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August 10, 2020

SEC Whistleblower Program: An Inside Look at the Makings of the Successful Investor Protection Program Now Under Fire

The SEC Whistleblower Protection and Rewards Program, one of the most successful programs established by the Dodd-Frank Act, is under threat following proposed changes by the SEC that would discourage whistleblowers from reporting illegal activity, which is costing hardworking American investors billions of dollars.
The proposal, if passed, would make significant amendments to the current program by allowing the SEC to cap whistleblower rewards and providing the agency with the power to subjectively determine whether a whistleblower’s information is original content. The SEC should not be creating disincentives for whistleblowers because it will result in more investors being ripped off and more crooks getting away with their illegal conduct.
In response to the proposal, Better Markets submitted a comment letter and recently released a comprehensive white paper on the SEC whistleblower program that provided background as well as analysis of the program and the proposed changes. In the document, we track and describe the recent activities of the program, which are not captured by any reports from the commission.
Lev Bagramian, senior securities policy advisor for Better Markets, was a member of the team under Sen. Chris Dodd, chairman of the Senate Banking Committee who was responsible for conceptualizing and developing the SEC whistleblower program. Mr. Bagramian discusses the development of the program, its ability to protect investors and concerns about recent proposals for change.
Q: What were the policy failures of the SEC that led to the whistleblower program being included in the Dodd-Frank Act?
A: There were several policy failures, but the trigger really was how the SEC mishandled a whistleblower case involving Bernie Madoff, who was later convicted of the country’s largest Ponzi scheme, which cost investors billions in losses. The whistleblower, Harry Markopolos, had gone to the SEC multiple times and provided them with detailed information about Madoff’s Ponzi scheme but the SEC did not take Mr. Markopolos seriously. In fact, in the years before 2008, the SEC had a reputation for being anti-whistleblower and their treatment of Mr. Markopolos certainly proved that. If the SEC had listened to Mr. Markopolos, Bernie Madoff could have been stopped much earlier and investors would have been saved billions of dollars and untold misery.
Another issue was that, although the SEC did previously have a tips and complaints line, it was very cumbersome and paper-based, and therefore not very effective. We studied this and other SEC failures during Dodd-Frank as we developed the new SEC whistleblower program.
Q: Is the whistleblower program mandated by the Dodd-Frank Act the first one at the SEC or have there been others?
A: The SEC did have a whistleblower program, along with its tips and complaints phone line, back in the 1970s but it focused solely on exposing insider trading issues. In the history of the program, the SEC only rewarded four whistleblowers, so it really wasn’t much of a program.
Certainly, it wasn’t as robust as the one the SEC has now which, since its 2011 launch, has attracted more than 33,300 high-quality tips, market intelligence and information from individuals in 123 countries. That has resulted in the SEC recovering nearly $2 billion from fraudsters who violated securities laws and SEC rules, including more than $1 billion in disgorgement of ill-gotten gains and interest. Of this $2 billion, nearly $750 million has been or is scheduled to be returned to investors.
Q: Did you review other programs to help inform your work on the SEC’s program?
A: One of the programs we looked at was the whistleblower program at the IRS. Initially, the program was not very successful because it lacked a minimum payment amount. However, when the IRS added a minimum payout amount, the effectiveness of the program increased substantially, and we noted that in our work for a successful SEC whistleblower program.
Q: What makes today’s SEC Whistleblower Program so successful and better than past whistleblower programs?
A: There are three features of the SEC’s whistleblower program that make the program investor- and whistleblower-friendly. First, the minimum reward payout of 10 percent gives whistleblowers a sense of security and predictability. This minimum payout ensures whistleblowers that they will receive 10 percent of the fine that the SEC collects from the wrongdoer. That’s a real incentive for a whistleblower to take on the risks of blowing the whistle, which can mean not only losing your job, but also being blackballed and finding it impossible to find another job. Second, the whistleblowers can take the SEC to court if they are denied a reward. This allows a whistleblower to have judicial review over the SEC’s decision. This accountability gives the SEC a powerful incentive to act consistent with the law and treat whistleblowers fairly. Third, whistleblowers can receive their reward from the investor protection fund, but if the fund is depleted, the whistleblowers would receive their respective awards from funds collected from the wrong-doer before they are distributed to investors. Those three features increase the protections of those who witness wrongdoing and are considering blowing the whistle.
Bottom line, the program has allowed the SEC to dramatically improve its ability to stop illegal conduct and protect investors. We issued our white paper to highlight the overall value and impact of the program, which has provided high-quality and relevant information to the SEC that it has used to protect and repay investors. We also wanted to highlight the danger to whistleblowers and investors if the SEC moves forward with its counterproductive and ill-advised proposals.


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