It has been a decade since the SEC issued its first whistleblower award, which was an almost $50,000 payment to a nameless insider whose tips led to over a million dollars of sanctions.[1] Since then, the size and scope of the awards have grown with the program paying out more than a billion dollars to over 200 whistleblowers.[2] The program is broadly reveled as a great success, having rare bipartisan support and praise from the U.S. Securities and Exchange Commission (the “SEC”) and Commodity Futures Trading Commission (the “CFTC”) chairs, prominent academics, and even whistleblowers themselves.[3] With a little over ten years of data, this post will provide an overview of the program’s inception, recognize the widespread benefits seen to date, and identify some of the shortcomings being acknowledged today.
On the heels of the 2008 financial crisis, the U.S. government sought “to increase oversight on the financial industry.”[4] As part of the Dodd-Frank Act, the Whistleblower Program was created to encourage individuals within offending financial organizations to report the types of crimes that contributed to the 2008 recession, such as the Bernie Madoff Ponzi scheme, which likely could have been prevented with proper oversight in place.[5]
Under the Act, whistleblowers can earn money through the bounty program by providing information relating to a violation of securities laws, provided the information leads “to the successful enforcement of . . . judicial or administrative action.”[6] This provision, added to the Securities Exchange Act of 1934, creates incentives and protections for whistleblowers.[7] A qualified whistleblower can make between 10 to 30 percent of the monetary sanctions collected in the enforcement action.[8] The legislation also disallows employers to “discharge, demote, suspend, threaten, harass, directly or indirectly, or in any other manner discriminate against, a whistleblower” because of the whistleblower’s actions.[9]
Why was the program designed this way? Like the IRS, the SEC could have employed enforcement officers to investigate fraud; the SEC does have over 4,500 people within its staff.[10] These SEC lawyers could even be incentizied if their successful enforcement resulted in a percentage of the bounty.[11] This would surely attract brilliant lawyers to the SEC.[12] One potential concern, however, is that “a prize-money-driven SEC” would focus on the biggest players rather than focus on important, low-impact behaviors.[13]
The current bounty program overcomes these concerns with its incentive structure.[14] Rather than having the big fish draw the sole focus of enforcement agents, whistleblowers, wherever they are employed, can flag and report such violations and reap the proportional rewards.[15] This ingenious mechanism is likely one of the reasons that this program is held in such high regard.
However, a recent paper by Alexander Platt points to an unexpected negative consequence of the program.[16]One downstream result of effectively privatizing the tips process was the creation of a new industry for lawyers and law firms to exploit through the incentive program.[17] The large potential awards have led to an onslaught of tips, with the SEC receiving an average of 49 new tips per business day.[18] With this heavy flow of submissions, it is unclear how the SEC chooses which tips to follow up on, ultimately influencing which individuals and law firms receive a payout through those rewards.[19]
The Platt paper finds this internal process to be opaque and lawyer-dominated.[20] The SEC and CFTC gave twice as many awards to represented tipsters compared to unrepresented ones; tipsters received five times more dollars from the SEC and 28 times more dollars from the CFTC than unrepresented ones.[21] There is also “a small set of well-connected” law firms that represent the tipsters, with one firm accounting for two-thirds of CFTC dollars paid out and another firm accounting for one-fifth of all SEC dollars paid out.[22] Further, “a quarter of all dollars awarded by the SEC ha[s]gone to clients of lawyers who formerly worked for th[e][SEC].”[23] In the last 18 months, “at least 42% of all dollars awarded . . . went to clients of former SEC officials.”[24] The paper concluded that the tip program “outsourced the tip-sifting” responsibility of the SEC “to private whistleblower lawyers,” many of whom are SEC alumni, creating a lucrative business for lawyers that undermines the transparency and accountability within the SEC.[25]
While broadly touted as a major success, a decade of findings reveals new challenges for the SEC. What tips get prioritized? And who has the most influence in getting the SEC’s attention? Congress may need to reconsider whether outsourcing without oversight serves the public’s interest. The SEC’s bounty program has led to many successful adjudications that point to the program’s successes. But even with these achievements, it may be worth taking a second look at the process to address some apparent flaws. Lawyers–especially SEC and CFTC alumni–have successfully escaped the bureaucratic spotlight, but is the program, as it is set up today, the best way to combat financial crimes?
[1] Press Release, U.S. Securities and Exchange Commission, SEC Issues First Whistleblower Program Award (Aug. 21, 2012), https://www.sec.gov/news/press-release/2012-2012-162htm.
[2] See Press Release, U.S. Securities and Exchange Commission, SEC Surpasses $1 Billion in Awards to Whistleblowers With Two Awards Totaling $114 Million (Sept. 15, 2021), https://www.sec.gov/news/press-release/2021-177.
[3] Alexander I. Platt, The Whistleblower Industrial Complex, 40 Yale J. Reg. (forthcoming 2022) (manuscript at 1), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4112398.
[4] Benjamin McCoy & Zac Arbitman, Blowing the Whistle (Part 2): A Primer on the SEC’s Whistleblower Program, Temple 10-Q, https://www2.law.temple.edu/10q/blowing-the-whistle-part-2-a-primer-on-the-secs-whistleblower-program/ (last visited Nov. 16, 2022).
[5] Id.; see also Madoff Whistleblower: SEC Failed To Do The Math, NPR (Mar. 2, 2010, 12:00 AM), https://www.npr.org/2010/03/02/124208012/madoff-whistleblower-sec-failed-to-do-the-math.
[6] § 15 U.S.C.A § 78u-6 (b)(1).
[7] Harold S. Blumenthal & Samuel Wolff, Sarbanes-Oxley Act in Perspective, § 12:12 (2021).
[8] § 15 U.S.C.A § 78u-6 (b)(1)(A)–(B).
[9] § 15 U.S.C.A § 78u-6 (h)(1)(A).
[10] Matt Levine, Some Free Brokers Are Cheaper Than Others, Bloomberg (Aug. 25, 2022, 2:00 PM), https://www.bloomberg.com/opinion/articles/2022-08-25/some-free-brokers-are-cheaper-than-others; 2021 Sec. Exch. Comm’n Agency Fin. Rep., at i, https://www.sec.gov/files/sec-2021-agency-financial-report.pdf.
[11] Levine, supra note 10.
[12] Id.
[13] Id. For example, a $200 million bank fine would reap the investigator up to a $60 million bonus
[14] See id.
[15] Id.
[16] See Platt, supra note 3, at 3.
[17] Id. at 4.
[18] Id. at 2.
[19] See id.
[20] Id. at 2, 4.
[21] Id. at 4.
[22] Id.
[23] Id.
[24] Id.
[25] See id. at 4–5.
