The Financial Times reported Dec. 5 that not one but three separate whistleblowers have told the SEC that Deutsche Bank didn’t properly report paper losses during the financial crisis, a move that let the bank appear healthier than it was and avoid a government bailout. They say the bank hid up to $12 billion in paper losses on derivatives trades.
Deutsche Bank says the allegations are “wholly unfounded” and that the bank’s valuations were “proper.” Just how Deutsche Bank allegedly hid the losses—and whether it matters—is quite confusing. (Blogger Felix Salmon tries to translate and concludes, “there’s a strong case to say ‘no harm, no foul.’”)
But one thing is clear: We’re likely to see more financial whistleblowing cases in the future. That’s because the Deutsche Bank case is part of a new program developed under the Dodd-Frank financial reform bill specifically designed to encourage insiders to share tips. As I explained in February, if a whistleblower provides original information that helps the SEC successfully impost sanctions of more than $1 million, the awards range from 10 percent to 30 percent, depending on a number of factors, such as the uniqueness of the information and whether the whistleblower reported the problems internally first.
The program started in the summer of 2011, and its results are starting to pop up. In August the agency released its first whistleblower award, a $50,000 payment as the first installment in a case that resulted in more than $1 million in sanctions. The SEC denied paying a second whistleblower in that same case, saying the tipster’s information didn’t directly lead to the sanctions. In its annual report (pdf) last month, the SEC whistleblower office said it had received 3,001 tips in the 2012 fiscal year.
In October, SEC Commissioner Luis Aguilar said in a speech that the flood of tips hasn’t drowned the staff in useless dead-end leads. “Our staff is reporting that they see a noticeable difference in the quality of the information that they are receiving,” he said. “This is critical. The quality of the information determines how quickly our staff can act, whether we can increase our odds to capture the true masterminds, and whether we can prevent greater harm from occurring.”
Whether the Deustche Bank whistleblowers will ever collect depends on several things, not the least of which is whether the SEC finds the accusations have merit and require sanctions. About 18 percent of the SEC’s tips in the 2012 fiscal year related to corporate and financial disclosures, like the Deutsche Bank case. That’s 547 distinct tips. In any case, Deutsche Bank isn’t alone.