Who would be a whistleblower?

Despite compensation payouts in the millions, few are ready to speak out against Wall Street. But, as Mark McSherry discovers, the US is serious about clamping down on fraud

Mark McSherry
Thursday 25 September 2014 02:21

When regulators give a whistleblower a $30m (£18m) reward, despite being angry that the whistleblower didn’t take them the information quickly enough, you know they are serious about trying to create a culture in the United States in which people feel comfortable spilling the beans on Wall Street’s dark arts.

This week’s reward was by far the biggest announced since the US Securities and Exchange Commission (SEC) created an “Office of the Whistleblower”, authorised by the Dodd-Frank Act in the wake of the financial crisis and sparked into action about three years ago.

Whistleblowers who provide the SEC with “high-quality original information that leads to a commission enforcement action” in which more than $1m in sanctions is ordered, can be paid between 10 per cent and 30 per cent of the money collected. Big money indeed, and it is helping to overcome a cultural barrier in the US, where people who spill the beans have not always been viewed as heroes – public opinion is still deeply divided on National Security Agency whistleblower Edward Snowden, for instance.

More than 6,000 people have already offered confidential information to the SEC under the programme, and while only a small proportion of those reports has so far led to action, the size of the potential reward is encouraging many to report corporate wrongdoing.

The Wall Street watchdog also helped calm the fears of would-be whistleblowers in June when it charged the New York hedge fund advisory firm Paradigm Capital Management for retaliating against an employee who had reported potentially prohibited transactions to the SEC.

“Those who might consider punishing whistleblowers should realise that such retaliation, in any form, is unacceptable,” said Andrew Ceresney, director of the SEC enforcement division.

Paradigm, and its owner Candace King Weir, agreed to pay $2.2m to settle charges that it had engaged in prohibited transactions and then retaliated against a tipster without admitting or denying wrongdoing. This was the first time the SEC had used its authority to bring anti-retaliation enforcement actions.

The latest whistleblower, who lives outside the US, said: “I was very concerned that investors were being cheated out of millions of dollars and that the company was misleading them about its actions. Deception had become an accepted business practice.”

The whistleblower will receive between $30m to $35m – more than double the previous highest payout of $14m. And yet the reward could have been much more if the SEC had been informed more quickly.

The SEC’s redacted order outlining the award points out: “We … have considered claimant’s delay in reporting the violations, which under the circumstances we find unreasonable.

“Claimant delayed coming to the commission… after first learning of the viola- tions, during which time investors continued to suffer significant monetary injury that otherwise might have been avoided.”

Phillips & Cohen, the law firm representing the latest whistleblower, said the Dodd-Frank Act allows SEC whistleblowers to remain anonymous “to the fullest extent allowed by the law” to encourage and reassure people who often put their careers and more at risk by reporting wrongdoing.

Phillips & Cohen said the company exposed in the latest case went to great lengths to conceal a fraud.

“Our client exposed extraordinarily deceitful and opportunistic practices that were deeply entrenched and well hidden,” said Erika Kelton of Phillips & Cohen.

“Federal regulators never would have known about this fraud otherwise, and the scheme to cheat investors likely would have continued indefinitely.” There is still scepticism as to how successful the new system will be, but Ms Kelton insisted it is working well.

She praised the work of the Whistleblower Office, the SEC’s division of enforcement, the Justice Department’s fraud section and the FBI.

“Federal enforcement officials worked closely with the whistleblower to stop a scheme that hurt investors, and by doing so the government was able to hold wrongdoers accountable for their actions,” Ms Kelton said.

The rewards to whistleblowers are paid from a special award fund created by Congress and do not affect the amount the government collects or the amount returned to investors.

A possible complication is that the latest whistleblower lives outside the United States, and some legal experts are not 100 per cent certain that the Dodd-Frank Act’s anti-retaliation legal protections cover such cases.

The SEC believes they do.

“This award of more than $30m shows the international breadth of our whistleblower programme as we effectively utilise valuable tips from anyone, anywhere, to bring wrongdoers to justice,” said Sean McKessy, chief of the Whistleblower Office.

“Whistleblowers from all over the world should feel similarly incentivised to come forward with credible information about potential violations of the US securities laws.”

Money issues: No big paydays in the UK

British watchdogs remain firmly opposed to US-style multi-million dollar rewards to whistleblowers.

It comes despite calls from the Chartered Institute for Securities & Investment for rewards to be considered alongside the launch of its “Speak Up” policy.

The CISI says Speak Up is designed to encourage staff to raise concerns at an early stage without financial incentive in the firms that they work for. At its launch, HSBC’s chairman Douglas Flint said delivering the right culture in financial firms meant “rewarding and celebrating those who escalate their concerns, even if they are sometimes wrong”.

And the CISI also suggested those forced to go outside their employers to raise concerns should receive help. It reported 46 per cent of respondents “strongly in favour” of rewards and 38 per cent “somewhat in favour” after polling more than 1,000 people.

They were, however, asked a slightly loaded question: “Financial incentives to US whistleblowers get results. Should the UK likewise offer rewards to encourage reporting of wrongdoing by companies?”

CISI chief executive Simon Culhane said: “The very real financial repercussions all too often suffered by whistleblowers means that they should be provided with financial support.”

Both the Financial Conduct Authority and the Bank of England’s Prudential Regulation Authority argue that incentives only benefit a small number of people in the US, do not increase the quantity and quality of whistleblowers and have resulted in high legal costs and complex governance structures.

They say firms should have effective internal whistleblowing mechanisms in place which rewards could detract from.

James Moore

Register for free to continue reading

Registration is a free and easy way to support our truly independent journalism

By registering, you will also enjoy limited access to Premium articles, exclusive newsletters, commenting, and virtual events with our leading journalists

Already have an account? sign in

By clicking ‘Register’ you confirm that your data has been entered correctly and you have read and agree to our Terms of use, Cookie policy and Privacy notice.

This site is protected by reCAPTCHA and the Google Privacy policy and Terms of service apply.

Join our new commenting forum

Join thought-provoking conversations, follow other Independent readers and see their replies


Thank you for registering

Please refresh the page or navigate to another page on the site to be automatically logged inPlease refresh your browser to be logged in