SEC’s former whistleblowing chief sues the SEC for changes to the whistleblowing program

WhistleThere are several whistleblowing programs in the United States, which all encourage and protect insiders to report fraud, waste and crime. The SEC’s whistleblower program is probably the most famous, as it has brought numerous and sometimes very large compensations to whistleblowers.

  • The SEC’s program was created as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, replacing older laws from Sarbanes-Oxley. The initial protection program dates to the Whistleblower Protection Act of 1989.
  • In essence, an individual is protected against retaliation from his employer for disclosing evidence of violations of laws, rules, gross mismanagement/waste of funds, abuse of authority, or substantial danger to public health or safety. That includes ponzis, theft, insider trading, manipulations, bribery, false statements…. the list is long.
  • You can report on an anonymous basis, meaning that only your attorney and very select/senior individuals at the SEC will ever know your identity. This is valuable, because whistleblowers are often met with shattered reputations, broken careers, unemployment and financial difficulties if they go public, or even follow their firms’ internal procedures. Wells Fargo was known to systematically punish employees reporting abuse.
  • A whistleblower is also entitled to compensation of at least 10% and up to 30% of all the collections, fines and disgorgements obtained, thanks to his/her “voluntary”, “original” information leading to a “successfull” action. The percentage essentially depends on how guilty of the crime the whistleblower is. He/she cannot be the “initator” or “main sponsor” of the crime for instance. If the recollection is less than $5m, the award should be 30%. There is a minimum recollection amount for such an award to take place (>$1 m). The individual or individuals do not need to be employees of the firm in question.
  • Many reported complaints are without merit (“My neighbor drives a car he can’t afford”), but the program is nevertheless very successful in bringing corporations and fraudsters to justice.  There are many famous cases, like Enron, and awards reach dozens of millions (the largest is $114m so far). The numbers of cases and awards keep growing year after year. The process is becoming a very efficient crime deterrent.
  • Other regulators also have whistleblowing programs: the CFTC, the IRS, the OSHA, etc, and you can sue in the name of the government (qui tam)…. Not all programs are as recognized or as efficient as the SEC’s; some would say it may be on purpose – the organizations may be criticized for not finding the cases in the first place. Also, there is solid lobby pressure to defang such programs.
  • If you see something abnormal in your firm, the main pieces of advice are:
    1. Keep your job. Your employment is valuable to both you/your family and your case. Staying at your firm will not impact your award.
    2. Talk to an attorney. Don’t wait too long; there are time limitations.
    3. Be patient. Cases can take 3-7 years, probably longer than standard litigations. Your anonymity WILL be preserved all along.
  • There are many law firms who can help you in this process, and associations (like the national whisteblower center) who can guide you in the process. Navesink can recommend you to attorneys if needed.
  • Law firms typically take these cases on contingency. A good attorney will attract the attention of the regulator, who is often bombarded with irrelevant requests. It is important to well select your attorney.

Now, why is Jordan Thomas, the former manager of the SEC’s whistleblowing program, suing the SEC?

  1. The SEC is amending the rules to gain discretion in the award amount; the award is a big motivation for insiders to risk their career.
  2. The SEC is taking some of the ‘related actions’ off the pool used to calculate the awards.

Essentially, the SEC is trying to reduce the awards. This will not help the program and its efficiency. FYI, Jordan Thomas is the head of Labaton Sucharow’s whistleblower program; he represents many whistleblowers.

 

Credits to Mengqui Sun at The Wall Street Journal

Credits to Lydia DePillis at ProPublica (outside link):

ProPublica article - The SEC undermined a powerful weapon against white-collar crime

Additional information on the SEC’s program is available here.

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Written by Gontran de Quillacq

Gontran de Quillacq is an expert witness and a legal consultant. He is a recognized authority in options, trading, derivatives, structured products, portfolio management, hedge funds, mathematical finance, quantitative investment, strategy research and financial markets in general.

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