the IRS has included descriptions of some of the tax fraud and tax evasion schemes that have caused courts to issue “more than 290 permanent injunctions against abusive tax scheme promoters and abusive return preparers since 2001.”

The summary by the IRS is reprinted below:
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Part 6: States’ Experiences With Their Own False Claims Acts

December 7, 2010
Michael Sullivan

This Part 6 is the final installment of an article explaining why the major qui tam whistleblower statute, the federal False Claims Act, has led to a wave of new state False Claims Acts. It is an updated version of part of a previously published article by whistleblower lawyer blog author Michael A. Sullivan.

V. States’ Experiences With Their Own False Claims Acts

As noted, at least twenty-eight states now have a False Claims statute, and many other states are considering similar laws. The financial incentives of the Deficit Reduction Act of 2005 have not only prompted states that lacked False Claims statutes to enact them, but also have caused many states wishing to qualify for the additional funds to amend their existing False Claims statutes.

In essence, while states may enact “tougher” or more comprehensive laws than the federal False Claims Act, states with “weaker” or less effective laws-as judged by the standards of the Deficit Reduction Act-will not qualify for the additional funds.

Seven of the first ten states whose statutes were scrutinized by the Office of Inspector General (OIG) quickly learned this lesson when OIG disapproved their state statutes. These included California (which lacked a minimum penalty), Florida (which omitted “fraudulent” from its definition of claims), Indiana (which did not make defendants liable for “deliberate ignorance” and “reckless disregard”), Louisiana (which did not permit the state to intervene in cases, set too low a percentage for whistleblowers to recover, and set no minimum penalty), Michigan (which omitted penalties and liability for decreasing or avoiding an obligation to pay the government, i.e., a “reverse false claim”), Nevada (which had a statute of limitations too short and a minimum penalty too low), and Texas (which did not permit the whistleblower to litigate the case if the state did not, and which provided for lower percentage shares to whistleblowers and lower penalties). Most of these states have gone back to the drawing board to correct these deficiencies.

In sum, the Deficit Reduction Act has set minimum standards for state False Claims Acts for states wishing to receive these additional funds. In plain English, the state laws must protect at least Medicaid funds, and they must be at least as effective as the federal False Claims Act, especially in rewarding and facilitating qui tam actions for false or fraudulent claims, with damages and penalties no less than those under the federal Act.
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Insider Trading Probe Reinforces Immediate Need for Strongest SEC Whistleblower Program

November 21, 2010
Michael Sullivan

Yesterday’s Wall Street Journal reports a “sweeping” insider trading investigation, with civil and criminal charges soon to follow, involving “consultants, investment bankers, hedge-fund and mutual-fund traders, and analysts across the nation.”

While the details remain to be seen, the unending series of fraud cases that continue–despite Sarbanes-Oxley–proves why Wall Street must not be allowed to neuter the first potentially meaningful SEC whistleblower program, mandated by the Dodd-Frank financial reform law.

How is it that the hallowed “compliance programs” born from Sarbanes-Oxley have utterly failed to stop the breathtaking frauds of Madoff, Stanford, and other recent post-SOX scandals?

As many honest employees encountering fraud discover, too often “compliance programs” mask efforts to identify employees who object to wrongdoing, so the wrongdoers can then gut their careers.

How well did compliance programs work at the many Madoff-abetting feeder funds that made scores of millions, as Madoff’s scheme spread to snare more victims? Read Harry Markopolis’ book to see how many of those firms’ “compliance” efforts worked, as Madoff’s enablers ignored glaring warning signs that multiplied over the life of the scheme.

SEC Chair Mary Schapiro and Director of Enforcement Robert Khuzami seem dedicated to invigorating the SEC’s enforcement efforts. While the new proposed SEC whistleblower rules show considerable thought, they threaten the program’s effectiveness by bowing too far to industry concerns, and excluding many potential whistleblowers such as accountants, who may be the best position to stop the next Madoff.

Wall Street would have the SEC create a labyrinth of further exceptions to who can participate in the new SEC Whistleblower program. One lethal industry proposal is to require potential whistleblowers first to run the gauntlet of firms’ “compliance” programs–a concept wholly inconsistent with Congress’ intent that whistleblowers must be allowed to report violations anonymously.

The initial screening of SEC whistleblower claims should not be outsourced to the very firms alleged to have violated the law, which is what mandatory internal reporting effectively would do. The SEC–like the Department of Justice and IRS–should be the first to screen SEC whistleblower claims. With any SEC whistleblower claim large enough to pursue, by definition the culpable firm has typically approved the violation, or at least looked the other way.

Otherwise, who in a position to expose significant fraud would come forward, if required first to reveal their objections to the fraud to those who may have approved it? And if the fraud stays concealed–as it too often has despite “compliance” programs–the public loses.

Excerpts from the WSJ article by SUSAN PULLIAM, MICHAEL ROTHFELD,JENNY STRASBURG and GREGORY ZUCKERMAN are below:
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With New SEC Whistleblower Program Proposed Rules Announced, Will the SEC Allow Potential Defendants to Gut Them?

November 4, 2010
Michael Sullivan

We have been awaiting the SEC’s proposed rules for its new SEC Whistleblower Program, released yesterday. Even before the announcement, however, those who oppose this first potentially meaningful SEC Whistleblower Program have begun efforts to undermine it.

The SEC’s website already includes some firms’ suggestions to impose extreme restrictions on SEC whistleblowers–contrary to how other successful whistleblower programs operate.

Designing any new whistleblower program should begin with studying more than two decades of successes of the nation’s major whistleblower law, the False Claims Act. The False Claims Act has been so effective in uncovering and penalizing fraud against the government since 1986 that it has inspired Congress and the states to enact a wave of new whistleblower statutes–including the Dodd-Frank whistleblower mandate in section 922.

Unless the SEC seeks to create an ineffective program, it makes no sense to impose restrictions on whistleblowers that do not exist in False Claims Act cases.

One such damaging restriction would be requiring whistleblowers first to report within the company violations of the law, before going to the SEC. Past experience with the False Claims Act shows that warning violators of the law (who know their own violations) invites destruction of evidence by those who engineered the lawbreaking, and destroys the whistleblower’s career.

Other deceptive suggestions are that the SEC follow the “approach” of the promising new IRS Whistleblower Program–but with far greater restrictions on whistleblowing.

For example, one representative of future defendants urges what are actually variations on the “one-bite” and “no-bite” rules of the IRS, which historically have restricted the IRS’s receipt of certain information, or information from certain whistleblowers.

In fact, the IRS trend appears to be the opposite. In a March 2010 IRS Notice and in June 2010 changes to the Internal Revenue Manual, the “one-bite” rule appears to be giving way to the more sensible approach of allowing whistleblowers more than “one bite” at submitting information that may be useful to the IRS.

Likewise, a suggestion that the SEC adopt a variation the “no-bite” rule would expand it far beyond the IRS concept of not accepting information from the “taxpayer’s representative” before the IRS. This suggestion would go much further and prohibit submissions to the SEC by anyone who has a “fiduciary” duty to a public company–which arguably could be most or all employees.

We will comment further on the specifics of yesterday’s proposed rules, but the basic principles above should guide the SEC in what it finally decides.

The SEC’s announcement yesterday is reprinted below:
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Links to SEC Whistleblower and CFTC Whistleblower Lawyer Information

October 18, 2010
Michael Sullivan

Our whistleblower lawyer blog has followed closely the development of the first potentially meaningful SEC Whistleblower and Commodities Whistleblower Programs. That link provides regular updates.

Based on our firm’s long experience in representing whistleblowers, we were asked by the Senate Banking Committee staff for input in how the new SEC and CFTC whistleblower provisions of the July 2010 Dodd-Frank Financial Reform Act should work. We urged that the Senate change the tepid House version, which provided no meaningful rewards to whistleblowers,
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SEC Recovers $39 Million under Foreign Corrupt Practices Act for Bribery and Kickbacks in Mexico and Iraq

September 29, 2010
Michael Sullivan

One of the most interesting twists to the new SEC Whistleblower Program will be how many commercial bribes and kickbacks paid to foreign government officials will now come to light. As we have written about previously, the SEC shares jurisdiction with the Justice Department over such cases that violate the Foreign Corrupt Practices Act (FCPA).

An example of why whistleblowers will come forward is this afternoon’s announcement of the SEC’s $39 million settlement with ABB Ltd (“ABB”), a Swiss company that provides power and automation products and services.

The SEC alleged that ABB made more than $2.7 million in bribes and kickbacks to obtain more than $100 million in contracts. The payments allegedly were made to “government officials in Mexico to obtain business with government owned power companies,” and to the “former regime in Iraq to obtain contracts under the United Nations Oil for Food Program.”

According to the SEC, some of the kickbacks were made through bank guarantees and cash payments. As is common in disguising unlawful payments, the kickbacks were recorded on the company’s books as legitimate payments–here, for “after sales services,” “consultation costs,” and “commissions.”

ABB, without admitting or denying the allegations in the complaint, agreed not only to pay disgorgement and penalties totalling more than $39 million, but also agreed to pay a criminal fine of $30,420,000, according to the SEC. The company also agreed to be bound by certain “undertakings” concerning its FCPA compliance program.

As to how an FCPA whistleblower might fare who reports similar FCPA violations of bribery of foreign government officials, the new SEC Whistleblower Program pays 10% to 30% of monetary sanctions collected–approximately $4 million to $12 million under similar facts.

The SEC’s announcement is reprinted in full below, and the SEC’s Complaint is linked here:
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Health Care Fraud Cases and 2009-2010 Amendments to False Claims Act Discussed at National Fraud and Compliance Forum

September 26, 2010
Michael Sullivan

At the annual Fraud and Compliance Forum in Baltimore that runs through Tuesday, the nation’s top health care lawyers will be paying close attention to recent changes to the nation’s primary whistleblower law, the False Claims Act. The “qui tam” provisions of the False Claims Act allow private citizen whistleblowers (“relators”) to share in the government’s recovery of damages.

As a former defense attorney who now represents whistleblowers, I have been asked to present a program at this conference with Rick Shackelford of King & Spalding, to discuss these major amendments to the False Claims Act–the first since 1986. Congress acted decisively in three recent major bills to restore the False Claims Act to its intended strength, in the face of court decisions that created obstacles to its use.

The recent amendments were part of the Fraud Enforcement and Recovery Act of 2009, Pub. L. No. 111-21, 123 Stat. 1617 (“FERA”); the Patient Protection and Affordable Care Act, Pub. L. 111-148, 124 Stat. 119 (“PPACA”); and the Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, 124 Stat. 1376 (the “Dodd-Frank Financial Reform Act”).

This week’s forum is sponsored by the American Health Lawyers Association and Health Care Compliance Association.

An updated discussion of the False Claims Act after these 2009 and 2010 changes will appear soon on this Whistleblower Lawyer Blog. A brief summary of those important changes to the Act is below:
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Indiana Attorney General Invites Qui Tam Whistleblower Cases by Health Care & Pharmaceutical Employees To Stop Health Care Fraud

August 20, 2010
Michael Sullivan

Smart and effective state Attorneys General have fought fraud against their citizens through encouraging greater use of the country’s major whistleblower law, the False Claims Act, and state versions of that law.

Texas AG Greg Abbott, for example, has a staff that has long distinguished itself for recovering millions of stolen taxpayer funds in health care fraud cases, under the leadership of Pat O’Connell and, more recently, Ray Winter.

Following this tradition, Indiana AG Greg Zoeller is urging employees of pharmaceutical companies and heath care entities to help stop health care fraud, and possibly share in the recovery as qui tam whistleblowers under the state and federal False Claims Acts.

While we have discussed in detail how the False Claims Act operates, AG Zoeller’s announcement gives a succinct summary. We have reprinted it below, and applaud his efforts.
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Shouldn’t the IRS Pay Tax Whistleblowers Who Help Prevent Fraudulent Refunds?

August 18, 2010
Michael Sullivan

When IRS whistleblowers save U.S taxpayers money, they deserve the rewards that lawmakers such as Sen. Chuck Grassley fought to establish. In 2006 his efforts resulted in the first meaningful IRS Whistleblower program ever, which is attracting many tax whistleblowers with significant evidence.

We have discussed previously the many positive aspects of the long-awaited IRS Whistleblower procedures published in June–and one illogical, self-defeating feature. Some in the IRS–and apparently not the IRS Whistleblower Office–thought whistleblowers should not be rewarded when they report tax
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Merck and Other Pharma Companies Probed by DOJ and SEC in Foreign Corrupt Practices Act (FCPA) Investigation

August 9, 2010
Michael Sullivan

When Pharma manufacturers are targeted by the Department of Justice, qui tam whistleblower cases under the False Claims Act are often the reason.

Now, whistleblowers may also receive rewards for reporting violations of the Foreign Corrupt Practices Act (FCPA), thanks to the new whistleblower provisions of the Wall Street financial reform law. Announcements like Merck’s recent SEC filing that it is now the subject an FCPA investigation involving other Pharma companies should become common, as corruption will now be increasingly exposed in a new wave of SEC Whistleblower cases.

The recent 10-Q filing of Merck & Co., Inc. stated in part:

The Company has received letters from the DOJ and the SEC that seek information about activities in a number of countries and reference the Foreign Corrupt Practices Act. The Company is cooperating with the agencies in their requests and believes that this inquiry is part of a broader review of pharmaceutical industry practices in foreign countries.

As we have followed through its development, the Dodd-Frank financial reform law created the new SEC Whistleblower and CFTC Whistleblower programs, which will include FCPA cases.

The FCPA, as we have discussed previously, prohibits bribery of foreign government officials in international business transactions, and false entries in books and records of those companies within the statute. Whistleblowers who assist the SEC recover monetary sanctions in FCPA cases now have an enforceable right to a monetary award of 10-30%.

Pharma’s exposure for any bribes and kickbacks abroad are a ripe subject for FCPA enforcement.
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Does SEC Whistleblower Reward of $1 Million Signal A New Attitude Toward Wall Street Whistleblowing?

August 8, 2010
Michael Sullivan

Only days after the new financial reform law created the first potentially meaningful awards for whistleblowers reporting securities and commodities violations and abuses, the SEC may have signaled a new attitude toward encouraging whistleblowers.

The SEC recently announced its first million dollar award for a whistleblower’s report of information about insider trading involving hedge fund adviser Pequot Capital Management, Inc., its chief executive, Arthur J. Samberg, and David E. Zilkha, a Microsoft employee.

Although $1 million may not sound like much when compared to the losses caused by the Madoffs of the world, it is a dramatic improvement over what the SEC had done before.

In following the development of the new SEC Whistleblower Program, we previously discussed the Inspector General’s summary of how, over the past eleven years, the SEC had paid a total of less than $160,000 to reward whistleblowers under the “old” SEC bounty program for whistleblowers. The IG reported:

The SEC bounty program has made very few payments to whistleblowers since its inception and received a relatively small number of bounty applications. As a result, the program’s success has been minimal and its existence is practically unknown.
Since the inception of the SEC bounty program in 1989, the SEC has paid a total of $159,537 to five claimants as detailed in Table 1 below.

Table 1: Bounty Payments to Whistleblowers Bounty Claimant Year Bounty Amount 1) Claimant 1 1989 $3,500 2) Claimant 2 2001 $18,152 3) Claimant 3 2002 $29,079 4) Claimant 4 2005 $17,500 4) Claimant 4 2006 $29,920 4) Claimant 4 2009 $55,220 5) Claimant 5 2007 $6,166
Total $159,537
Source: OIG Generated

Just as another Inspector General’s report in 2006 set the stage for the successful new IRS Whistleblower Program that is attracting many reports of even billions in tax liability, let’s hope this Inspector General’s report has motivated the SEC to make full use of the opportunity to build a meaningful whistleblower program. We are already getting calls from potential Wall Street whistleblowers wishing to take advantage of it, and it could be a rewarding process–depending on how well the SEC seizes the opportunity.

The SEC’s recent announcement of the $1 million reward is reprinted below:
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