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It’s part of the new Office of the Whistleblower, which is officially open for business under rules that come into effect Friday.
The unit was designed by the Dodd-Frank Wall Street reform law to uncover the next Bernie Madoff before he or she can do too much damage.
For the first time, SEC whistleblowers will be eligible for massive bounties for tips on corporate and Wall Street fraud. People who bring in reliable new information about frauds of $1 million or more will be eligible for payouts of between 10 percent and 30 percent of the amount recovered.
Since the law was passed in July of 2010, lawyers have been busy filing cases with the SEC, says Erika Kelton, an attorney with the firm Phillips & Cohen. “We are seeing significant frauds directed at or near the top of the organization,” she said, frauds that in some cases involving prominent CEOs. “Some will be very newsworthy. These schemes are core business strategies of the company, this is not a rogue trader or the activity of an obscure regional office.”
Now those whistleblowers who have already filed claims will be able to officially stake their claim to a payout. The SEC says the new whistleblower website will also post a list of roughly 170 enforcement actions the agency has taken in the past year. The commission says any whistleblowers involved in those cases will be encouraged to file official paperwork claiming their rewards. The SEC has not yet revealed how many new tips it had gotten as a result of the bounties, or how many of those have panned out into actual cases.
“As the first Chief of the SEC’s Office of the Whistleblower, I am excited about the promise that this program holds,” said Sean McKessy, the man tapped by the SEC to head up the new effort, in a speech at Georgetown University on Thursday. “It will help us to more quickly identify and pursue frauds that we might not have otherwise found on our own. It will strengthen our ability to carry our mission. And, it will save us much time and resources in the process.”
Senator Chuck Grassley, a longtime proponent of whistleblowers, said he’s not declaring success just yet. “It’s too early to tell how the implementation of the new whistleblower rules is going,” the Iowa Republican said. “Even if things appear to be going well, it takes only one whistleblower to fall through the cracks for another Madoff to occur. I’m keeping tabs to make sure the system is put in place as quickly as possible and that any remaining institutional resistance to whistleblowers doesn’t interfere.”
Not everyone thinks this the new rules are a good idea. The business community argued for most of the year that aggressive whistleblower payouts would cripple internal corporate compliance programs, since employees with knowledge of fraud would be more likely to go to the government than to their own bosses with the information.
Business lobbyists argued that the SEC should write rules that required whistleblowers to report internally before going to the government. In the end, though, the SEC did not make that a requirement.
“The rules are a mistake,” said attorney Michael K. Loucks, a partner at Skadden. “This will make it harder for corporate compliance programs to work. There will be a slow but increasing number of leaks to the SEC, and then someone will get paid $10 million and there will be a flood.”
And that’s got fraud lawyers salivating at the possibility of cashing in on a deep well of here-to-fore unknown corporate frauds.
Attorney Stuart Meissner says he has filed at least seven cases already in the year since the Dodd Frank created the whistleblower protections, in cases ranging from failures by investment banks to disclose important information to accounting fraud at public corporations. He stands to collect a piece of whatever payout his clients collect if their tips bear fruit.
“The firms that are not doing anything wrong have nothing to worry about,” Meissner says. “But those that are are looking over their shoulders—all the way up the chain of command.”
Whistleblower advocates say their fight isn’t over. Now, they say, they’re pushing to make sure the SEC gets enough money to make the new program effective: “The fraudsters are trying to starve the SEC by playing budget games, even though its funding comes from user fees and the government’s return on investment from fraud enforcement is many times its cost,” said Susan Strawn, President of Taxpayers Against Fraud. “To realize the billions the whistleblower program could save investors, it’s critical that the SEC gets the funding it needs.”
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