Will Paying Whistle-Blowers for Tips Lead to More SEC Crackdowns?

The feds know that money talks, but they may get more than they bargained for. According to the Financial Times (subscription required), the new Dodd-Frank financial reform act includes a provision to offer lucrative rewards to people who alert authorities to securities and other types of financial fraud. People who are able to provide information that leads to a successful SEC enforcement action will be entitled to 10% to 30% of any penalties collected over the $1 million mark, the newspaper said.

The possibility of a seven-figure reward "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," the Securities and Exchange Commission's Stephen Cohen told the FT.

Cohen says the SEC expects "a tremendous response" from Wall Street insiders. But at least one long-term observer of the system is skeptical.

Gaming the System?

"It's good to have people reporting some type of malfeasance, either corporate or government wrongdoing. You want to encourage people to report," says Dr. Stephen Martin, a clinical professor with the department of business ethics and legal studies at the University of Denver's Daniels College of Business.

But for Martin, who has also worked as a corporate compliance officer and federal prosecutor, providing incentives for such tip-offs can encourage frivolous or unjustified claims.

"The system might be played by people as well as lawyers who are working with whistle-blowers," he says, "to encourage them to go after some type of report, to try and get some kind of big settlement out of it. The real key is not the quantity of reporting [of fraud]. You want quality reporting so the government can use their resources in the best way possible, to really uncover what are the major crimes, frauds, issues -- not chasing down every possible lead, because they don't have the resources to do it."

And while it's "perfectly legitimate" for the Obama Administration to go after such fraud, Martin doubts if it will have any long-term effect on Wall Street's notoriously flexible ethics.

"I think it's something the government [must do] to show it's serious," he says. "I don't know that it really changes behavior on Wall Street. People make decisions based on short-term benefit and greed, financial incentive. They don't worry really about the downside, long-term impact. If they did, you wouldn't see these [financial collapses] happening, and you wouldn't see them repeat. I don't think most people who make these decisions in Wall Street are really worried about whether a whistleblower is going to get 10% or not. For them it doesn't really enter the calculus of when they're making those kinds of decisions. Of course, they'll tell you they weren't doing anything wrong to start with."

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T REXX

a certain big phone/cable comp. used sub contractors to dig ditches for wireing who couldn't speak english..that's how they all get around the system,,sub contractors..Let them take the fall

August 11 2010 at 7:20 AM Report abuse rate up rate down Reply
dterraman

blow the whistle on the central bank.....and keep the payoff....this one is for free

August 11 2010 at 6:03 AM Report abuse rate up rate down Reply
ATM

It ought to be clear, now that Wall Street has dumped toxic assets onto tax payers, that Wall Street ownes the US GOvernment- they will never be prosecuted- they own the government and Goldman has planted enough alumni in places to prevent any real governmental action against them.

We just witnessed the biggest land grab in jistory for private equity groups, and the largest defrauding of tax payers, to aid wall street for their faulty analysis and excessive risk taking. THey will never be prosecuted by the Government, because they ARE the GOVERNMENT.


If you want reform, take away their license to sell investments. Let the newcomers come in with a clean slate and then watch them like hawks - they are crooks and have defrauded all tax payers, and they are laughing while they have borrowed at 0.25% for the past two years - where else can people who run into bankruptcy obtain the lowest financing rates in history? Onl;y Wall Street.

August 11 2010 at 12:34 AM Report abuse rate up rate down Reply
ATM

Paying for tips should occur. Although, it did not occur when I provided the info back in 2001-2002 to provide specific evidence against a global investment bank that settled for $200+ million with Spitzer- I incurred $2500 out of my pocket and the state of New York ignored me once they got their info - what a crock - bottom line, they will give death threats, threaten your security, and threaten legal action to bury any whistle blower - the whistle blower ought to have incentive to provide info - it would force corporations to clean up their act and especially investment banks, that defrauded investors with false research, misleading risk analysis based on investment banking fees, and phone demand for stocks, based on non-disclosed relqtionships with insider fund groups and hedge fund managers. The fraud will continue - just boycott wall street firms.

August 11 2010 at 12:28 AM Report abuse rate up rate down Reply
Welcome

99% government employees who are told to commit fraud would commit fraud.
We have a system where anyone who challenges any order from Management, regardless of policies, procedures and rules is retaliated. Employees shut up and look the other way because they are threatened that if they come forward, they will lose their job.
Many whistleblowers report WFA after they retire or leave the job. Human Resources and Corporate Attorneys protect Waste, Fraud and Abuse in government and will punish anyone who comes forward. The only way to have whisleblowers to come forward is not a cash reward, but protection against retaliation. The Government does not protect whistleblowers. It informs employees that if they see Fraud, they are responsible to report it to Management. What they dont tell the employee is that he/she will then become a target for abuse, harassment and termination or in the next lay off. Every employee knows that reporting WFA will lead to the place in the unemployment line.

August 10 2010 at 9:46 PM Report abuse +1 rate up rate down Reply
missmymind2353

IF IT'S GOING TO HELP SAVE THE COUNTRY, SO BE. PROBLEM IS CONVICTING SOMEONE IN A COURT OF LAW.

August 10 2010 at 7:44 PM Report abuse rate up rate down Reply
thoubelive1

The government knows about how North korea has been given a choice by south korea :surrender or give leader to south

August 10 2010 at 7:32 PM Report abuse rate up rate down Reply
spongeworthy06

Why has the govt refused to talk about any action taken against the incompetent SEC?

August 10 2010 at 7:22 PM Report abuse +2 rate up rate down Reply
Robert DelRaso

I wish whistle blowing was mandatory - even better a law for ALL STATES!

We really need whistle blowing to continue on. Too much corruption goes on.

I DEFINITELY WOULD LIKE TO SEE THIS HAPPEN AT THE WHITE HOUSE - WHISTLE BLOWING ON A POLIIAN WOULD BE EXCELLENT!!!

HOPE IT REALLY DOES HAPPEN!

August 10 2010 at 6:22 PM Report abuse +3 rate up rate down Reply
mimsysc

Wow, the sec is going to stop spending the day on porn??? Who knew?

August 10 2010 at 4:24 PM Report abuse +2 rate up rate down Reply