One of the suggestions I made in the new chapter of Bailout Nation (written for the paperback prior to fin reg passing) was some common sense advice to the SEC:

“To root out more corporate fraud, [the SEC] should establish an aggressive whistle blower program that rewards those who identify fraud with a percentage of any recovery of penalties imposed (similar to the program the IRS has).”

It turns out that the the financial reform legislation has big cash rewards to whistleblowers who report fraud and other wrongdoing at publicly traded firms and Wall Street banks:

“Under the program, which is already live, anyone who provides a tip that leads to a successful Securities and Exchange Commission action will be able to collect between 10% and 30% of the amount recovered — as long as the total amount exceeds $1 million. This means the minimum payout is $100,000. The whistle-blower could be a company insider or a private investor, if they’re able to offer information or analysis that leads to an action. And with potential payoffs netting millions — or even tens of millions — of dollars, experts are bracing for a surge in tipoffs.”

We should look forward to the annual SEC reports of how much in fraud and corruption was rooted out by whistle blowers.

I also expect to see this become somewhat institutionalized — we might see some well capitalized hedge funds hiring or funding whistle blowers to gain insight into stocks to short;

I wonder if we might see a new hedge fund model: A fund that is formed and funded to literally chase whistle blower rewards with a similar pay structure as traditional 2/20 hedge funds.

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Source:
SEC Now Offering Big Payoffs To Whistle-Blowers
Janet Morrissey
Time, Aug. 19, 2010
http://www.time.com/time/business/article/0,8599,2012066,00.html

Category: Bailout Nation, Regulation

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13 Responses to “SEC Increasing Whistle Blower Payoffs”

  1. Mannwich says:

    I love this idea. Financially incent the whistleblowers in a big way. Incentives matter here. My concern is that the whistleblowers may actually get penalized for blowing that whistle on the “wrong” folks, if you know what I mean.

  2. Jeff,

    are you alluding to this caveat: “…anyone who provides a tip that leads to a successful Securities and Exchange Commission action…” ?
    ~~

    this wouldn’t happen to be an ‘Election Year’, would it?

  3. solanic says:

    I wonder if we might see a new hedge fund model: A fund that is formed and funded to literally chase whistle blower rewards with a similar pay structure as traditional 2/20 hedge funds.

    Are you serious?

    How do you think it could work?

  4. Robespierre says:

    “his means the minimum payout is $100,000. The whistle-blower could be a company insider or a private investor, if they’re able to offer information or analysis that leads to an action.”

    As long as that recovered money does not come from the perpetrators this will help but not much. Now if you double the reward if criminal convictions are obtained then you have something with real deterrent value… And yes I’m aware the SEC does not do criminal but the FBI and AG do….

  5. realgm says:

    Love the idea, but would the SEC be able to get these criminals into the jails and get the money back from these financial jerks?

    Punishing the firms alone would not help fixing the system much if those criminals can escape and stay business as usual.

    Investors of the firms are obviously responsible for the bad decisions they made, but these criminals should pay for all the frauds they have done.

  6. obsvr-1 says:

    It is good to see that there is an incentive program in place to allow the whistle blowers a voice and venue for uprooting the insidious insider illegal activities, perhaps it will help.

    What is needed is for investigations and prosecution to be expedited so we do not see 7 and 8 year cycles — justice delayed is justice denied.

    If the current crisis doesn’t provide fertile ground for low hanging fruit prosecutions – nothing will !! The financial industry should be a target rich environment.

    Some degree of legal reform needs to be discussed such that lawyers and law firms suffer some sort of pain when they perpetuate the delay and/or participate in creating legal quagmires, maneuvering or circumvention of the spirit of the law. The legal profession never loses – they suck money before an event, during an event and after an event. They suck from the winners, the losers and society as a whole. Back in topic of whistle blowers, I am sure the lawyers will suck 30-50% from the whistle blowers as well.

  7. ian says:

    I wonder if we might see a new hedge fund model: A fund that is formed and funded to literally chase whistle blower rewards with a similar pay structure as traditional 2/20 hedge funds

    But for that to work, massive fraud would have to be essentially endemic to Wall Street, and we know that’s not…..

    Oh, yeah. Right

  8. Mannwich says:

    @Hoffer: Yes, definitely a very important caveat indeed.

  9. Petey Wheatstraw says:

    $100K should buy you about 250 hours of competent legal representation. I don’t think that’s going to be enough to defend doing the right thing.

  10. Mannwich says:

    @Petey: I would times that by about at least 10 or 20 (or more). You’re right though.

  11. Jojo says:

    $1,000,000 minimum crime is too high a bar. ALL fraud should be able to be reported and rewarded!

    There are many crimes that re difficult to put a $$ amount on. For instance:

    Many companies actively mislead potential investors with “customer” lists that are fake. I’ve worked for more than one company in the past that clearly did this.

    Such companies might list major Fortune 500 companies as customers but what they really have is only one small department that brought a couple of seats or a small consulting project years ago. Then there is the company that brought a product 10 years ago but has since dropped maintenance and no longer uses the product.

    Since the company names look good form a marketing perspective, the customer list is rarely cleaned up.

    A good looking customer list serves to help people think that the company is successful and hopefully, entice them to buy company stock or products/services. Or in the case of analysts, write glowing reports about the companies successful market penetration.

    Unless you are buying product/services from the company and ask for specific references, you will never be given the names and numbers of contacts to verify product usage for these ghost customers.

    Given this example, how do you assess market damage at any specific $$ amount?

  12. This is right for so many reasons. First, it will encourage folks to go after the biggest financial criminals. The bigger the crime the bigger the payoff. Second, the whistleblower will have a strong incentive to be very diligent in getting evidence because they have so much to gain and probably only one shot to gain it. This could therefore take years to bear full fruit as cases are slowly and thoroughly built but I’ll bet the convictions will be more airtight

  13. todd399 says:

    SEC is not competent enough to sustain this business model. Even if they are cornfed with evidence. The problem is you have lawyers at the SEC and not finance professionals investigating finance crimes.

    Guys, all you have to do is read Harry Markopolis book.