Whistle-Blowers Seek SEC Bounties at a Rate of Seven per Day

Whistle-Blowers Seek SEC Bounties at a Rate of Seven per Day
A man walks into the headquarters of the U.S. Securities and Exchange Commission (SEC) in Washington. Photographer: Brendan Hoffman/Bloomberg

Bounty-hunting corporate tipsters are filing reports of potential wrongdoing with the U.S. Securities and Exchange Commission at a rate of about seven per day, according to the first progress report from the agency’s new whistle-blower program.

The public snapshot released last week counted 334 tips in the first 50 days after the program -- revamped under the Dodd-Frank Act -- became fully operational on Aug. 12.

The program gives whistle-blowers a share of proceeds if their tips lead to more than $1 million in penalties. So far, the top three categories of tips are those alleging market manipulation, problems with public disclosure or fraud in offerings.

“This is a red-hot area of awareness for us right now,” said Gregory Keating, co-chair of the whistle-blowing practice group at Littler Mendelson PC in Boston, who expects the next reports will show an “exponentially” higher tip rate. “These claims can impact stock price. They can be incredibly expensive. It’s something we need unequivocally to get ahead of.”

Congress expanded the SEC’s whistle-blower provisions after the agency failed to act on tips it received about Bernard Madoff’s multibillion-dollar fraud. Companies that opposed the program said that offering bounties could undermine internal programs set up to collect and address employee concerns -- expensive systems the companies are legally required to operate.

Under the SEC program, a whistle-blower can be awarded between 10 and 30 percent of any money the SEC collects, depending on how central the tip was to proving the case.

‘Large Payouts’

“The lowest amount they could get would be 10 percent of a million, which is $100,000,” said Keating, whose clients say they are “moderately to highly concerned” about the program. “Large payouts mean more interest and more awareness by the plaintiffs’ bar and by the public.”

The bounty system technically went live as soon as Dodd-Frank was enacted in July 2010. In August, the SEC formally launched its reporting program, which includes a website where whistle-blowers can access an online tips system. At the current rate, the program is on course to collect 2,438 tips a year.

The highest number of U.S. tipsters come from the state of California, and the highest number outside the U.S. are from China, according to the report. That geography could be influenced by population, since California is the most populous U.S. state according to the U.S. Census Bureau, and China the world’s most populous nation.

China has drawn recent attention for accounting problems at some of its U.S.-listed firms, highlighted on Nov. 10 by James Doty, chairman of the U.S. Public Company Accounting Oversight Board, who said the market “mistrusts the value of the Chinese balance sheet.”

Short Timeframe

The SEC report, covering the fiscal year that ended Sept. 30, tallies data from the time the program was fully operational to the end of the fiscal year. As a result, tips reported to the SEC before Aug. 12 aren’t included -- a point that frustrates Stuart Meissner, a New York lawyer representing several securities-law whistle-blowers who filed prior to that date.

“People like us, as well as others, have filed whistle-blower complaints pursuant to the Dodd-Frank law, and they don’t refer to them at all,” he said.

No whistle-blower has collected yet from the SEC’s $452 million bounty fund, which is financed from “a portion of monetary sanctions collected by the SEC in judicial or administrative actions,” according to a 2010 agency report.

90-Day Window

In the SEC’s system, the agency posts resolved cases on the whistle-blower office’s website, and tipsters have 90 days to file claims for awards. The deadline in the first batch of 170 eligible cases was Nov. 11, the report said.

“We’re going to continue to be out there to let people know the program exists and how to submit information and be eligible for an award,” Sean McKessy, director of the whistle-blower office, said in an interview. This initial data “shows that people know about the program and they’re submitting information in exactly the way they are supposed to,” he said.

Dodd-Frank expanded the agency’s previous whistle-blower program from one that offered smaller bounties only for insider-trading tips to a much broader effort. SEC officials responsible for policing the tips say their quality has improved since the program got under way and corporate concerns that the agency would be flooded by a wave of cash-chasing whistle-blowers haven’t materialized.

“I’m not sure personally that the trends are going to change much,” George Canellos, chief of the SEC’s New York office, said at a legal conference last month.

‘Some Uptick’

Since Dodd-Frank’s enactment in July 2010, the agency has seen “some uptick” in the number of tips, SEC Chairman Mary Schapiro said in congressional testimony on June 21. “But I think the real measure is the quality of referrals and tips is better.”

With the agency drawing back from random examinations of companies, Carlo di Florio’s Office of Compliance Inspections and Examinations is relying on the whistle-blower program to help keep firms “on their toes,” he said in an interview.

“This is, I think, a key time for this program,” Meissner said. The SEC could draw even more tips by advertising it like a state lottery: “They have to promote it, just like other reward programs.”

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