Bigger payouts seen for U.S. financial market whistleblowers

Reuters

By Sarah N. Lynch

WASHINGTON, Oct 1 (Reuters) - In the two years since U.S.market regulators launched programs to encourage whistleblowersto report corporate wrongdoers, all of five people have beenrewarded, but officials are bolstering their efforts and predictlucrative payouts for tipsters.

Both the Securities and Exchange Commission and CommodityFutures Trading Commission launched their offices in 2011 aspart of post-crisis reforms laid out in the 2010 Dodd-Frankfinancial law.

Lawmakers hoped the allure of financial windfalls wouldencourage witnesses to turn in fraudsters or other corporatewrongdoers. But the initial tips and payout numbers have beenmodest.

The SEC had paid a total of four whistleblowers $170,000despite receiving 3,001 tips in fiscal year 2012 alone, whilethe CFTC paid nothing after getting 58 tips in the same timeperiod.

But on Tuesday the SEC announced its largest award yet - $14million to an anonymous whistleblower - and the official incharge of the agency's office said high-quality tips that couldlead to big payouts are now being submitted routinely.

"We have some very interesting ongoing investigations that,depending on how they play out, could, given our historicalrecovery in these kinds of cases, mean very big numbers," SECWhistleblower Office Director Sean McKessy said in an interviewwith Reuters last week.

"I think logically speaking, in the years to come, I expectthere will be more frequent and continuous payments on a morerolling basis," he added.

The SEC provided few details about how the latestwhistleblower helped assist SEC investigators, citingconfidentiality concerns by the whistleblower.

Under SEC rules, if the tip proves vital to a case, awhistleblower can receive anywhere from 10 to 30 percent of themonetary sanctions collected if they exceed $1 million.

The SEC said the person's tip allowed the agency to bring anaction against the perpetrators in less than six months andrecover investors' money.

While the SEC's office has received the bulk of the tips sofar, the CFTC's program is gaining traction.

In July, the CFTC hired SEC enforcement veteran ChristopherEhrman to head its whistleblower office. In an interview withReuters, Ehrman said the program is thriving.

As of late September, he said, the CFTC had received morethan double the tips for fiscal 2013, jumping from 58 to 137.

"The overall visibility of the agency I think has increasedsignificantly," he said, noting that the CFTC's blockbustercases against banks like UBS, The Royal Bank ofScotland and Barclays, settlements over therigging of Libor interest-rates and the ongoing litigationagainst ex-MF Global Chief Executive Jon Corzine have been a"game-changer" for the agency.

EARLY CRITICISM

The offices have their critics.

Corporate interest groups, including the U.S. Chamber ofCommerce, warned that the rules governing the offices could killcompany compliance programs, especially if whistleblowers werenot required to report internally first.

They say regulators could be swamped with an avalanche ofpossibly less-than-stellar tips from insiders who have a beefwith management and were looking for a big payday.

In a concession to companies, the final SEC rule included aprovision that improved a whistleblower's chances of receiving ahigher percentage award by reporting problems internally first.But the rule only protects the whistleblower from retaliation ifthe employee also reports wrongdoing to the SEC.

Tom Quaadman, vice president of the Chamber's Center forCapital Markets Competitiveness, said in an interview that it istoo soon to know if the program has had adverse effects and thatmore data is needed.

Other groups, namely whistleblower lawyers, have been fierceadvocates of the offices' potential.

Lawyers in private practice who specialize in whistleblowercases say they have clients, including high-level people fromwell-known companies, who have strong potential to reap thebenefits of the new Dodd-Frank whistleblower programs.

"We have 26 cases pending before the SEC right now and ofthat number, close to half have had some enforcement interest,"said R. Scott Oswald, a lawyer with the Employment Law Group."Of that number, I'd say about six or seven are verysignificantly down the track in the enforcement action."

Regulators and lawyers say few awards have been handed outso far due to the time it takes to investigate, litigate anddetermine whether whistleblowers should be rewarded.

"An SEC investigation can take two to four years todevelop," said Jordan Thomas, a partner at Labaton Sucharow LLP,who previously worked at the SEC helping to create thewhistleblower program.

Because the rules took effect only in 2011, that means mostcases have not yet run their course, he added.

"In the coming years, I predict that many of the SEC's mostsignificant cases will be the result of whistleblowers," Thomassaid.

As for the CFTC's program, experts say they believe therehave been no payouts yet for a variety of reasons.

In addition to the time it takes to check out tips, the CFTCinvestigates a narrower swath of issues than the SEC and is notas well known a regulator on Wall Street.

"I think that office should go on a massive public relationscampaign to explain what they do and how whistleblowers canhelp," said Stephen M. Kohn, the executive director at theNational Whistleblowers Center and author of "TheWhistleblower's Handbook."

The CFTC's Ehrman, for his part, said he could not agreemore.

He plans to go on a road show of sorts, visiting CFTC andFBI regional offices, bar association events and trade groupgatherings. In November, he will set up a table at the FutureIndustry Association's popular annual conference in Chicago.

"We are redoubling our efforts," he said.

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