Opinion: Who Truly Benefits from SEC Whistleblowers?

By Publius

On May 5, 2023, the Securities and Exchange Commission announced that it had given its largest whistleblower award ever, nearly $279 million, to an unnamed individual whose “information and assistance led to the successful enforcement of SEC and related actions,” according to the SEC’s press release.

In that same press release, Gurbir S. Grewal, director of the SEC’s Division of Enforcement, said, “The size of today’s reward – the highest in our program’s history – not only incentivizes whistleblowers to come forward with accurate information about potential securities law violations, but also reflects the tremendous success of our whistleblower program.”

Under the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), whistleblowers are entitled to a reward of between 10% and 30% of the monetary sanctions collected. This means that the whistleblower may have caught someone who had to pay between $930 million and $2.7 billion to the SEC. This award is more than double the previous highest total of $114 million awarded in October 2020. The whistleblower program has awarded over $1 billion since its inception in 2011.

Under the Dodd-Frank Act, whistleblowers are kept anonymous, so we may never know who this person was or what case they were involved in. The SEC proposes that anonymity will encourage others to speak up when they witness bad behavior, and, while I certainly support the protection of investors, I question the program’s lack of transparency, especially from an agency that demands so much transparency of those who operate under its authority.

As those of us who work in the financial services industry are well aware, the SEC requires full transparency from us every step of the way, from simple brochures to long and complicated legal documents. In whistleblowing cases, however, the SEC does not have to reveal the whistleblower’s name, the companies involved in any fraud or bad actions, nor does it reveal the law firms involved who received money for their clients. It does not even report its office’s annual budget.

The SEC seems to be proud of the fact that it has paid out more than $1 billion in awards, money that may have otherwise benefitted taxpayers, but without more transparency, it is impossible to discern what crimes are uncovered and if the payments are justified. One thing that does seem to be clear, however, is that the whistleblower program is another SEC maze of rules and regulations, which in the end benefits attorneys, many of whom are former cronies of the SEC.

According to Bloomberg Law, attorneys who specialize in whistleblower cases typically work on contingency fees of 35% to 40% and the cases may be so complex and specialized that the same attorneys receive the majority of the cases. For example, Jordan Thomas, a former SEC assistant chief litigation counsel helped to write the rules of the whistleblower program. Days before the program went online, he left to begin his own whistleblower practice. His clients received more than $152 million of the first $600 million awarded by the program.

Adding to the complexity of the issue, one must also consider the potential for graft and the perverse incentive structures inherent within this system. It is concerning that a public servant, such as Thomas, who is tasked with regulating the financial sector could contribute to creating a program like this, only to transition into private practice and reap substantial financial rewards from the very program. This treads on very dubious ethical grounds and presents a compelling case for potential conflicts of interest, posing questions about the integrity of such practices.

The potential for personal gain in such situations threatens to overshadow the original intent of the program, protecting investors and ensuring fair practices in the financial sector. Therefore, examining potential graft and ethical considerations surrounding the whistleblowing program is urgently needed. Those in positions of power must be held to the highest standards of transparency, integrity and public service.

Government service has traditionally been viewed as a duty and a commitment to uphold public interest, not as a stepping-stone towards personal enrichment. Yet, the design of the SEC’s whistleblower program seems to provide an opportunity for exactly that type of anonymous graft due to cronyism and lack of oversight from Congress. The public deserves to know that the systems designed to protect them are not being used for personal gain, and those benefiting disproportionately from such programs should face appropriate scrutiny.

Please let me know your thoughts on the SEC’s recent payouts. Email me at Publius.Connect@gmail.com and visit the website www.publiusconnect.com. We must stop the hypocrisy of the program and find an alternative solution that truly protects investors and our industry.

Editor’s note: The author of the preceding article is a chief executive officer in the financial services industry, who, for fairly obvious reasons, elects to share his thoughts on this subject anonymously. The DI Wire does not normally publish articles that do not disclose the author. In this instance, however, we have allowed it given the nature of the piece, the importance of open discussion and varying viewpoints, and the fact that we have personally confirmed Publius’ identity.

The views and opinions expressed in the article are those of the author and do not necessarily reflect the views of The DI Wire.

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