This is a riveting long read from the Institutional Investor on a subject that is of considerable interest to some of us in Mumbai’s financial markets: whistleblowing. The article traces the travails of successful wealth manager, Eugene Ross, who used to work at Bear Stearns and who blew the whistle on a hedge fund which was stealing money from one of his clients. Whilst the hedge fund boss eventually ended up in jail for theft, the prolonged nature of the prosecution process bankrupted Ross. To compound his misery, the hedge fund boss used his influence to basically oust Ross from his job at Bear Stearns. All of this happened before 2010.
The article then describes how in 2010 the SEC revamped the whistleblowing regime and in so doing created a model that other countries could follow: “Well into the 21st century, people like Ross were left completely exposed when they attempted to blow the whistle. That changed in 2010, when the Securities and Exchange Commission set up a new division bearing the Orwellian title of Office of the Whistleblower. Since the SEC granted its first whistleblower award in 2012, the program, set up under the Dodd-Frank Wall Street Reform and Consumer Protection Act, has meted out more than $937 million in awards to 178 individuals. Last year, the SEC presented the highest-ever whistleblower award of $114 million to a single whistleblower (who, like many, chose to remain anonymous). Whistleblowers can receive anywhere from 10 percent to 30 percent of the total collected by the SEC in an enforcement action, granted at its discretion, when they voluntarily turn over information leading to sanctions in excess of $1 million.
Jane Norberg, who commandeered the whistleblower program from its embryonic stages…. says, “are specific, timely, and credible — tips that point to specific people, specific transactions, and specific dates; things that are tangible that the staff can dig into.” Of the whistleblowers who have received awards under the program, 71 percent provided original information allowing the SEC to open an investigation or examination into securities violations..
About 68 percent of those who end up receiving SEC whistleblower awards are company employees or insiders, such as corporate officers or directors, internal auditors and accountants, or members of the compliance department. That said, award recipients don’t have to be insiders. Sometimes they are simply investors who have been victims of a fraud; professionals working in the same field or in a related industry…
Stephen Kohn, whose Washington law firm, Kohn, Kohn & Colapinto, has represented whistleblowers like Ross since the 1980s, says the Dodd-Frank whistleblower program’s masterstroke is that it finally puts the whistleblower first. The incentives, he says, are threefold: whistleblowers can file tips confidentially and anonymously; whistleblowers are protected by exceedingly strict anti-retaliation laws; and any tip filed with the SEC resulting in an enforcement action can be used by other agencies, such as the Department of Justice or the Internal Revenue Service, allowing whistleblowers to stack their awards. As a result, the average whistleblower award extends into the millions. None of these benefits or safeguards existed before Dodd-Frank, Kohn says. “The beauty of the SEC program is that it can open the whistleblower to eligibility of mandatory awards of 10 percent to 30 percent for every civil, administrative, or criminal action pursued by not just the SEC, but the United States,” he explains…
That means, over time, whistleblowers can reap compounding returns as their information is deployed throughout the system by various government agencies undertaking related actions. When the $114 million whistleblower award was granted last October, approximately $52 million of it came from the SEC, while $62 million emanated from related actions by another agency, which the SEC did not name to ensure it did not give away the whistleblower’s identity. “The SEC is super, super careful to keep all whistleblower identities secret,” Kohn says. “I don’t think it has ever messed up.””
Basically, the SEC has recreated a modern form of the bounty system that American sheriffs used to tame the Wild West. However, in a connected planet, you and I can also get these bounties and become US$ multi-millionaires without anyone (other than the taxman) ever finding out about it: “In the latest fiscal year ended September 30, the Office of the Whistleblower reported the largest number of tips and complaints came from California, Pennsylvania, New York, Florida, and Texas — in that order — while about 11 percent of complaints came from outside the country, with Canada, the U.K., China, Colombia, and India leading. Since the program began just over a decade ago, 19 whistleblower award recipients lived outside of the U.S. or were foreign nationals when they filed their tips. The top complaints, in order from greatest to least, are securities violations related to corporate disclosures and financials; offerings; manipulation; insider trading; and initial coin offerings or cryptocurrencies.”
If you want to read our other published material, please visit https://marcellus.in/blog/
Note: the above material is neither investment research, nor financial advice. Marcellus does not seek payment for or business from this publication in any shape or form. Marcellus Investment Managers is regulated by the Securities and Exchange Board of India as a provider of Portfolio Management Services. Marcellus Investment Managers is also regulated in the United States as an Investment Advisor.
Copyright © 2022 Marcellus Investment Managers Pvt Ltd, All rights reserved.