Whistleblower Lawyer Blog

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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When the President signed the new financial reform bill into law today, new whistleblower provisions quietly took effect to battle corruption, bribery, and corporate fraud to obtain foreign government contracts.

This new law creates the new SEC whistleblower program that we have followed since its gestation after the Madoff scandal broke. The SEC and the U.S. Department of Justice share jurisdiction over a growing and increasingly important area of enforcement, the Foreign Corrupt Practices Act (FCPA).

Bribery of foreign government officials in international business transactions, and false entries in books and records of those companies within the statute, are the targets of the FCPA. Whistleblowers whose information helps the SEC recover monetary sanctions from those corrupt entities in FCPA cases now have an enforceable right to a monetary award of 10-30%.

Based on the increasing number and size of these FCPA cases, the rewards to whistleblowers can be meaningful–as they must be to cause whistleblowers to come forward. Over the past decade, the government has pursued more and more FCPA cases, and some recover hundreds of millions of dollars.

Recall that, in late 2008, Siemens agreed to pay more than $1.6 billion to the United States and Germany, after allegedly paying “$1.4 billion in bribes to government officials in Asia, Africa, Europe, the Middle East and the Americas.” Announcing the guilty plea and settlement, the government described “a corporate culture in which bribery was tolerated and even rewarded at the highest levels of the company.”

The SEC obtained $350 million in disgorgement from that settlement, which was the largest FCPA settlement to date.

In announcing that 2008 recovery, the government explained that “there is no question that the Department has in recent years significantly increased its FCPA enforcement. From 2001 to 2004, the Department resolved or charged 17 FCPA cases. For the period of 2005 to 2008, that number is 42 resolutions, representing an increase of more than 200 percent within these four years as compared to the prior four-year period.”

With money scarce both at home and abroad, it is even more urgent to recoup funds lost to fraud. The new SEC whistleblower awards and Commodity Futures Trading Commission rewards should prompt more efficient law enforcement efforts to stop this fraud, just as the False Claims Act and the new IRS Whistleblower Program have shown is possible.

This corruption harms legitimate businesses, who cannot compete when corruption prevents a level playing field. This crime also causes damage to others, as the government explained in announcing the Siemens settlement. That transcript is reprinted below, and in part states:

For let there be no doubt that corruption is not a victimless offense. Corruption is not a gentlemen’s agreement where no one gets hurt. People do get hurt. And the people who are hurt the worst are often residents of the poorest countries on the face of the earth, especially where it occurs in the context of government infrastructure projects, contracts in which crucial development decisions are made, in which a country will live by those decisions for good or for bad for years down the road, and where those decisions are made using precious and scarce national resources.

To illustrate the types of corruption this new whistleblower law should bring to light more often, the government’s announcement of the 2008 Siemens settlement is reprinted below:
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The new financial reform bill that awaits the President’s signature this week has something important for potential whistleblowers with knowledge of fraud in options, futures, derivatives and other financial products within the jurisdiction of the Commodity Futures Trading Commission (CFTC). The bill will modify the Commodity Exchange Act to provide whistleblower rewards and protections.

Similar to the new SEC whistleblower awards for persons who reports securities fraud, the rewards to whistleblowers will be available if the CFTC recovers monetary sanctions of more than $1 million because of the whistleblower’s information.

Like SEC whistleblowers, CFTC whistleblowers will have an enforceable right to 10-30% of what the CFTC recovers in substantial cases when the whistleblower has “voluntarily provided original information to the Commission that led to the successful enforcement of the covered judicial or administrative action, or related action.” (Section 748 of Dodd-Frank Wall Street Reform and Consumer Protection Act, reprinted below).

Crucial to the success of these new whistleblower programs, whistleblowers will know that they will receive at least 10% of the recovery in significant cases when the whistleblower meets the law’s criteria.

The history of the nation’s major whistleblower statute, the False Claims Act, shows that guarantees of meaningful rewards are the critical element in causing whistleblowers to report substantial fraud. Fraud recoveries increased dramatically once Congress amended the False Claims Act in 1986 to provide meaningful whistleblower rewards of 15-25% in cases in which the government intervenes.

The new IRS Whistleblower Program is proving the same point, as quality submissions have poured in now that a right to a meaningful whistleblower award exists.

Congress has set forth general criteria for the CFTC to determine the amount of the award within the 10-30% range. Factors that the CFTC will consider include:

“(I) the significance of the information provided by the whistleblower to the success of the covered judicial or administrative action;

”(III) the programmatic interest of the Commission in deterring violations of the Act (including regulations under the Act) by making awards to whistleblowers who provide information that leads to the successful enforcement of such laws; and
”(IV) such additional relevant factors as the Commission may establish by rule or regulation”.
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