New SEC Whistleblower Rules Spur Fraud Complaints

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The Dodd-Frank Wall Street Reform and Consumer Protection Act was passed by the US Congress and signed by President Obama earlier this summer and contains some very attractive incentives for securities fraud whistleblowers. Now, according to the US Securities and Exchange Commission (SEC), the Act is leading to an increase in tips, wrote the Wall Street Journal.

The law empowers the SEC and the Commodities Futures Trading Commission (CFTC) to award between 10 and 30 percent of any monetary sanctions that exceed $1 million to whistleblowers providing information leading to a successful enforcement. The hope is that, said the Journal, massive financial debacles, such as what was seen in the historic Bernard Madoff Ponzi scam, be averted.

We previously wrote that according the Financial Times, the so-called “Wall Street Tip-Off Law” is expected to lead to a sharp increase in tips from senior employees and third parties with knowledge of securities fraud. “The scale of the awards reflects the high quality of whistleblower we hope to get people within a company, broker or other regulated firm that we might not have heard from before,” Stephen Cohen, an SEC official, told the Financial Times. “We’re expecting a tremendous response.”

Lawyers representing whistle-blowers are passing the information along. “We’ve gotten some very high-quality tips,” SEC official Stephen Cohen told the Journal. “The goal is not just to get more tips; we want to get more high-quality tips,” Cohen added, noting that the law is meant to speed information delivery, but to also close cases, minimize loss, and recover victim funds, wrote the Journal. Not unexpectedly, defense lawyers say that the program could prompt the reporting of meaningless cases and could stop employees from working through these issues internally, said the Journal.

Because of the broad nature of the new program, it is conceivable that informants will not always be corporate insiders, but those who could present a case that enables the SEC to locate a fraud, said the Journal, noting that this element of the program was likely put in place in response to the Madoff fiasco. In that case, Harry Markopolos had approached the SEC on a variety of occasions over several years with information pointing to Madoff’s massively growing Ponzi scam.

The Act was passed in response to the recent recession, which holds the record as the worst economic meltdown experienced by the US since the Great Depression; securities malfeasance played a large role in the downturn. Until Dodd-Frank was enacted, the SEC could only provide a whistleblower award for information regarding insider trading, limiting the award to a maximum of 10 percent of the recovered amount.

Now, whistleblowers can report fraud anonymously and employers are prohibited from firing, demoting, suspending, threatening, harassing, or discriminating against them. To be eligible, a whistleblower’s information must lead to a successful SEC or CFTC enforcement. Regulators will determine the extent of awards based on a number of factors, including the significance of the information provided and whistleblower assistance.

Another report in Forbes Magazine recommended that those seeking to take advantage of the new law consult with an attorney to ensure their rights are protected; all anonymous whistleblowers must be represented by an attorney.

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