Making Whistle-Blowing Pay
SEC issues big-game hunting licences.
The federal bureaucracies are hard at work churning out rules to implement the Dodd-Frank financial “reform” act. In May the Securities and Exchange Commission announced rules for its new whistleblower program, which rewards individuals who provide the agency with “high-quality tips that lead to successful enforcement acts.” Anyone who has sent tips to the agency since Dodd-Frank was enacted in last July is eligible, but must re-file under the new rules, which are expected to take effect next month. The rules were approved on a party-line 3-2 vote of the Commission.
The minimum amount of recovered funds that can earn a reward is $1 million, but the sky’s the limit on the upside. The whistleblower gets to keep 10-30 percent of the amount collected, including fines, interest, and disgorgement of ill-gotten gains. We’re talking about big game here, with awards conceivably topping $100 million.
Huge Category
Eric Havian, an attorney with a law firm that represents whistleblowers, noted in an interview with the San Francisco Chronicle‘s Kathleen Pender that the securities laws cover a “huge category of bad conduct,” such as illegal insider trading, cooking the books, market manipulation, stock option back-dating, false or misleading disclosures, and the deceptive sales of securities. Indeed, almost anything potentially can be illegal, and these vaguely defined offenses leave much room for government mischief. As for insider trading, this is a practice that does little harm and may actually provide benefits to small investors. (See my Freeman article.)
If corporations felt they needed limits on insider trading or other conduct to attract shareholders, they could write prohibitions into their bylaws so that violations, if not settled internally, could be remedied under civil law.
The mind boggles at the incentives the whistleblower program establishes. Law firms must be gearing up already to coach whistleblowers in the fine art of identifying and documenting actions that can be gussied up into plausible cases. It would make sense for law firms to take cases on a contingency basis because this sort of lawyering potentially could be very lucrative. The SEC staff, concerned primarily with covering its collective rear end, will shy away from dismissing all but the most frivolous cases.
The road to riches will not be short or direct. Many years could elapse, if only because of bureaucratic inertia, between the time of filing and the bestowal of an award. “There will be more people struck by lightning in a given year than will get a check from the SEC in the next five to ten years,” cautioned Tim Mazur of the Ethics and Compliance Officers’ Association. But once the first awards hit the headlines, “a lot of people will start paying attention,” he added (San Francisco Chronicle).
All whistleblowers run the risk of retaliation from their employers, but in today’s climate, this risk seems minimal. Besides, complaints may be filed anonymously.
Forget Internal Review
Whistleblowers will lose their incentive to pursue complaints through their companies’ internal review process, an avenue that could correct any genuine wrongdoing relatively quickly. With such a massive potential pot of gold beckoning, why not wait and let the supposed wrongdoing fester for a while?
To be sure, the SEC rule makers are aware of at least some perverse incentives. The website announcement contains a section headed, “Avoiding Unintended Consequences,” which excludes certain people from eligibility. The SEC also says information presented must be the whistleblower’s independent knowledge or analysis. But these limits seem to leave enough space to drive a truck through, and the truck drivers are revving their engines.
Of course corporate officers will be aware of the new incentives for whistle-blowing, which may well make them more cautious about taking on the risks of new or expanded production. Too bad. Investment is exactly what the country needs to get out of its economic funk. New uncertainty will further delay recovery.
Double Standard
Meanwhile, government whistleblowers aren’t doing nearly so well. Thomas Drake, a National Security Agency employee, found hundreds of millions of dollars being squandered on failed programs and tried to expose them. He did not leak any classified information, and he tried informing his bosses, the NSA inspector general, the Defense Department inspector general, and congressional intelligence committees before taking his findings to the Baltimore Sun. Rather than a pile of cash, Drake’s reward was an indictment on ten felony charges that could have gotten him many years in prison. But earlier this month, following a New York Times article on his situation and a judge’s ruling that certain classified information which prosecutors wanted to use against him could not be kept under wraps, all charges were dropped in a deal in which he pleaded guilty to one misdemeanor.
A recent petition signed by 20 noted whistleblowers calls for rescinding a “Transparency Award” given to President Obama recently. The President “has invoked baseless and unconstitutional executive secrecy to quash legal inquiries into secret illegalities more often than any predecessor,” the complaint noted. “Ignoring his campaign promise to protect government whistleblowers, Obama’s presidency has amassed the worst record in U.S. history for persecuting, prosecuting and jailing government whistleblowers and truth-tellers.”
But hey, we should just be glad the feds are protecting us from those nasty corporate insiders.
Comment by Sherry on 21 June 2011:
It will surely be a race against time — older career government workers in state and federal institutions are retiring, or being ‘re-structured’ out of positions: THEY are the ones who know, and have lived with the knowledge, of anti-American corruption in so-called state and national government agencies on a massive scale going back decades. Similarly, complaints too often get ‘gag orders’ from judicial sources. Valid internal complaints get obfuscated in hiring corporate pals (using tax-payer funds) from firms like Ernst & Young who generate data that minimizes and re-directs issues.
We need to ask clear questions, get accurate information, stick to the genuine issues — especially as to why borders, ports and computer traffic lines are non-sovereign, purposely insecure, leaving America unprotected and citizens misinformed and disinformed. Chronic, long-standing, institutionalized non-feasance, mis-feasance, and mal-feasance have been altogether the function/dysfunction of America’s crypto-fascist globalist government for many years. Globalism is Sovietism, alive and flourishing in American government practise. It only has to be heard, like, “The Emperor has no clothes!”
Comment by Allyson on 21 June 2011:
What we have here, is a government, laws, and regulations for sale to the highest bidder, a growing government business at every level, and massive corporate and individual entitlement programs. This is about as far from true free market capitalism as is corrupt banana-republic socialism. Or maybe what we have IS a corrupt banana-republic socialist state.
In any case, I am absolutely not opposed to rewarding whistle blowers. I guarantee that some of them may have the greediest of motives. Who cares? If that’s what it takes to clean up the wall street firms that are cooking the books and doing their part to undermine our fragile market economy so be it. Look what happens when honest people TRY to out these crooks – remember Enron anyone?
I cannot believe anyone would seriously suggest that a whistle blower would be able to “gussy up” documents to such a level that it would create a case that would be able to withstand the rigors of corporate attorneys paid hundreds of dollars an hour and a courtroom. It strains credulity to actually believe these companies, many of whom we as taxpayers bailed out while they were/are handing out huge pay raises and bonuses that not only were undisputed but were taken without having to wait years or risk anything but the public ire at the “let them eat cake” mentality.
Hey – I have an idea. Instead of whistle blower awards let’s start using the guillotine to punish any corporate executive, lobbyist, or politician found to be corrupt or a thief. The only caveat is they get the right to a very speedy trial but rescind any appeal mechanism. How does that sound? Probably would cost a lot less than the legal fees we’re paying to defend Fannie Mae and Freddie Mac corporate-government thieves right now. Even if we make the guillotines in gold.
Comment by Rob on 21 June 2011:
How appropriate: the government wants to reward those who snitch on private enterprise, but has declared war on anyone who dares snitch on the government’s illegal behavior. Apparently that “transparency” that Obama was talking about in the campaign was only for the rest of us, not the political class.
Comment by LarchOye on 21 June 2011:
I get the feeling that instead of rewarding whistle blowers- they’re going to wind up destroying them, like Bradley Manning.
Comment by Charlie on 21 June 2011:
Whistle-blowing has always applied to both public and private employees.
I think a reward is reasonable, if the accusations prove to be true, because whoever blows the whistle is finished- they’ll never be employable again, at least in anything meaningful, and if someone is truly a low man on the totem pole, they’re toast.
What I find especially egregious is a practice used by either the FHA or DOJ, I don’t remember which, in which they send operatives out to trap landlords and real estate agents in housing law issues, then pay the ENTIRE fine to the agent as a commission. If anything needs to be stopped, that’s it.
I think whistle-blowing, if applied properly, protects the integrity of government and businesses, especially those engaged in fiduciary responsibilities to ensure that they’ll do their jobs right. In the case of other businesses, it can lead to the issues above. Why is reporting something illegal “ratting out,” though? If you want a truly free market and society, then everyone needs to abide by the rules, or my rights become abridged, as do yours, and then we all lose, ending up with the mess we now have. On the flip side, I think the government and/or businesses should be allowed to recover against a whistle-blower who knowingly makes a false or misleading report.
Abuses in any system are unacceptable, and should be stopped or prevented. It appears from this article that Dodd-Frank has put the ability to abuse in place, and that is wrong.
Then again, it was written by two of the biggest crooks on Capital Hill, so what else would you expect?
Comment by erne lewis on 23 June 2011:
Some of the above comments indicate that the SEC will seek only guilty parties. In fact prosecutors prosecute those that can be convicted . . . without regard to their innocence. If a witness is to be rewarded for testifying against the accused and charged with complicity or another crime if they do not, they will frequently decide to testify against someone they may know is not guilty.
This form of prosecution is all too prevalent in our present justice system. It is used constantly in the case of drug crime. Prosecutors love to earn a tough-on-crime reputation before running for higher office.