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October 23, 2019

Good News: SEC Does Not Weaken Protections for Whistleblowers

Whistleblowers perform a vital public service by revealing fraudulent and illegal conduct, usually at great personal risk to their jobs, livelihoods and reputations.

Before the 2008 crash, the SEC was derelict in many of its duties, including in particular in its repeated failure to listen to and act on information from whistleblowers. The most egregious example was the decades-long $65 billion Ponzi scheme of Bernie Madoff. A whistleblower repeatedly went to the SEC and provided detailed evidence of Madoff’s scheme, but the SEC literally laughed at him and did nothing, year-after-year as Madoff ripped off hundreds-and-hundreds of more victims.

Congress was disgusted by the SEC’s indefensible behavior and included provisions in the Dodd Frank law that required the SEC to incentivize, reward and protect whistleblowers. The SEC aggressively opposed many of these common-sense requirements.

Almost ten years old now, the SEC’s whistleblower program has been wildly successful. By appropriately rewarding and protecting whistleblowers who have provided the SEC with original information about fraudulent and illegal conduct, more than $1.5 billion has been returned to harmed investors. Because whistleblowers only get paid if they provide decisive information that the SEC did not otherwise have and because they are only paid from monies recovered from the lawbreakers, this program protects investors, markets and the financial system at no cost to the taxpayer. It’s a win-win-win.

Yet despite all that, the SEC has proposed changes to the program that risk snatching defeat from the jaws of victory. As we spelled out in a comment letter opposing those changes, the move would violate the law and the SEC would needlessly put investors at risk, disincentivize whistleblowers, and increase the likelihood that future Bernie Madoffs will go unreported and undetected.

Nevertheless, as recently as last Friday, the “SEC was poised to finalize” the changes this week. Until, as PoliticoPro reported late last Friday, a torrent of criticism from elected officials and the media, which recognized the value of whistleblowers, caused the SEC to delay their meeting to adopt the changes.

We hope that — even after the headlines highlighting the critical importance of whistleblowers fade — the SEC reconsiders its groundless and unwise decision to weaken the whistleblower program and kills the proposed rule. It should be proud of the achievements of its whistleblower program and strengthen it.



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