Whistleblowers Receive Whopper Payouts as SEC Proposes New Rules to Limit Future Awards

The U.S. Securities and Exchange Commission announced two large whistleblower payouts last week, bringing the total paid-out bounty for the program to more than $320 million since it was created as part of the 2011 Dodd-Frank Act.

The $39 million and $15 million awards are the second- and eighth-largest payments distributed in the program’s history. Like most of these cases, the whistleblowers’ identities and other key details have remained confidential.

Reports of these mega bounties have made the SEC becoming a magnet for tips, both good and bad. But the flood of tipsters means the whistleblower review process now takes more than two years to reach resolution, with some taking four years or more. Tipsters who provide the SEC information that leads to sanctions in excess of $1 million can receive 10 percent to 30 percent of the money collected. Payments are funded by monetary fines collected by wrongdoers.

Writes the Wall Street Journal:

Deciding who gets paid is a demanding process that involves vetting each request to determine how important the person’s tip was, according to current and former officials. When multiple whistleblowers are involved, decisions are more challenging because the SEC has to measure each tipster’s value to the case.

Hoping to get a handle on the backlog, the SEC is proposing a new procedure with the goal of creating a way for the agency to quickly reject what it considers to be less-deserving applicants so it can focus on better-quality whistleblowers reporting waste, fraud and abuse. The proposed amendment also includes a controversial plan to potentially increase payouts for relatively small cases under $2 million (which make up 60 percent of the rewards program payouts) and limit the size of the relatively small amount of very large recoveries. According to the proposal, whistleblower awards over $30 million could be reduced at the commission’s discretion based on the “value of the whistleblower’s information and the personal and professional sacrifices made in reporting the information.”

SEC commissioner Kara Stein – who voted against the amendments – expressed concern that the changes could weaken incentives for whistleblowers to come forward.

“This means the Commission can reduce the award if, in its sole discretion, it thinks the award is ‘too large.’ I am worried that this subjective determination will be used as a means to weaken the Whistleblower Program.”

Some, perhaps many, whistleblowers are motivated by the prospect of a monetary award. In this respect, it may be a positive step to provide commissioners with the ability to increase payouts to the large percentage of smaller whistleblower claims. However, it seems the overall intent behind this proposed amendment is to dissuade whistleblowers, and procedural changes aimed at reducing the backlog will not necessarily result in a better or more efficient system. It’s critical to bring issues of fraud related to publicly traded entities to the SEC’s attention. Any change that allows such fraud to be kept concealed only serves to protect fraudsters and harm the public.

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