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SEC Whistleblower Changes Are A Mixed Bag

by | Jul 27, 2018 | Others

The SEC Whistleblower Program has been a smashing success. Whistleblower tips have led to the recovery of more than $1.4 billion in fraud recoveries, much of which goes back to the victims of securities fraud.

The program succeeded by offering a generous monetary award to whistleblowers for their sacrifices. Recently proposed amendments to the program would incentivize even more people to come forward – but could deter whistleblowers in the most egregious cases.

Making a good program better

The SEC Whistleblower Program was created in the Dodd-Frank legislation to curb abuses in the financial services industry. Since 2011, the program has produced 22,000 tips of wrongdoing on Wall Street. Many of those investigations led to enforcement actions that yielded a total of $1.4 billion in fines and settlements.

Under the program, qualifying whistleblowers can receive 10 percent to 30 percent of the government’s recovery. To date, $266 million has been paid to whistleblowers. The remainder goes to the victims and the U.S. Treasury.

The SEC is considering a number of changes to the program. One key proposal would give the Securities and Exchange Commission discretion to increase the percentage of the reward in marginal cases to strengthen the incentive. Because whistleblowers often face retaliation, including being blackballed from the industry, they may be reluctant come forward unless the reward outweighs the sacrifices. Currently, whistleblowers do not get paid unless their information yields at least $1 million in monetary sanctions.

Is there really a need for caps on awards?

Another SEC proposal would potentially decrease the biggest awards on the other end of the spectrum. The two largest awards to whistleblowers to date were $50 million and $33 million. While those whistleblowers helped to uncover nearly a billion dollars in securities violations, some feel such rewards are an excessive “jackpot.”

Under the proposed change, the Commission would have leeway to reduce any awards exceeding $30 million, although the whistleblower would still be guaranteed no less than 10 percent of the government’s recovery.

Two commissioners and other opponents of the measure argue that a cap is unwarranted. First of all, the reward money comes from the crooks, not from taxpayers. Second, they worry that capping the awards could undermine a highly successful program. In particular, it would have a chilling effect on the ability to ferret out the biggest abuses. Even accounting for the millions paid to whistleblowers, the program has rooted out major criminal conspiracies AND paid for itself.