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June 16, 2014

William D Cohan on Wall Street whistleblowers

Whistleblowing is not for the faint-hearted – and especially not on Wall Street.

“On Wall Street, as every­one now knows, wrong­doing by bankers, traders and executives led to disaster in 2008 after they were rewarded for taking risks with other people’s money. Leading bankers and traders were motivated – by the hope of getting large bonuses – to package up mortgages into securities and then sell them off as AAA-rated investments all over the world. This happened even though one damning email after another makes clear they knew some of the mortgages would probably default and that the securities should never have been sold in the first place. But some people did try to blow the whistle – the problem is they were not listened to. Worse than that, they were treated in a way that would discourage anyone from following in their footsteps.

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“As a further harbinger of danger, Edwards points to the secret $14m award the SEC made recently to an anonymous whistleblower at an unnamed financial institution. The SEC didn’t even reveal the nature of the wrongdoing the whistleblower uncovered, so both the company’s shareholders and the public remain in the dark about what was specifically uncovered and where. All that is known is that the SEC did bring a major enforcement action against a financial institution that resulted in a large penalty and the corresponding $14m award to the whistleblower. “If you allow this – that the award can be made without naming the company or the type of fraud – it’s really nothing more than hush money,” she says. “How is it different? The SEC of course defends itself by saying, ‘We’re not revealing the name of the company or the nature of the fraud because we’re protecting the identity of the whistleblower.’ But the SEC is a disclosure agency, so they should have to establish that [not revealing the information] is really required in order to protect the whistleblower, if they’re going to in a sense subvert their mission . . . They really are not able to justify why they are silent about the name of the company or the nature of the fraud.”

“She believes the SEC’s failure to release publicly the details of the $14m reward sends precisely the wrong message. ‘The one effect obviously it has is that it protects the reputation of the fraudulent corporation,’ she adds. ‘[Reputational damage] is probably the main deterrent in cases like this, since there have been really no prosecutions of senior managers for fraud over a period of time on Wall Street. If even the name of the company is withheld by the SEC when it makes a bounty award, there’s no reputational risk, either. What’s the downside of trying to get away with it?’

“Dennis Kelleher, a former attorney at Skadden, Arps and now the CEO of Better Markets, Inc, a Washington-based non-profit organisation that is a leading advocate for tough banking regulations, says that the architects of the Dodd-Frank law – of whom he was one – were trying to balance the need for disclosure about financial wrongdoing with provisions to protect the whistleblower from public humiliation and retaliation. ‘The most important thing is to incentivise whistleblowers to come forward, and all the incentives previously were dramatically stacked against whistleblowers, and it’s still an incredibly high-risk action,’ he says. Although critics remain, he thinks the new whistleblower provisions in Dodd-Frank strike the right balance. ‘I would be significantly more likely to encourage a whistleblower post-Dodd-Frank than pre-Dodd-Frank,’ he says.

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Read full Financial Times article here

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