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Ultimate Resource On Government And Corporate Whistleblowers (#GotBitcoin)

One of the tipsters received $37 million, the third-largest award in the history of the agency’s whistleblower program. Ultimate Resource On Government And Corporate Whistleblowers (#GotBitcoin)

Two whistleblowers received a total of $50 million for providing information that helped the Securities and Exchange Commission pursue a case of corporate wrongdoing, the agency said Tuesday.

The case is related to a December 2015 settlement with JPMorgan Chase & Co., according to law firm Labaton Sucharow LLP, which represented one of the whistleblowers. In the case, the New York-based bank agreed to pay $307 million to settle charges it failed to disclose conflicts of interest to its wealth management customers.

The agency granted $37 million to one whistleblower—the third-biggest individual whistleblower award granted by the SEC—and $13 million to the other.

The SEC didn’t disclose details of the case in a news release or provide identifying details about the whistleblowers.

One tipster received $50 million in March, and another received $39 million in September, according to the SEC.

Updated: 6-1-2020

Tips To SEC Surge As Working From Home Emboldens Whistleblowers

Over 4,000 reports of potential wrongdoing poured in from mid-March to mid-May. ‘These people have more time on their hands,’ a lawyer says.

A new side effect of remote working, layoffs and furloughs stemming from the coronavirus pandemic: more whistleblowers.

The U.S. Securities and Exchange Commission received about 4,000 tips, complaints and referrals of possible corporate wrongdoings from mid-March to mid-May, said Steven Peikin, co-director of the SEC’s enforcement division. That number is 35% higher than it was in the same period last year. The tips have led to hundreds of new investigations—“many Covid-19 related, but many in other traditional areas,” Mr. Peikin said in a recent speech.

Lawyers chalk up the increase to the fact that many would-be tipsters are working from the privacy of their home, out of view of snooping colleagues and managers and thus safer from being exposed as whistleblowers. Tipsters might also feel less concerned about retaliation if they are not interacting regularly with their managers, lawyers say; if they have been furloughed or laid off, they might feel even less so.

“These people have more time on their hands,” said Christopher Connors, a managing attorney at the Connors Law Group in Chicago, whose team has taken on at least seven new whistleblower clients since the end of February—a big increase for the firm. “They don’t have to go see their bosses, and they may feel a bit more emboldened to report,” he said.

When employees face pressure to meet goals during difficult financial times, the likelihood of wrongdoing can increase. Anticorruption organizations have warned that the current economic tumble could create an environment ripe for bribery.

In recent months, Mr. Connors’ clients have raised red flags on possible foreign corruption in health care, pharmaceuticals and technology to the SEC, the Justice Department and the Federal Bureau of Investigation.

Stuart Meissner, an attorney at Meissner Associates in New York, said some of the whistleblower cases brought to him are connected to the pandemic, such as small, public companies promoting home-testing kits that were allegedly fictional. Others presented more typical infractions such as money-laundering, insider trading, accounting gambits and bankruptcy fraud, unrelated to the pandemic, he said.

The economic spiral following coronavirus lockdowns is likely a factor in the rise in calls and reports he has received in recent weeks, he said.

“This caused companies to do things—whether they worry about survival or failures—that often lead to people doing wrong,” said Mr. Meissner, who said he has filed five complaints on behalf of clients to the SEC.

A record number of whistleblower awards from the SEC this year may also have incentivized more people to report wrongdoing, said Rebecca Katz, who leads the whistleblower litigation team at Motley Rice LLC in New York.

Under SEC rules, a whistleblower can get between 10% and 30% of the fines levied in SEC civil enforcement actions that result from their tip, assuming the fines total more than $1 million.

Over $64 million was paid to whistleblowers in the seven months of the fiscal year that began in October—more than the SEC has disbursed in any full year except 2018, according to an analysis of agency records. Most of that total was awarded just since March 23.

Publicity of those awards might have tempted tipsters to come forward, Ms. Katz said.

Updated: 9-1-2020

SEC Cancels Vote On Controversial Whistleblower Program Reforms

The U.S. Securities and Exchange Commission has twice canceled a vote on a proposal that could allow it to curtail the largest whistleblower awards.

The U.S. Securities and Exchange Commission has called off a second attempt to vote on long-pending amendments to its whistleblower award program—a sign the agency’s commissioners still haven’t reached a consensus on a final version of the rules.

The amendments, in the works for more than two years, would give the SEC the ability to curtail the largest whistleblower awards and process some award claims more quickly. A vote on the amendments scheduled for Wednesday morning was canceled Tuesday.

“In light of a combination of factors, including holiday schedules and other work demands, we will reschedule the meeting for a future date,” an SEC spokeswoman said. One of the SEC’s Democratic commissioners, Caroline Crenshaw, only began her tenure on Aug. 17.

The SEC previously called off another vote on the amendments that was scheduled for last October.

The regulator unveiled the proposed changes in 2018. Under the whistleblower program, tipsters who provide information that leads to a successful enforcement action against a company can be eligible for an award of between 10% and 30% of the overall monetary sanction.

Whistleblower advocates have supported changes that the SEC says would make it more efficient in processing claims, including one that would allow it to ban tipsters who provide false information or make repeated, frivolous claims.

But they have mounted a vocal opposition to several other amendments, including one that would allow the SEC to downsize awards for information that leads to fines of $100 million or more, simply because of their size. The amendment would disincentivize the highest-paid Wall Street insiders from providing information, whistleblower lawyers have said.

Whistleblower advocates have also criticized new guidance that could restrict the type of information whistleblowers can be rewarded for providing, and a new rule that disqualifies tipsters who don’t submit a special form before contacting the SEC.

Stephen Kohn, a whistleblower lawyer and a founder of the National Whistleblower Center, said the commission shouldn’t adopt changes that would undermine the program’s success. In an award announcement on Tuesday, the SEC’s whistleblower office said the agency had awarded approximately $510 million to 92 individuals since its first award in 2012.

“There’s an old saying, ‘If it ain’t broke, don’t fix it’,” Mr. Kohn said. “The success of the program should carry the day and I think those successes are weighing heavily on those that may want to weaken it.”

After the first vote was canceled last year, SEC Chairman Jay Clayton issued a statement defending the proposed amendments, including the discretion to limit large awards, which whistleblower advocates and others had referred to as a “cap.”

The proposed provision wasn’t a cap, Mr. Clayton said, adding that he had taken on board comments by the whistleblower bar about how the amendment had raised uncertainty over the SEC’s commitment to the program.



Updated: 9-24-2020

SEC Votes To Amend Whistleblower-Award Rules

Regulator says new rules would bring efficiency and transparency to how awards are given out.

The U.S. Securities and Exchange Commission has approved amendments to the rules governing monetary awards made to whistleblowers who voluntarily report potential wrongdoing.

Commissioners voted 3-2 Wednesday to approve the amendments, with Democratic members Allison Herren Lee and Caroline Crenshaw opposing.

The long-anticipated vote, which clarifies the regulator’s discretion in determining award amounts, could change how the SEC pays out some of its largest whistleblower awards, lawyers representing whistleblowers said.

The regulator said the new rules would add clarity to its decade-old whistleblower program and bring efficiency and transparency to the award determination process, according to a statement published Wednesday.

“These amendments would allow us to devote more time and resources to the processing of meritorious award claims,” Jane Norberg, chief of the SEC’s Office of the Whistleblower, said during a meeting for the vote on Wednesday.

The SEC’s whistleblower program was enacted in 2011 as part of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act. Under the program, a whistleblower can receive an award totaling between 10% and 30% of the fines levied in SEC civil enforcement actions that result from their tip, assuming the fines total more than $1 million. The SEC has awarded about $523 million to 97 individuals since the program began.

The commission analyzes a range of factors in determining an award amount. Some factors—such as whether the whistleblower provided firsthand information and whether a tipster assisted in an investigation—can lead to bigger awards. The SEC also weighs discounting factors, such as whether tipsters themselves are culpable in the alleged violations.

The new rules would allow the SEC to streamline the award evaluation process, particularly for certain awards of $5 million or less. The adopted amendments provide a presumption of a statutory maximum award percentage at 30% for awards that are estimated to be $5 million or less, assuming that there were no negative factors.

The SEC, which has faced complaints that it was slow to issue awards, said the move would help the agency process whistleblower claims faster and issue awards more efficiently, considering that about 75% of the awards given out in the whistleblower program have been $5 million or less.

For awards estimated to be more than $5 million, the SEC would analyze more deeply positive and negative factors in determining a final award amount, the agency said. If there are no negative factors, a tipster can expect to receive an award that is in the top third of the range, according to the final rules published Wednesday.

After considering comments from the public, the SEC said it decided not to adopt a proposed amendment that sought the authority to reduce rewards in cases involving monetary penalties of at least $100 million.

The proposal argued that the whistleblower rules at the time “do not expressly permit the commission to consider whether a relatively small or exceedingly large potential payout is appropriate to advance the program’s goals of rewarding whistleblowers and incentivizing future whistleblowers.”

The proposal might have dissuaded some would-be tipsters from reporting major securities-law violations, attorneys representing whistleblowers said when the rules were proposed in 2018.

The rule that was approved, however, “is even more problematic than the proposal,” Ms. Lee, one of the commissioners who opposed the rule, said in the meeting Wednesday.

The new rule says the SEC already “has the authority to consider the dollar amount when applying the award criteria.”

The two commissioners who opposed the new rules questioned the pre-existence of this discretion. Ms. Lee said this would create different outcomes for tipsters in cases where the only difference is the size of the fine collected by the SEC.

“Importantly, the rule will not require the commission to tell whistleblowers if or when we have exercised this discretion, that there will be no transparency and no accountability,” Ms. Lee said during the meeting.

While acknowledging the efforts by the SEC to improve the speed in issuing payouts to tipsters, lawyers representing whistleblowers are concerned about how the SEC would exercise that discretion.

“I think this is particularly problematic,” Erika Kelton, a partner at Phillips & Cohen LLP, said, noting that the consideration of the size of the payouts wasn’t a factor that Congress adopted when it enacted the law in 2010. She said her clients and potential whistleblowers are concerned about the new rules. “The rules do not bring clarity to the awards process and actually bring more uncertainty.”

“The lack of transparency as to how they would apply that discretion is troubling and could dissuade whistleblowers from coming forward,” said Jason Zuckerman, principal of Zuckerman Law in Washington.

Updated: 9-28-2020

Whistleblower In Orthofix Bribery Case Awarded $1.8 Million

SEC grants award more than three years after Texas-based medical-device company agreed to settle bribery accusations.

The U.S. Securities and Exchange Commission awarded $1.8 million to a whistleblower whose tip helped the regulator conduct an investigation that led to bribery charges against Orthofix International NV.

The regulator, which announced the award Friday, didn’t name the company nor did it identify the tipster, but lawyers representing the whistleblower said the award was connected to a 2017 bribery settlement involving Orthofix, a Lewisville, Texas, medical-device company.

The tipster, a doctor in Brazil, provided information to the SEC about an alleged kickback scheme operated by an Orthofix subsidiary in that country, according to the lawyers, Christopher Connors of Connors Law Group LLC and Andy Rickman of Rickman Law Group LLP.

The company, now called Orthofix Medical Inc., “self-reported to the SEC about these matters and cooperated fully with the government during the course of the investigations,” a spokeswoman said.

Orthofix in 2017 agreed to admit wrongdoing and pay more than $14 million to settle accusations that it improperly booked revenue in some instances and made improper payments to doctors at government-owned hospitals in Brazil from 2011 to 2013, the SEC said at the time.

As part of the total, the company agreed to pay more than $6 million to settle allegations that it violated the Foreign Corrupt Practices Act, a U.S. antibribery law that prohibits the use of bribes to foreign officials to win or keep business. Orthofix also agreed to pay an $8.25 million penalty for allegedly failing to maintain an adequate system of internal accounting controls.

The tipster first reported the potential wrongdoing to Orthofix’s executives, general counsel and auditors before providing the tip to the SEC in 2014, according to the lawyers.

The SEC, which has faced complaints that it has been slow to issue awards, this week approved amendments to whistleblower-award rules that it said would make the process more efficient and transparent.

Under the program, whistleblowers are entitled to between 10% and 30% of monetary penalties when their tips result in a successful enforcement action and when the monetary penalties total more than $1 million.

The rules amended this week were also designed to raise percentages for certain awards of $5 million or less.

The SEC initially set the award percentage in the Orthofix case at 15%, according to the lawyers. But the regulator increased the percentage this week to 30% of the $6 million FCPA settlement payment, consistent with the updated rules, Messrs. Connors and Rickman said.

The award reflected factors the SEC considers in determining award amounts, with an eye toward rewarding whistleblowers with the highest possible amount based on the circumstances of their claims, the agency said.

The amended rules are technically not in effect yet. They will become effective 30 days after they are published in the Federal Register.

The SEC on Friday issued a separate award of $750,000 to a tipster that also reported securities violations abroad. The regulator didn’t identify the whistleblower or the case connected to the award.

The regulator has awarded about $525 million to 99 people since the program began in 2011 as part of the 2010 Dodd-Frank Act.

Updated: 10-23-2020

SEC Whistleblower Program Awards Tipster A Record $114 Million

The whistleblower, who was not identified, gave the SEC and another agency ‘substantial, ongoing assistance’ critical to bringing successful enforcement actions.

The U.S. Securities and Exchange Commission’s whistleblower program on Thursday awarded more than $114 million—a record amount—to a person whose information helped it and another agency bring successful enforcement actions against a company, the agency said.

In keeping with policy, the SEC didn’t identify the whistleblower, the company or the case the award is connected to.

The award is a combination of roughly $52 million from the SEC case and another $62 million from a related enforcement action brought by the other agency alleging similar misconduct to that in the SEC case, according to the SEC.

A whistleblower can receive an award of between 10% and 30% of the fines collected in SEC civil enforcement actions and related actions from other enforcement agencies resulting from their tip, assuming the SEC collects more than $1 million.

“After repeatedly reporting concerns internally, and despite personal and professional hardships, the whistleblower alerted the SEC and the other agency of the wrongdoing and provided substantial, ongoing assistance that proved critical to the success of the actions,” Jane Norberg, chief of the SEC’s Office of the Whistleblower, said in a statement Thursday.

The award set a record for the SEC’s whistleblower program, the agency said. The next largest was a nearly $50 million award to an individual in June. Two individuals also shared a nearly $50 million award in 2018.

“This may be the largest award to a whistleblower in any whistleblower program,” Erika Kelton, a partner at law firm Phillips & Cohen LLP who represents tipsters, said in an email.

The record award comes as the SEC adopted amendments to its whistleblower program rules last month. The SEC, as part of the vote last month, clarified that it would consider the dollar amount of the potential payout as a factor in deciding the award.

The SEC’s whistleblower program, enacted as part of the 2010 Dodd-Frank Act, has awarded about $676 million to 108 individuals since it began in 2011.

Updated: 12-08-2020

Defense Bill Proposes Anti-Money-Laundering Whistleblower Program

The proposed rules would offer an award to those who report possible violations of anti-money-laundering laws to the Treasury or the Justice Department that lead to successful enforcement.

A new whistleblower reward program incentivizing the reporting of potential violations of anti-money-laundering laws would be established as part of an annual defense-spending bill that is poised to clear Congress.

The program would offer awards to tipsters who voluntarily provide original information to the Treasury Department or the Justice Department on possible violations of the Bank Secrecy Act. Awards would be granted in cases where the tips lead to successful enforcement actions and the monetary sanctions exceed $1 million.

Congress is expected to vote as soon as this week on the National Defense Authorization Act for the 2021 fiscal year.

Under the proposed rules, a tipster or joint tipsters can receive up to 30% of the monetary penalties collected in an enforcement action brought by the Treasury or the attorney general and from related actions.

The amount would be determined by factors such as the significance of the information and the degree of assistance from the tipster, according to the defense bill. The rules would also provide tipsters protection against retaliation from employers, including demotion, suspension and industry blacklisting.

The program, if enacted, would be an expansion of current incentives, observers said. Existing regulations permit the Treasury, at its discretion, to pay a reward of either $150,000 or 25% of the fine or penalty, whichever is less. Proponents of a new whistleblower program have said the existing incentives aren’t strong enough and haven’t attracted much attention.

A spokesman for the Treasury Department declined to comment.

The whistleblower program is part of the bill’s provision to improve efforts in communications and oversight in combating money laundering and terrorism financing. The bill also includes beneficial-ownership rules requiring companies in the U.S. to register their true owners.

The proposed cash-for-tips program would be a critical tool to identify and combat money laundering, said Jason Zuckerman, a lawyer at Zuckerman Law who represents whistleblowers. He said the proposed program rules are similar to those governing the Securities and Exchange Commission’s whistleblower program, which was created by the Dodd-Frank Act.

The SEC whistleblower program has awarded at least $731 million to 123 individuals. Information provided by tipsters has helped the securities regulator recover more than $2.7 billion in total monetary sanctions from enforcement actions between 2011 and the end of September, according to the SEC Whistleblower Office’s annual report to Congress.

The proposed anti-money-laundering whistleblower program could close the enforcement gaps left by existing whistleblower programs at various agencies, including those of the SEC and Commodity Futures Trading Commission, which may have limited jurisdiction over potential money laundering violations.

“Often, people aware of money laundering might have learned about it in the course of interaction with organizations that are involved in financial crimes, and stepping forward to report it is a big deal,” Mr. Zuckerman said.

Updated: 12-10-2020

Whistleblowers Worry SEC’s Interpretation of ‘Independent Analysis’ Could Discourage Tipsters

New guidance from the regulator states that a tip must offer insight ‘beyond what would be reasonably apparent’ from publicly available information.

A new Securities and Exchange Commission rule interpretation threatens to weaken the incentive for external whistleblowers to come forward with details about potential corporate fraud, tipsters and lawyers who represent them said.

The clarification, which goes into effect Monday, states that a whistleblower’s tip has to offer insight “beyond what would be reasonably apparent” to the agency from publicly available information. That worries whistleblower lawyers and tipsters who have received awards.

They fear the clarification could make it harder for tipsters from outside of a company to be awarded in a fast-growing program where the odds of getting a payout are already long.

Anyone with original information of potential financial wrongdoing can submit a tip to the SEC. The cash-for-tips program has attracted tips from company insiders as well as outside experts who scrutinize corporate filings, such as forensic accountants and Wall Street analysts.

The original rules define independent analysis as examination or evaluation of information that may be public, done by a person or group that reveals information that isn’t generally known or available.

In its new guidance, the agency said it would consider whether a whistleblower’s conclusion derives from multiple sources, “including sources that are not readily identified and accessed by a member of the public without specialized knowledge, unusual effort, or substantial cost.” The sources must also collectively “raise a strong inference of a potential securities law violation that is not reasonably inferable” from any single source.

Whistleblowers and their attorneys are concerned that the interpretation could give the commission greater scope to reject payouts and raise the bar for potential awards so high that some tipsters might be discouraged from coming forward.

“It’s a sliding scale and it’s so subjective, and I think that’s what is worrisome to me,” said Harry Markopolos, a former derivatives portfolio manager who began alerting regulators to Bernard Madoff’s multibillion-dollar Ponzi scheme years before it was publicly exposed and an advocate for creating the SEC’s whistleblower program.

Mr. Markopolos said, however, he understood why the SEC would adopt stricter language, as third-party evaluation is highly specialized work.

“It’s a higher burden of proof and it should be,” he said. Mr. Markopolos, who since Mr. Madoff’s arrest has pursued cases of alleged corporate wrongdoing and submitted at least five tips based on independent analysis to the SEC, said he doesn’t think the clarification will affect his own efforts to win an award.

The SEC program has grown rapidly since it began in 2011. The program, created by the Dodd-Frank Act, has given out at least $728 million to 118 individuals. It set a new record in the fiscal year ended Sept. 30 with 6,911 tips, and has received an average of about 4,400 annually over its nine-year history, according to a Wall Street Journal analysis of SEC data.

The odds of winning an award for somebody submitting a tip to the program were less than one-third of 1%, according to law firm Labaton Sucharow LLP.

Nine whistleblower awards have been given to individuals for providing independent analysis that led to successful enforcement actions, according to the SEC data.

Jane Norberg, chief of the SEC’s whistleblower office, said the agency recognized the “incredibly valuable” independent analysis by outsiders that helped it bring enforcement actions against companies.

“Simply providing a publicly available document is not enough,” Ms. Norberg said. “It needs to be more. It needs to reveal insight into the securities law violation that isn’t evident from the face of that public document.”

An SEC spokeswoman said “requiring additional analysis to publicly available information in order to qualify for an award is how the commission has been approaching this issue for years.”

Two Democratic commissioners who dissented during the vote for the rule amendments in September called the clarification problematic. “I worry this guidance will inadvertently impact the perception of the type of information the commission considers valuable,” Commissioner Caroline Crenshaw said at the time.

Ms. Crenshaw argued that the focus for the SEC should instead be on the quality of the information and the analysis provided by the tipster. “The amount of data and information available to the commission is extensive,” she said at the time of the vote.

“Given that, we should not focus on whether the staff could have inferred the information from what was provided, but whether the staff actually did infer the information prior to getting the submission.”

For one of the cases that Mr. Markopolos submitted to the SEC—concerning what he suspected to be a Ponzi scheme—agency staff told him the case wasn’t robust enough to meet the requirements of an independent analysis. Mr. Markopolos hired an expert in the relevant area to address the problem.

“You have to go down a lot of paths and a lot of blind paths, without success, to come out with something fruitful for a third-party independent analysis that qualifies under this program,” Mr. Markopolos said. “It’s a lot of work. Cases aren’t done in hours or days. The cases are done in months and seasons.”

The SEC hasn’t disclosed its decisions regarding the tips that Mr. Markopolos has submitted to the SEC based on independent analysis, in keeping with its policy. He has received an award from the SEC and filed at least two applications for claims of awards, he said. The SEC spokeswoman declined to comment.

Edward Siedle, a former SEC attorney who won a $48 million SEC whistleblower award in 2017 for helping provide information leading to an enforcement action against JPMorgan Chase & Co. for failing to disclose conflicts of interest, said staffing and resource limitations at the SEC mean some outside experts are better equipped to do the kind of forensic analysis that is often required to uncover wrongdoing.

Mr. Siedle, who now runs his own law office representing whistleblowers and has submitted about 20 tips to the SEC based on independent analysis over the years, said he imagined the SEC was inundated with possibly frivolous claims. But limiting awards could discourage people from coming forward, he said.

“The program is so incredibly powerful, so incredibly profitable to the SEC, so incredibly beneficial to investors, that this is not an area where you need to be concerned about cutting back on the input you’re getting from the public,” Mr. Siedle said.

SEC Whistleblower Program Sets New Records In 2020

The office paid out around $175 million in awards to 39 tipsters in the fiscal year ended in September, and received a record number—around 6,900—of tips.

The U.S. Securities and Exchange Commission’s whistleblower program set annual records, awarding more money to more tipsters in fiscal 2020 than in any other year of the program’s history.

The volume follows efforts by the regulator to speed up payouts to whistleblowers after years of complaints that it was slow to dole out awards.

“We are sending the message to people that if you bring us high-quality tips, we’re going to dig into them, and pursue actions with vigor, and then we’re going to get you a whistleblower award promptly,” SEC Chairman Jay Clayton said in an interview last Thursday.

On Monday, Mr. Clayton announced that he plans to step down at the end of this year.

The SEC’s Office of the Whistleblower issued about $175 million to 39 individuals in the fiscal year ended Sept. 30, according to the office’s annual report to Congress, which was published Monday. The total dollar amount was 4% higher than the previous record—about $168 million in fiscal 2018—and almost three times the total issued in fiscal 2019, when $60 million was distributed to eight individuals.

In the most recent fiscal year, the whistleblower’s office also issued a record 315 preliminary determinations of award claims detailing whether a tipster’s claim should be approved or denied, which is 96% more than the previous record, set in 2014—when the majority of the preliminary orders were denials issued to one claimant, according to the report.

The SEC started to review its claim-evaluation process with the goal of making it more efficient about a year and a half ago, as the regulator proposed changes to whistleblower program rules, according to Mr. Clayton.

Amendments to the whistleblower program rules, approved in September and designed to make the award process more efficient, go into effect next month.

The regulator has added staff to the program and used resources from across the SEC enforcement division, said Stephanie Avakian, director of the division, which oversees the whistleblower program.

The office now has 13 attorneys, plus three more on temporary detail, and a support staff that includes an accountant, paralegals, analysts and law clerks, according to the report. That is up from eight attorneys, three paralegals and a support specialist in 2012.

“The program, like everything else, needs to adapt over time,” Ms. Avakian said. “It’s really paid massive dividends, and I expect those dividends to only increase as time goes by.”

The SEC also received a record number of about 6,900 whistleblower tips this year—the most for any year since the program began in 2011, according to the report.

Lawyers representing whistleblowers have chalked up the increase in part to the pandemic, pointing to the fact that many would-be tipsters are working from the privacy of their home, out of view of snooping colleagues and managers and thus safer from being exposed as whistleblowers.

“There’s probably been a fair amount of uptick in things to complain about in light of Covid,” said Ms. Avakian, the enforcement chief, noting that they can’t be certain what precisely contributed to the increase and there could be multiple reasons.

Under the program, which was enacted as part of the 2010 Dodd-Frank Act, a whistleblower can receive an award totaling between 10% and 30% of the fines levied in SEC civil enforcement actions that result from their tip, assuming the fines total more than $1 million.

By Monday, the SEC had awarded about $720 million to 113 individuals since the program began.

Updated: 4-19-2021

SEC Whistleblower Program Shows Value of Speaking Up, Departing Chief Says

Jane Norberg, who has served as chief of the whistleblower office since 2016, is leaving the agency on Friday.

The departing chief of the Securities and Exchange Commission’s whistleblower office, who helped lead the unit from its infancy, hopes the growth of the cash-for-tips program will help show the true value of whistleblowers.

Jane Norberg, who has served as chief of the whistleblower office since 2016, is leaving the agency after nine years. Her last day was Friday.

“One thing I hope the program has accomplished is that whistleblowing is becoming more accepted as the fabric of normalcy,” Ms. Norberg said in an interview this week, noting that about $1.1 billion has been or is scheduled to be returned to harmed investors based on whistleblower tips.

She said she thinks the program helped investors and companies see the value in creating an environment in which employees feel comfortable speaking up when they see potential wrongdoing.

Ms. Norberg’s departure from the unit, announced last week, came days before the death of Bernie Madoff, whose fraud—one of the biggest in U.S. history—helped lead the regulator to create the bounty program to encourage reports of financial wrongdoing and prevent lapses in oversight.

The SEC initially failed to discover Mr. Madoff’s multibillion-dollar Ponzi scheme, despite warnings from whistleblower Harry Markopolos. Mr. Madoff confessed to the scheme in 2008.

The regulator’s whistleblower program was enacted by the 2010 Dodd-Frank Act and has since received more than 40,000 tips, according to a Wall Street Journal analysis of the agency’s data. In the fiscal year ending Sept. 30, 2020, it received more than 6,900 tips, a single-year record.

Ms. Norberg said the tips have helped the SEC’s enforcement efforts—particularly those from company insiders who have access to detailed information on possible wrongdoing.

The program has issued a record amount of award dollars already this fiscal year, a surge that follows the agency’s adoption of controversial amendments to its whistleblower-award rules. The rules were intended to bring efficiency and transparency to the award determination process, the regulator has said. But some have criticized the amendments, saying they would disincentivize would-be tipsters.

In the first seven months of fiscal 2021, more than $250 million was awarded to whistleblowers, including a $50 million award to joint whistleblowers announced Thursday. The agency didn’t identify the whistleblower or the case the award is connected to, in keeping with its policy.

The agency has faced complaints in recent years that it has been slow to compensate tipsters for the risks they take to help spot fraud.

The SEC credited Ms. Norberg with streamlining the award determination process, and managing an expansion of the unit and growth in the number of awards issued to whistleblowers. The office now has 30 staff members that include attorneys, paralegals, an accountant and other support staff, the agency said. That is up from eight attorneys, three paralegals and a support specialist in 2012, according to the agency’s 2012 annual report to Congress.

“We’re seeing the fruits of the efficiencies now and things are working seamlessly,” she said in a statement sent after the interview. “I think you will keep seeing more and more awards being paid to deserving whistleblowers.”

Ms. Norberg, who previously worked as a lawyer in private practice and before that served as a special agent for the U.S. Secret Service, said she was always interested in returning to the government. “Public service has always been very important to me,” she said. “The SEC seemed to be a logical path for me based on my work in private practice.”

She declined to say what she will be doing after she leaves the regulator. She added that she thinks the program will continue to deliver on its mission after she is gone.

Emily Pasquinelli, the whistleblower office’s deputy chief who joined the office as an attorney in 2012, will take over as the unit’s acting chief, the SEC has said.

Lawyers who represent whistleblowers praised Ms. Norberg’s contribution to the program.

“She has a lot to be proud of, and she left her mark,” said Jordan Thomas, a former SEC assistant director who helped develop the agency’s whistleblower program and now represents tipsters.

Mr. Thomas, who chairs the whistleblower representation practice at law firm Labaton Sucharow LLP, filed a lawsuit in January against the securities regulator over the recent whistleblower-program rules changes.

“Jane Norberg’s efforts to protect SEC whistleblowers from employer retaliation and intimidation were extremely important and put the industry on notice that efforts to silence or chill whistleblowers would not be tolerated,” Erika Kelton, a partner at law firm Phillips & Cohen LLP who represents whistleblowers, said in a statement.

Updated: 5-11-2021

CFTC Whistleblower Program In Peril Over Potential $100 Million-Plus Payout

Agency in turmoil over proposed award to ex-Deutsche Bank executive who provided information in Libor investigation.

The Commodity Futures Trading Commission’s whistleblower program is in turmoil over a potential payout exceeding $100 million to a former Deutsche Bank AG executive—one so large it would deplete the agency’s whistleblower funds and has led it to seek congressional action.

The executive had provided information that helped CFTC and Justice Department investigations that led to roughly $2.5 billion in settlements with Deutsche Bank in 2015, including $800 million with the CFTC. They alleged that the bank manipulated the London interbank offered rate, or Libor, a benchmark interest rate used to set short-term loans for global banks.

A unit of the German bank pleaded guilty to U.S. criminal charges, and acknowledged that it failed to adequately police employees.

Some CFTC officials who have reviewed the case internally have recommended the whistleblower payout, calculated as a percentage of the agencies’ legal settlements. But the application is under investigation by others, according to people familiar with the matter. Agency leaders have contended there is no mechanism to pay the bank executive and other applicants and keep funding the whistleblower program.

The CFTC pays whistleblowers from money it collects in enforcement penalties. But the agency’s whistleblower fund can be replenished only when it falls below $100 million. Penalties collected otherwise typically go into the U.S. Treasury.

It would be difficult to quickly replenish the fund through new settlements after a large whistleblower award because many of the agency’s penalties are $5 million or less, according to a person familiar with the matter.

The payout flap is creating sharp tensions inside the agency, which regulates U.S. futures and derivatives markets, according to people familiar with the matter. It also led the CFTC to seek legislation that would expand its whistleblower fund cap; a bill sponsored by Iowa Sen. Chuck Grassley, the ranking Republican on the Judiciary Committee, has languished.

A CFTC spokeswoman in a statement said the whistleblower program “has been critically important” and that the agency is “working with Congress to ensure the continued success of the program.”

At issue is one of regulators’ front-line defenses against white-collar crime. The nation’s two largest financial cops, the CFTC and the Securities and Exchange Commission, launched whistleblower programs in the wake of the 2008 financial crisis and the Bernie Madoff Ponzi-scheme scandal, encouraging insiders and others to help the agencies uncover fraud.

The Dodd Frank Act, enacted in 2010, said whistleblowers could collect between 10% and 30% of penalties or settlements reached with the companies accused of financial misconduct. The $100 million CFTC cap didn’t anticipate that a single award could exceed that amount.

Besides paying awards, the money is used to fund the whistleblower office, which attracts and handles whistleblowers, who are the source of or are helping with about one-third of the agency’s active investigations.

Amid the uncertainty, most other whistleblower applications before the CFTC stalled for many months, the people familiar with the matter said. In April the agency issued its first two whistleblower awards since September, for $3 million and less than $250,000, respectively.

“We know there are cases right now in limbo because the payout could potentially deplete the funds,” said Jeb White, president of Taxpayers Against Fraud, an organization that represents whistleblower attorneys. “What we’re seeing is a hyper-concern” about whether whistleblowers will step forward, he said.

David Kovel, a lawyer for the ex-Deutsche Bank whistleblower, said his client “paid a very high price, personally and professionally” in helping the government’s investigation around 10 years ago. “It is critically important for him and others like him that the award system works,” Mr. Kovel said.

The CFTC’s fund cap hadn’t previously been a problem. Since its first whistleblower award in 2014, the payments have ranged from less than $250,000 to $30 million, according to the agency, awarding a total of around $123 million to 30 individuals.

The Deutsche Bank action changed the equation.

The former bank executive reached out to the CFTC in 2012. At the time, the CFTC and other U.S. agencies were investigating whether more than a dozen banks, including Deutsche Bank, had rigged the Libor market.

The whistleblower held midlevel positions in the bank’s risk management and global markets areas. He submitted a formal whistleblower complaint to the CFTC with specific allegations and documents showing the size and scope of Deutsche Bank’s risky bets.

The whistleblower provided the CFTC and Justice Department additional documents and extensive information during a series of meetings, including the details of trades and the names of people involved, according to correspondence with the CFTC.

In 2015, the CFTC announced its largest-ever fine, $800 million, settling civil charges against Deutsche Bank alleging false reporting and Libor manipulation. At the same time, Deutsche Bank agreed to pay $775 million in a criminal penalty to the U.S. Justice Department, and a total of more than $900 million in civil penalties to two other financial authorities.

A Deutsche Bank spokesman said the bank “disciplined or dismissed individuals involved” in the misconduct and strengthened its controls in reviewing and addressing the matter.

Two former Deutsche Bank traders were convicted in 2018 on charges related to Libor manipulation. In an argument in that case, the Justice Department said it had sought information from the whistleblower, among other sources, in its investigation, according to court filings.

The CFTC initially denied the whistleblower’s application, saying the agency relied solely on two 2008 Wall Street Journal articles and evidence turned over by the bank.

But after Mr. Kovel asked for reconsideration, agency staffers wrote a memo last summer stating that the whistleblower did deserve a substantial award, according to the people familiar with the matter.

The agency’s whistleblower office could end up furloughed if the fund is depleted. The Government Accountability Office in October said there is no other mechanism to fund the office.

Some CFTC officials have argued that the agency could find legal solutions, but the agency’s leadership says there is no other option but to furlough the whistleblower office staff if the large award is paid, according to the people familiar with the matter.

Late last year, the CFTC reached out to Sen. Grassley’s office saying the situation had become an emergency.

The Senate bill, introduced by two Republicans and two Democrats, would raise the cap to $150 million and temporarily create a separate account to pay for the whistleblower program. It hasn’t yet been taken up by the Agriculture Committee, which oversees the CFTC.

Sen. Grassley’s office said it is “working on a bipartisan fix to restructure the program and avoid catastrophe.” A spokesman for the majority Democrats on the Agriculture Committee said the committee was working with the CFTC on a potential solution.

Updated: 5-19-2021

Whistleblower Is Awarded $28 Million In Panasonic Avionics Case

SEC says sum is one of 10 largest awards paid out by its whistleblower program.

The U.S. Securities and Exchange Commission said it awarded more than $28 million to a whistleblower whose tip helped the regulator and the Justice Department launch investigations that led to bribery charges against a U.S. subsidiary of Japanese electronics company Panasonic Corp. and former executives.

The SEC said the sum is one of the 10 largest awards paid out by its whistleblower program, which was created by the 2010 Dodd-Frank Act.

The regulator, which announced the award Wednesday, didn’t name the company and didn’t identify the tipster, in keeping with its policy. But lawyers representing the whistleblower said the award was connected to 2018 bribery settlements involving Panasonic Avionics Corp., a Lake Forest, Calif.-based unit of Panasonic that makes entertainment and communication systems for aircraft.

The tipster, who isn’t a Panasonic employee, notified the SEC about alleged wrongdoing at the company in countries in Asia and Europe, prompting the regulator to open the investigation, according to the whistleblower’s lawyers, Christopher Connors of Connors Law Group LLC and Andy Rickman of Rickman Law Group LLP.

Under the SEC program, whistleblowers are entitled to between 10% and 30% of monetary penalties when their tips result in a successful enforcement action and when the penalties total more than $1 million.

The tipster in the Panasonic Avionics case received 10% of the monetary penalties collected from both the SEC and the Justice Department actions, according to documents viewed by The Wall Street Journal.

The award “shows the SEC’s continued commitment to rewarding [Foreign Corrupt Practices Act] whistleblowers under the program,” Messrs. Connors and Rickman said in a statement, noting that this was the third SEC whistleblower award related to FCPA violations their clients received in the past few years.

A spokesman for Panasonic Avionics declined to comment. Representatives for Panasonic didn’t respond to a request for comment.

The chief executive of Panasonic Avionics said in 2018 that the company was pleased to have resolved the matter and had taken steps to improve its compliance program and internal controls. Panasonic said it disclosed the U.S. investigations to investors in February 2017.

Panasonic Avionics in April 2018 agreed to pay the SEC more than $143 million to resolve accusations that it violated the Foreign Corrupt Practices Act and engaged in accounting fraud. The FCPA, a U.S. antibribery law, prohibits the use of bribes to foreign officials to win or keep business.

Later in 2018, the SEC accused the former chief executive and former chief financial officer of Panasonic Avionics of violating federal securities laws.

The Justice Department also announced in 2018 that Panasonic Avionics had entered into a deferred prosecution agreement and agreed to pay $137 million. U.S. prosecutors alleged that the company retained consultants for improper purposes and concealed payments to third-party sales agents, including in China and other Asian countries.

SEC staff said in the documents viewed by The Wall Street Journal that the tipster’s information prompted the agency and the Justice Department to begin investigating potential improprieties at the company.

But the settlements ultimately focused on misconduct in different regions than the one identified by the tipster and were based on information reported by the company and following investigative efforts by SEC and Justice Department staff, according to the documents.

The SEC said in 2018 that Panasonic Avionics had offered a consulting position to a government official at a state-owned airline to get help in obtaining and retaining business from the airline. Panasonic Avionics at the time was negotiating agreements with the airline that were valued at more than $700 million, the SEC alleged. The company hired the official and used a third-party vendor to conceal the payments, the SEC said.



Updated: 5-23-2021

Anti-Money-Laundering Whistleblower Program Struggles To Get Off Ground

With no minimum reward setting and program delays, lawyers are reluctant to represent potential tipsters.

A new U.S. program to reward those who report possible violations of anti-money-laundering laws has gotten off to a slow start, as some lawyers say the lack of a minimum reward and delays in establishing the systems for receiving and investigating tips have made them reluctant to take on whistleblowers as clients.

The cash-for-tips program, included in the annual defense-spending bill passed into law in January, aims to offer rewards to people who voluntarily provide original information to the Treasury Department or the Justice Department on possible violations of the Bank Secrecy Act when their tips lead to enforcement actions where monetary sanctions exceed $1 million.

The provision of the National Defense Authorization Act said tipsters can receive up to 30% of the monetary penalties collected in an enforcement action brought by the Treasury Department or attorney general and from related actions.

But the bill didn’t set a deadline for the implementation of the whistleblower regulatory framework, designate an agency to implement it or set a floor for rewards. That stands in contrast to the bounty programs at the Securities and Exchange Commission and the Commodity Futures Trading Commission, which offer a 10% minimum reward payment to successful whistleblowers.

Secretary of the Treasury Janet Yellen has delegated responsibility for the whistleblower program to the Financial Crimes Enforcement Network, an anti-money-laundering bureau of the U.S. Treasury Department, a Treasury official said in a statement. FinCEN has already received tips from several purported whistleblowers and is evaluating those tips, the official said.

“The kind of robust and well-funded office needed to implement the enhanced whistleblower provisions…has not been funded by Congress, so FinCEN has diverted existing enforcement, compliance, and policy division resources to start implementing the law,” the Treasury official said in the statement. The statement also noted that FinCEN is consulting with several agencies that have mature whistleblower programs, such as the SEC, CFTC and the Internal Revenue Service, to identify best practices.

“We understand that full, robust implementation of the whistleblower program and other measures will require significant resources, and our immediate focus is on obtaining the necessary resources to support implementation,” a spokeswoman for FinCEN said. “Once the available funding levels are known, FinCEN will continue its detailed hiring plan and execute against those plans.”

Representatives For The Justice Department Didn’t Respond To A Request For Comment

The new anti-money-laundering program offered further business opportunities to lawyers who have set up practices to guide corporate whistleblowers through government investigations, with a share of any reward windfall as their compensation.

Stuart Meissner, an attorney with his own practice that represents whistleblowers, said he has decided not to participate in the anti-money-laundering program after looking into the law. In December he started working to recruit clients by tracking down individuals who previously called him about possible money-laundering cases, with an expectation that the program could be more popular than the SEC’s. He said he still receives calls every day from people with information on possible money laundering.

But now he is turning down possible tipsters unless the case also falls under the SEC’s jurisdiction. He cited a lack of minimum reward of 10% of monetary sanctions as well as how those sanctions are defined as two factors for his decision, adding that so far there is no clarity on where to file the complaints and which office would handle them.

“These things take years; you don’t want to wait four to five years before finding out it’s all a waste of time,” Mr. Meissner of Meissner Associates said of whistleblowers. “That’s a bit too frustrating, knowing that you might not get an award when you help with the investigations.”

Rebecca Katz, who leads the whistleblower litigation team at law firm Motley Rice LLC, said she would still assess cases and information from whistleblowers, but added that opaque parameters, the fact that the government has more discretion in giving out rewards and a lack of a track record of results make the program difficult.

“It’s always good to have another program for whistleblowers, since they are risking a lot to come forward,” she said. “But this one is certainly not as well crafted as the SEC program.”

Sean McKessy, who helped set up the SEC whistleblower program as the first chief of the whistleblower office, said the lack of leadership in the government program is making some law firms hesitant to get involved.

“I saw my job as publicizing the program to whistleblowers,” Mr. McKessy said. “I just don’t think you can get a program off the ground if you don’t have a champion internally and externally.”

Updated: 6-3-2021

Senate Passes Bill To Fund CFTC Whistleblower Program

The bill was passed unanimously on Friday; a similar bill may be considered by the House of Representatives.

A newly passed Senate bill would temporarily create a separate account to pay for the operation of the Commodity Futures Trading Commission’s whistleblower program as the agency confronts a funding crisis over a large potential payout.

Currently, the CFTC’s Customer Protection Fund, which is funded by money the agency collects in enforcement penalties, is used to pay successful whistleblowers as well as for operating expenses and educational initiatives associated with the whistleblower office.

The bipartisan legislation proposes the establishment of a separate account at the U.S. Treasury Department until Oct. 1, 2022, to ensure that the CFTC’s whistleblower office will be able to continue operations even if the amount in the fund drops to a critical level.

The CFTC Fund Management Act was passed unanimously by the U.S. Senate on Friday. A similar bill may be considered by the U.S. House of Representatives.

“We continue to work with Congress to ensure the program’s success,” a CFTC spokeswoman said in an email.

The CFTC, which regulates the U.S. futures and derivatives markets, has been in turmoil in recent months over a potential whistleblower payout of more than $100 million to a former Deutsche Bank AG executive, The Wall Street Journal previously reported. CFTC leaders contended there was no mechanism to pay the bank executive and other applicants and keep funding the whistleblower program.

The Customer Protection Fund, created by the 2010 Dodd-Frank Act, can be replenished only when it falls below its cap of $100 million. Any fines collected after the account reaches the cap typically go into the U.S. Treasury. If the fund is depleted, the CFTC whistleblower office could end up furloughed.

The bill would allow the CFTC to transfer up to $10 million from the fund into a separate account and use the account to pay for operating and programming expenses when the balance in the protection fund is insufficient. After Oct. 1, 2022, the remaining money in this account would be returned to the fund.

Under the program rules, eligible tipsters are entitled to between 10% and 30% of monetary penalties collected. The CFTC has awarded roughly $123 million to whistleblowers, according to the agency website.

The increasing size of the whistleblower awards in recent years would risk depleting the fund before it could be replenished, according to a statement for the bill from the office of Sen. Chuck Grassley (R., Iowa), who wrote the bill. The bill would carry no cost to taxpayers, according to the statement.

“The CFTC whistleblower program has become far more successful than Congress imagined when we set it up back in 2010,” Sen. Grassley said in the statement. “We can’t allow this program to become a victim of its own success. Now that the Senate has passed this bill, the House must act quickly to preserve the program.”

Without congressional action, Sen. Grassley’s office said they have been told the whistleblower office staff could be furloughed as soon as mid-June, said Taylor Foy, the communications director for Sen. Grassley. “We’re trying to get it done as soon as we can,” Mr. Foy said.

Attorneys representing whistleblowers said the legislation is an important step to help keep the CFTC program operating.

“Without the legislation, we would lose the whistleblower office during a time of heightened fraud concerns,” said Jeb White, chief executive of Taxpayers Against Fraud, an organization that represents whistleblower attorneys.

“This program has worked really well and any action that would allow it to keep operating is a big win,” said Jason Zuckerman, a lawyer at Zuckerman Law who represents whistleblowers. He noted that without the legislation, tipsters might be deterred from making further disclosures to the CFTC.

Some attorneys worry the temporary fix might not be enough to address the problem long-term.

“What I fear about this is they are just kicking the can down the road and we’ll be encountering this again,” said Erika Kelton, a partner at law firm Phillips & Cohen LLP who represents whistleblowers.

Updated: 6-27-2021

Whistleblower Thought He Would Get A Big Payout. Instead He Got Nothing And Went Broke

Securities and Exchange Commission says it can’t reward watchdogs if recouped funds come through bankruptcy process.

John McPherson was almost certain he’d get rich from the Securities and Exchange Commission’s whistleblower program. Instead, he ended up bankrupt and embittered.

Despite what the SEC called his “extraordinary and continuing” assistance in helping the agency shut down an alleged $1.4 billion investment scam, Mr. McPherson was notified last year that his whistleblower award would likely be close to zero.

The reason? The target company, Life Partners Holdings Inc., had declared bankruptcy, and the SEC never collected financial penalties it was owed. Investors, however, were able to recoup more than $1 billion through the bankruptcy process.

Mr. McPherson’s experience illustrates a little-known facet of the SEC’s whistleblower program: The regulator won’t pay awards for financial recoveries in bankruptcy proceedings, even if the affected company entered bankruptcy as a result of the agency’s enforcement actions.

Some critics say that discourages people from reporting the most egregious frauds—Ponzi schemes and companies with major accounting chicanery—which often collapse or end up in bankruptcy court.

“It’s lunacy on the part of the SEC to interpret the rules that way,” says Harry Markopolos, a financial sleuth who has partnered on whistleblower cases with Mr. McPherson. Mr. Markopolos is famed for trying, but failing, to get the SEC to investigate Bernard Madoff’s huge Ponzi scheme.

The 2008 collapse of Mr. Madoff’s securities firm was a major reason Congress established the SEC’s whistleblower program in 2010. But under the SEC’s interpretation of the rules, Mr. Markopolos says, “I wouldn’t have been paid anything” for turning in Mr. Madoff, because the Madoff firm filed for bankruptcy as soon as its fraud finally came to light.

Mr. Markopolos says many major frauds, including WorldCom Inc. and Enron Corp., also ended up in bankruptcy.

The SEC declined to comment. The agency, in revising and clarifying rules for its whistleblower program last year, said that by statute it can only pay awards based on actions brought by it or other government entities, not from bankruptcies, which are private actions. That is true, it said, even if a bankruptcy in some way results from SEC enforcement action or the activities of a whistleblower.

Attorneys who represent whistleblowers say they have other clients who have blown the whistle on companies that ended up in bankruptcy and can’t collect on their awards, though it is unclear how often this happens.

“The problem with Ponzi schemes is that the money is gone,” says Sean McKessy, a former chief of the SEC’s whistleblower office who is now in private practice representing whistleblowers.

The SEC’s whistleblower program is intended to help the regulator police the markets by rewarding citizens who provide original information about a securities violation. Successful whistleblowers can get 10% to 30% of the amount the agency collects in fines or penalties.

To date, the SEC has paid more than $900 million in awards, including a record-setting $114 million sum last October.

Although most whistleblowers are former or current company insiders, others are analysts, short sellers or industry observers. Attorneys who practice in the area say the program is skewed to incentivize blowing the whistle on deep-pocketed public companies and Wall Street firms, who can afford to pay big fines.

Mr. McPherson, a former Ernst & Young LLP forensic accountant, was a partner in a small consulting firm working in the “life settlements” industry when he discovered what he believed was fraudulent conduct by Life Partners, a publicly traded company based in Waco, Texas. Life Partners was the subject of an article in The Wall Street Journal in December 2010.

The company sold more than 20,000 individual investors fractional shares in life settlements—the right to collect on a stranger’s life insurance policy when the insured person dies. Mr. McPherson suspected the company was overcharging clients by providing misleading estimates of how quickly the insured person was likely to die.

He contacted the SEC in mid-2010, becoming a key source for the agency as it pursued a case against Life Partners. In praising his help, the SEC later noted that Mr. McPherson had communicated with its staff on more than 100 occasions and provided “voluminous pages of documents.” By his own count, he spent about 3,000 hours helping the SEC over a five-year period.

Mr. McPherson says he initially wasn’t interested in getting rewarded for aiding the SEC, but did it to help out the investors. It wasn’t until years later that he realized he might be in line for a big payday.

Life Partners officials denied any wrongdoing, saying retail investors could still make money even if its life expectancies were off. Its chief executive, Brian Pardo, in a later self-published book, blamed much of the negative attention on competitors and short sellers. An attorney for Mr. Pardo said his client had nothing new to say on the topic.

The SEC in 2012 sued Life Partners, later telling Mr. McPherson some of its claims closely aligned with information he had provided. Despite a mixed jury verdict, the agency in 2014 won $47 million in financial penalties against the company and its top two executives.

Then came the events that cost Mr. McPherson his hoped-for whistleblower award.

The SEC asked the federal judge overseeing the case to appoint a receiver to take control of Life Partners. If that had happened, Mr. McPherson might have been in line for a whopping payout, based on the more than $1 billion later recovered by investors.

The SEC has said that “monies recovered by a receiver and returned to harmed investors” could count for whistleblower-award purposes.

On the eve of a January 2015 hearing at which the judge was going to consider appointing a receiver, Life Partners filed for bankruptcy protection, saying it was doing so “to avoid the appointment of a receiver which could have liquidated the company.”

The SEC quickly got the bankruptcy judge to appoint a trustee to take control of Life Partners. It was an almost identical outcome, but under the aegis of a bankruptcy court.

The trustee, who in a court filing accused Life Partners of a “wide-ranging scheme to defraud its investors,” eventually set up a mechanism to return more than $1 billion over years to the retail investors in Life Partners’ fractional policies.

Last September, a decade after the original tip, the SEC told Mr. McPherson his whistleblower application was successful. The SEC staff recommended he be awarded 23% of the amount collected in the Life Partners case. But the agency said in a letter that “to date there have been no collections” in the case—meaning he shouldn’t expect much, if anything.

“I was astonished,” says Mr. McPherson. “My reward for five years’ work on one of the most successful enforcement actions in the SEC’s history was zero.”

Part of the reason the SEC hadn’t collected anything was due to the regulator’s own actions. When Life Partners declared bankruptcy, the SEC had a legal claim over $38.7 million, which was the company’s portion of the disgorgement and penalties the agency had won in the 2014 court judgment. But the SEC voluntarily subordinated its claim, making sure Life Partners’ retail investors collected as much as possible.

Mr. McPherson applauds the idea of protecting retail investors but believes he shouldn’t be penalized for that decision. At minimum, he thinks he should get 23% of that money, or $8.9 million.

“This outcome is deeply troubling,” says Jordan Thomas, a former SEC attorney who helped establish the regulator’s whistleblower program, and now represents whistleblowers at Labaton Sucharow. “Discretionary decisions made by the commission resulted in him being denied a whistleblower award. That kind of scenario is inconsistent with the way the program was developed.”

More broadly, Mr. Thomas says cases where bankruptcies keep a whistleblower from getting paid are relatively infrequent and tend to involve “low-level fraud—not the Wall Street banks but the small-time bad guys.” But he thinks the loophole is big enough that the SEC should either change its rules or seek a legislative fix.

Early in the Life Partners saga, Mr. McPherson was so beguiled by the lure of whistleblower millions that he essentially quit his day job to become a full-time whistleblower, using his accounting and life-insurance knowledge to spot potential miscreants.

He has submitted whistleblower tips to the SEC on 11 companies, in several cases teaming up with Mr. Markopolos. In 2018, he took out a $1 million litigation-funding loan at very high interest rates, secured by the Life Partners whistleblower claims, to pay back taxes and continue to pursue his cases.

The SEC at one point verbally told Mr. McPherson’s lawyers that he might get a small payout of about $18,000 from the Life Partners matter. But so far, he has received nothing from a decade’s whistleblower work. A financial squeeze at one point left him unable to pay his daughter’s past-due tuition, he says, and he received an eviction notice from the local sheriff.

In January he declared personal bankruptcy.

Updated: 7-7-2021

Former Enron Executive: SEC Whistleblower Program Is A Game Changer

Sherron Watkins, who warned management about accounting practices in 2001, says being publicly known hurt her career prospects.

Sherron Watkins, the Enron Corp. executive who warned management about fraud, said not having confidentiality and protection for whistleblowers can have a cost.

Nearly 20 years after the energy company’s collapse, Ms. Watkins, 61 years old, said being labeled a whistleblower has been a challenge to her career ever since.

If current whistleblower protections had been in place at the time, she said she would have been able to report her concerns to the Securities and Exchange Commission while keeping her name confidential.

Her revelations come as more corporate insiders are blowing the whistle these days on possible wrongdoing through whistleblower programs that give out awards for helpful tips and provide confidentiality and anti-retaliation protections to those who come forward.

Following her report of Enron’s use of complicated off-balance-sheet vehicles to mask hundreds of millions of dollars in losses, Ms. Watkins was lauded and even chosen as one of Time’s Persons of the Year in 2002, alongside two other whistleblowers. She has since co-written a book and traveled around the world to speak about Enron.

Ms. Watkins, now living near Austin, Texas, still gives speeches about Enron and on the warning signs of bad organizational culture. Nonetheless, Ms. Watkins describes herself as “grossly underemployed,” adding that she has struggled to find another job in the corporate world or long-term stable employment, including opportunities to teach.

“Different things I’ve looked into, there was always just a door kind of slammed at some point,” Ms. Watkins said. These included consulting gigs with companies that provide directors and officers liability education for boards. She said she also interviewed to be an adjunct professor for executive sessions at Rice University’s business school, a job she didn’t get in the end.

A representative for Rice declined to comment on personnel matters.

Today’s whistleblower reward programs at the SEC and the Commodity Futures Trading Commission provide an option to report potential misdeeds confidentially, offering an easier path for those concerned about fraud at their companies, industry observers said.

“I think it reflected badly on our country and on corporate America,” Jordan Thomas, who chairs the whistleblower representation practice at law firm Labaton Sucharow LLP, said, speaking of the repercussions on the career of Ms. Watkins and other whistleblowers whose names became public.

He adds that what Ms. Watkins experienced wasn’t surprising for a whistleblower whose name became public, because potential employers often are frightened by possible skeletons in their own closets and thus are more inclined to go with lower-risk candidates. “I think the most significant change has been the ability to report anonymously, which is the best protection against blacklisting” and retaliation, he added.

Ms. Watkins first wrote her one-page fraud complaint anonymously and placed it in an employee dropbox in August 2001, but she decided to identify herself the next day and meet with Kenneth Lay, Enron’s chief executive at the time.

She didn’t report what she knew directly to the government in hopes Enron executives would report it themselves, but later she was interviewed by the SEC and the Justice Department for their investigations into Enron and testified at congressional hearings.

She said she felt shunned after her name became attached to the Enron collapse. “It’s a toxic label, where you won’t work in your chosen career ever again, and you lose friendships. People are hesitant to really join in a venture with you or move forward, just because there’s too much noise around that label ‘whistleblower,’” she said.

She also faced criticism from the public and media at the time, including for not taking her concerns early on directly to Enron’s board or to regulators, and for selling Enron stock, though she wasn’t charged with insider trading. Looking back, she acknowledged the criticism that she could have done things differently, but added “that criticism is far outweighed by the thank-yous that I received from rank and file employees” who thought justice would be served, she said.

Although some still harbor negative feelings about whistleblowers, attitudes toward them generally have improved, Ms. Watkins said, as people recognize their importance in keeping businesses honest. “I think it is becoming a very important check and balance to abuses of power,” she said.

She attributes this to the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, which established bounty programs such as the one at the SEC, enabling individuals to report possible violations of federal securities laws anonymously with the help of lawyers. The SEC whistleblower program offers eligible tipsters a portion of the penalties the agency collects as a reward and has been widely seen as a success.

The SEC whistleblower program has received more than 40,000 tips, based on a review of the data. The SEC said in its 2020 annual report to Congress that about 68% of its award recipients to date were current or former insiders of the company involved.

The incentives and protection provisions of Dodd-Frank changed the landscape “because it attracted legal advocacy and legal support towards the cause of the whistleblower,” Ms. Watkins said.

Had Dodd-Frank been in place while she was at Enron, Ms. Watkins said she would have reported anonymously through an attorney and believes the SEC would have investigated and fined Enron earlier before the minor frauds became major ones.

“I would have remained anonymous, stayed employed, Enron would still be alive,” she said. “So it’s a wonderful check and balance.”

In 2019, Ms. Watkins wrote a comment letter protesting two amendments the SEC proposed to its whistleblower program rules, which she said could discourage individuals from reporting tips and affect how they are rewarded, and met with several of the commissioners at the time. The final versions were better than what was first proposed, she said.

Much has changed for Ms. Watkins since she first raised her concerns at Enron. She said her daughter, who was too young to remember when the company imploded and is now a senior in college, doesn’t have a detailed understanding of what she did but is still proud of her actions.

“In a way, it’s been interesting. I certainly do not make the kind of living I could have had I stayed in corporate America the last 20 years,” she said. “But then again, my daughter probably felt like I was a stay-at-home mom able to go to all of her school events, sporting events and was always there. So that’s got a benefit that money can’t buy.”

Updated: 7-8-2021

President Biden Signs Bill To Fund CFTC Whistleblower Program

The measure would temporarily set up a new account at the Treasury Department to pay for the operations of the Commodity Futures Trading Commission’s whistleblower program.

President Biden has signed into law legislation that would temporarily set up a new account to pay for the operations of the Commodity Futures Trading Commission’s whistleblower program, paving the way for the U.S. derivatives markets regulator to resolve a funding crisis over a large potential payout.

The bill, an amended version of the CFTC Fund Management Act, was signed into law by the president on Tuesday, after Congress passed the bipartisan legislation last month.

The White House in a statement thanked Senators Chuck Grassley (R., Iowa), Maggie Hassan (D., N.H.), Joni Ernst (R., Iowa), Tammy Baldwin (D., Wis.) and Susan Collins (R., Maine) for their work on the new law.

“We thank Congress and President Biden for their continued support of the Commodity Futures Trading Commission and our whistleblower program, which year after year contributes to our successful enforcement efforts,” a spokeswoman for the CFTC said in an email Thursday. A spokesperson for the White House didn’t respond to a request for additional comment.

The CFTC has been in turmoil in recent months over a potential whistleblower payout of more than $100 million to a former Deutsche Bank AG executive, The Wall Street Journal previously reported. CFTC leaders contended there was no mechanism to pay the bank executive and other whistleblower applicants while maintaining funding for the program.

The CFTC Customer Protection Fund, created by the 2010 Dodd-Frank Act, is funded by money the agency collects in enforcement penalties and is used to pay eligible whistleblowers as well as for operating expenses and educational initiatives associated with the whistleblower office.

The fund can be only replenished when it falls below $100 million. Any fines collected after the account reaches its cap typically go into the U.S. Treasury. The $100 million CFTC cap set in 2010 didn’t anticipate a single award could exceed that amount. If the fund is depleted, staff from the CFTC whistleblower office could end up being furloughed.

Under the new law, the CFTC would be able to transfer up to $10 million from the fund into a separate account at the Treasury and use the account to pay for operating and programming expenses when the balance in the protection fund is insufficient. After Oct. 1, 2022, the remaining money in this account would be returned to the fund.

The CFTC will include relevant information related to the account in its reports to Congress, the bill said.

“Congress’s broad bipartisan support for this bill demonstrates just how important this program is,” Sen. Grassley, who wrote the bill, said in a statement.

Some observers are concerned that the measures provided in the bill didn’t go far enough to address the funding problem long-term.

Under the program rules, eligible tipsters are entitled to between 10% and 30% of monetary penalties collected. The CFTC has awarded roughly $123 million to whistleblowers since issuing its first award in 2014, according to the agency website.

Updated: 8-8-2021

SEC Pauses Enforcement of Some Whistleblower Program Rules

The move comes after SEC chairman said he was directing staff to prepare potential revisions to two amendments for the agency’s consideration.

The Securities and Exchange Commission said it would look into revising two amendments to its whistleblower award program rules adopted last September, adding that in the interim it would largely pause enforcement of parts of the two amendments.

Earlier this week, SEC Chairman Gary Gensler said he was directing staff to prepare potential revisions to the two amendments for the agency’s consideration later this year to address concerns that they would discourage whistleblowers from coming forward. The two rules were part of a set of amendments approved by the SEC last year, with a vote of 3-2, with Democratic members Allison Herren Lee and Caroline Crenshaw opposing.

The SEC’s whistleblower program was enacted in 2011 as part of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act. Under the program, a whistleblower can receive an award totaling between 10% and 30% of the fines levied in SEC civil enforcement actions stemming from a tip, assuming the fines total more than $1 million.

One amendment, according to Mr. Gensler’s statement on Monday, could be used by a future commission to lower an award because of its size. Another amendment could prevent the SEC from making an award in related enforcement actions brought by other law-enforcement and regulatory authorities if another whistleblower award program might also apply to the action, he said.

Mr. Gensler said the agency is considering whether the related-action rule should be revised to allow the SEC to make awards when the other authority’s whistleblower program isn’t comparable to the SEC’s program.

The SEC staff will also look into clarifying that the agency won’t lower an award based on its dollar amount, according to the statement Monday.

The SEC on Thursday issued a statement adopting new procedures for the interim period while it considers possible revisions. The SEC said it would continue considering dollar amounts only in connection with the part of the rules that explicitly allows the use of such discretion to raise awards.

That refers to automatically applying a 30% maximum for awards that are estimated to be $5 million or less, assuming that there were no negative factors, such as an unreasonable delay in reporting potential wrongdoing.

In the case of the related-action rule, during the interim period the SEC would exempt certain eligible awards from the limitations of the amendment or notify the award recipients that they are affected by the amendments.

The applicants can then request a delay of the processing of the applications after the rule-making, according to the procedural announcement.

The two Republican commissioners, in a joint statement Thursday, criticized the procedural changes. Hester Peirce and Elad Roisman said the procedural changes effectively nullified the standing SEC rules and were designed to ensure that the two rules are substantively ignored while proposed amendments are formulated and considered. They said such action reduces the certainty of the law.

“This course of action is unwise and continues a troubling and counterproductive precedent,” they said in the statement. “Abandonment of duly-adopted rules without notice and request for comment raises the prospect that the rules that the Commission adopts in compliance with the Administrative Procedure Act may be interim at best, and transitory at worst.”

Jordan Thomas, a lawyer who sued the SEC in January over the two amendments, filed a joint motion on Friday with the SEC in federal court in Washington, D.C., to halt the lawsuit in light of the SEC’s agreement to consider changing the rules.

“It’s a big event; we raised concerns in January, and less than six months later, the commission agreed to change the rules we challenged and abandoned enforcement of the two rules,” he said. “That’s a huge win for whistleblowers and a loss for those that have been championing Wall Street interests.”

Other attorneys representing whistleblowers also welcomed the SEC actions.

“The policy statement issued by the SEC on August 5, 2021, is a home run for whistleblowers,” Stephen M. Kohn, chairman of the board of directors of the National Whistleblower Center, said in a statement Friday. “The SEC has done the right thing in protecting its highly successful program from administrative abuses.”

Updated: 8-10-2021

Whistleblower Is Awarded Over $3.5 Million In Juniper Bribery Case

The California-based networking and cybersecurity solutions company settled SEC allegations in 2019.

The U.S. Securities and Exchange Commission awarded more than $3.5 million to a whistleblower whose tip helped the regulator expand an existing investigation that led to civil bribery charges against networking and cybersecurity solutions company Juniper Networks Inc.

The regulator, which announced the award Tuesday, didn’t name the company and didn’t identify the tipster, in keeping with its policy. But lawyers representing the whistleblower said the award was connected to the 2019 cease-and-desist order involving Sunnyvale, Calif.-based Juniper over allegations that the company violated the Foreign Corrupt Practices Act through its subsidiaries in Russia and China.

The tipster, who isn’t a Juniper employee and is a foreign national, notified the SEC in late 2012 that Juniper was engaged in a large “channel partner discounting” bribery scheme in Russia, according to the whistleblower’s lawyers, Christopher Connors of Connors Law Group LLC and Andy Rickman of Rickman Law Group LLP.

The individual also assisted in the company’s internal investigation and was later interviewed by a team from the SEC and the U.S. Justice Department, the lawyers said in a statement.

The SEC credited the whistleblower for providing new information that led the regulator to expand an existing investigation into a new geographic area and for providing supplemental information and assistance, according to an SEC statement Tuesday announcing the award.

Juniper agreed to pay more than $11.7 million as part of a 2019 settlement with the SEC. The company didn’t admit to or deny the findings. The FCPA, a U.S. antibribery law, prohibits the use of bribes to foreign officials to win or keep business.

“In connection with the settlement, the SEC highlighted Juniper’s extensive cooperation with its investigation and its strengthened Integrity & Compliance Program,” a Juniper representative said Tuesday. “During the pendency of the investigation, Juniper took a number of steps to substantially strengthen and invest in our compliance program.”

In 2018, Juniper, which manufactures and sells networking equipment products and services, said the U.S. Justice Department had closed a parallel investigation into the matter.

The SEC in 2019 alleged that, between 2008 and 2013, some sales employees of Juniper’s Russian subsidiary secretly agreed with third-party distributors to fund leisure trips for customers, including government officials, through the use of off-book accounts. The SEC said the alleged misconduct continued even after the company’s senior management learned about it, and that the company’s remedial efforts were ineffective.

The SEC also said that some sales staff of Juniper’s Chinese subsidiary falsified trip and meeting agendas for customer events that understated the true amount of entertainment involved on the trips from 2009 through 2013. Juniper’s legal department approved numerous trips without adequate review and after the event had taken place, contrary to the company’s policies, according to the SEC order.

Under the SEC program, whistleblowers are entitled to between 10% and 30% of monetary penalties when their tips result in a successful enforcement action and when the penalties total more than $1 million.

The whistleblower received the maximum award of 30%, under a new rule adopted by the SEC last year that automatically applies the maximum for awards that are estimated to be $5 million or less, assuming that there were no negative factors, such as an unreasonable delay in reporting, according to a document reviewed by The Wall Street Journal.

The whistleblower’s attorneys said there has been a recent trend of U.S. regulators holding technology companies accountable for their sales partners’ misconduct and rewarding whistleblowers who help expose it.

“In our opinion, this sort of sales partner bribery scheme still is pervasive throughout the technology industry in Asia, Eastern Europe, Africa and the Middle East,” they said in a statement Tuesday. “And we expect that other well-known technology giants will be held accountable in the not-so-distant future for the corrupt practices of their local sales partners.”

The SEC on Tuesday also announced a separate award of more than $2.4 million to another whistleblower. The regulator also didn’t name the company and didn’t identify the tipster in that case. The agency said the individual alerted the agency to previously unknown conduct and helped with the investigation.

 

Updated: 8-13-2021

Whistleblower Is Awarded Over $3.5 Million In Juniper Bribery Case

The California-based networking and cybersecurity solutions company settled SEC allegations in 2019.

The U.S. Securities and Exchange Commission awarded more than $3.5 million to a whistleblower whose tip helped the regulator expand an existing investigation that led to civil bribery charges against networking and cybersecurity solutions company Juniper Networks Inc.

The regulator, which announced the award Tuesday, didn’t name the company and didn’t identify the tipster, in keeping with its policy. But lawyers representing the whistleblower said the award was connected to the 2019 cease-and-desist order involving Sunnyvale, Calif.-based Juniper over allegations that the company violated the Foreign Corrupt Practices Act through its subsidiaries in Russia and China.

The tipster, who isn’t a Juniper employee and is a foreign national, notified the SEC in late 2012 that Juniper was engaged in a large “channel partner discounting” bribery scheme in Russia, according to the whistleblower’s lawyers, Christopher Connors of Connors Law Group LLC and Andy Rickman of Rickman Law Group LLP. The individual also assisted in the company’s internal investigation and was later interviewed by a team from the SEC and the U.S. Justice Department, the lawyers said in a statement.

The SEC credited the whistleblower for providing new information that led the regulator to expand an existing investigation into a new geographic area and for providing supplemental information and assistance, according to an SEC statement Tuesday announcing the award.

Juniper agreed to pay more than $11.7 million as part of a 2019 settlement with the SEC. The company didn’t admit to or deny the findings. The FCPA, a U.S. antibribery law, prohibits the use of bribes to foreign officials to win or keep business.

“In connection with the settlement, the SEC highlighted Juniper’s extensive cooperation with its investigation and its strengthened Integrity & Compliance Program,” a Juniper representative said Tuesday. “During the pendency of the investigation, Juniper took a number of steps to substantially strengthen and invest in our compliance program.”

In 2018, Juniper, which manufactures and sells networking equipment products and services, said the U.S. Justice Department had closed a parallel investigation into the matter.

The SEC in 2019 alleged that, between 2008 and 2013, some sales employees of Juniper’s Russian subsidiary secretly agreed with third-party distributors to fund leisure trips for customers, including government officials, through the use of off-book accounts. The SEC said the alleged misconduct continued even after the company’s senior management learned about it, and that the company’s remedial efforts were ineffective.

The SEC also said that some sales staff of Juniper’s Chinese subsidiary falsified trip and meeting agendas for customer events that understated the true amount of entertainment involved on the trips from 2009 through 2013. Juniper’s legal department approved numerous trips without adequate review and after the event had taken place, contrary to the company’s policies, according to the SEC order.

Under the SEC program, whistleblowers are entitled to between 10% and 30% of monetary penalties when their tips result in a successful enforcement action and when the penalties total more than $1 million.

The whistleblower received the maximum award of 30%, under a new rule adopted by the SEC last year that automatically applies the maximum for awards that are estimated to be $5 million or less, assuming that there were no negative factors, such as an unreasonable delay in reporting, according to a document reviewed by The Wall Street Journal.

The whistleblower’s attorneys said there has been a recent trend of U.S. regulators holding technology companies accountable for their sales partners’ misconduct and rewarding whistleblowers who help expose it.

“In our opinion, this sort of sales partner bribery scheme still is pervasive throughout the technology industry in Asia, Eastern Europe, Africa and the Middle East,” they said in a statement Tuesday. “And we expect that other well-known technology giants will be held accountable in the not-so-distant future for the corrupt practices of their local sales partners.”

The SEC on Tuesday also announced a separate award of more than $2.4 million to another whistleblower. The regulator also didn’t name the company and didn’t identify the tipster in that case. The agency said the individual alerted the agency to previously unknown conduct and helped with the investigation.

Updated: 9-15-2021

SEC Issues $114 Million To Two Whistleblowers

With the latest awards, the SEC whistleblower program has provided more than $1 billion in awards.

The U.S. Securities and Exchange Commission awarded about $114 million in total to two whistleblowers, including one who provided independent analysis to the regulator that helped substantially advance investigations, the SEC said.

With the latest awards, the SEC whistleblower program has paid out more than $1 billion to 207 whistleblowers since issuing its first award in 2012, the agency said. That marks a milestone for the SEC whistleblower program created by the 2010 Dodd-Frank Act.

The SEC announced the awards Wednesday but didn’t name the cases involving two companies that the awards are connected to and didn’t identify the tipsters, in keeping with its policy.

Under the program, a whistleblower can receive an award totaling between 10% and 30% of the fines levied in SEC civil enforcement actions or a related agency’s actions stemming from a tip, assuming the fines total more than $1 million.

“Today’s announcement underscores the important role that whistleblowers play in helping the SEC detect, investigate and prosecute potential violations of the securities laws,” SEC Chairman Gary Gensler said in a statement.

Reaching the $1 billion mark is significant for a whistleblower award program that was only implemented in 2011, said Erika Kelton, a partner at law firm Phillips & Cohen LLP who represents whistleblowers. “Because it is that kind of headline-grabbing number, I do think that would generate and encourage more people to step forward,” she said.

The awards and the milestone are another reminder that companies need to commit to compliance and ensure they address issues raised internally, according to Gregory Keating, a whistleblower defense attorney for employers at law firm Epstein Becker & Green PC. “For employers, this is a clarion call that you need to embrace best practices and training,” he said.

The SEC awarded about $110 million in total to a whistleblower that voluntarily provided “independent analysis” to the SEC and another agency, which led to successful enforcement actions.

The $110 million award stands as the second-largest one in the SEC program’s history. Last October, the SEC awarded more than $114 million to a person whose information helped the SEC and another agency bring successful enforcement actions against a company.

Another whistleblower received about $4 million for providing original information to the SEC that led to a successful enforcement action. The SEC said the information was much more limited in comparison to the information provided by the other whistleblower.

The awards come as the SEC said last month that it would look into revising two amendments to its whistleblower award rules that were adopted in 2020, adding that in the interim it would largely pause enforcement of parts of the two amendments. Potential revisions would be designed to address concerns that the amendments could discourage whistleblowers from coming forward.

Mr. Gensler said at the time that one amendment could be used by a future commission to lower an award because of its size. Another amendment could prevent the SEC from making an award in related enforcement actions brought by other law-enforcement and regulatory authorities if another whistleblower award program might also apply to the action, he said.

Updated: 9-24-2021

SEC Awards $36 Million To Whistle-Blower For Enforcement Tip

The U.S. Securities and Exchange Commission awarded $36 million to a tipster whose information resulted in an SEC enforcement action as well as a related case brought by another federal agency.

The whistle-blower provided crucial information on misconduct to the SEC and the other agency, which included multiple meetings and the identification of key documents and witnesses, according to a Friday statement from the regulator. Under the SEC’s program, tipsters can be paid for information that prompts sanctions by another agency.

“Whistleblowers can act as a springboard for an investigation or, like here, they can propel forward an already existing investigation,” Emily Pasquinelli, acting head of the SEC’s whistle-blower office, said in the statement.

The SEC has paid about $1.1 billion to 214 tipsters since issuing its first award in 2012, including a $110 million payment announced earlier this month.

Individuals are eligible for payments ranging from 10% to 30% of the fines collected in enforcement cases where penalties exceed $1 million. Funds used to pay tipsters don’t come out of disgorgement, the portion of a sanction that’s supposed to be returned to harmed investors.

Neither the whistle-blowers nor the firms accused of misconduct were identified by the SEC, in keeping with the federal government’s policy of withholding information that could reveal a tipster’s identity.

Updated: 10-12-2021

Employee Engagement Crucial In Weeding Out Corporate Misdeeds

Experts from the corporate and government realms address cryptocurrency, cybersecurity and the importance of whistleblowers at the WSJ Risk & Compliance Forum.

Issues around cryptocurrency, cybersecurity and efforts to encourage whistleblowers dominated the discussion at Tuesday’s WSJ Risk & Compliance Forum.

Employee engagement is seen by compliance professionals as instrumental in uncovering potential crimes within companies, said Glenn Leon, senior vice president and chief ethics and compliance officer at Hewlett Packard Enterprise Co.

During the coronavirus pandemic, Mr. Leon initially saw a decline in incoming complaints and inquiries from employees. Although he isn’t sure of the precise reason behind the decline, his working theory is that people aren’t in the office as much engaging with managers face to face, and they may be seeking external sources to report on issues in the workplace.

“The more serious issues that come to our attention, they have not gone down too much,” he said. “We take all of our whistleblower complaints obviously very seriously, and…I view them as one of the more important tools that I have in my tool kit.”

Other topics of note at Tuesday’s Risk & Compliance Forum:

Cryptocurrency

Around 23% of Americans now own cryptocurrency, said Melissa Strait, Coinbase Global Inc.’s chief compliance officer, citing figures from comparison platform Finder.com that suggest crypto has begun a move toward the investing mainstream.

As cryptocurrency moves into the mainstream, however, it has emerged as the tool of choice for bad actors employing ransomware against corporations, requiring regulatory authorities to refocus their efforts.

Leo Tsao, the principal deputy chief in the Justice Department’s money laundering and asset recovery section, pointed to the formation of the Ransomware and Digital Extortion Task Force, which brings together components from across the department, as well as the National Cryptocurrency Enforcement Team, which targets the misuse of cryptocurrency for money laundering and other criminal activities, as proof the department is putting its resources to bear on the emerging problem.

“I think both of these actions reflect just how important ransomware is to the department and to cryptocurrency crimes in general,” said Mr. Tsao.

Cybersecurity

The pandemic also has moved a new set of concerns to the forefront of compliance professionals—the increasing threat posed by employees working from home, often using technology in suboptimal security conditions.

Hewlett Packard Enterprise’s Mr. Leon described it as a “growing concern” connected with the increased use of laptops at home, with many cyber breaches stemming from employees misusing their computer or clicking on an errant link.

“For companies…around the world, it’s perhaps not a matter of if, it’s a matter of when,” referring to cyberattacks, said Nancy Grygiel, senior vice president and chief compliance officer, world-wide compliance and business ethics, for biotechnology company Amgen Inc. “So companies ought to definitely invest resources and a lot of educational training.”

“What you do in that situation is you train, you educate, you retrain, and you remind people of the proper way to use their computers,” said Mr. Leon. “That frankly is the biggest thing from a compliance perspective you can do.”


Updated: 10-15-2021

SEC Awards $40 Million To Two Whistle-Blowers Who Helped Agency

The U.S. Securities and Exchange Commission is awarding about $40 million to two tipsters whose information contributed to an enforcement action by the agency.

The first person will receive about $32 million for exposing hard-to-find violations and helping identify witnesses, the agency said in a statement issued Friday. The other person will get $8 million for providing important details during the probe after waiting several years to come forward.

“These whistleblowers reported critical information that aided the Commission’s investigation and provided extensive, ongoing cooperation that helped the commission to stop the wrongdoing and protect the capital markets,” Emily Pasquinelli, the acting head of the SEC’s whistleblower office, said in the statement.

Neither the whistle-blowers nor the firms accused of misconduct were identified by the SEC, in keeping with the federal government’s policy of withholding information that could reveal a tipster’s identity. Since 2012, the agency has awarded more than $1 billion to tipsters.

 

Updated: 10-21-2021

The Whistleblowers Are in All the Wrong Places

Can someone expose the hidden truths about leaf blowers, country music, and relaxed-fit jeans?

Whistleblowers are always appearing before congressional committees and revealing that big companies are hiding the flaws and dangers of their products from the public. But is there any reason whistleblowing has to be limited to tech giants like Facebook ? Not really.

As I see it, there are lots of other areas of American life in desperate need of whistleblowers:

Contemporary country music. Critics wonder why every country song is about the same old achy-break heartbreak, that hard-drinking man that left me high and dry, that lying Jezebel that broke up our happy home. And, oh yes, that tractor I so dearly love.

A whistleblower reveals that there are thousands of country songs that aren’t stupid and interchangeable—songs that deal with topics like deep, enduring love and wonderful marriages and dating guys who aren’t likely to wrap the F-150 around that old oak tree. But the powers-that-be deliberately withhold these songs from the public. Why?

Relaxed-fit jeans are part of a Machiavellian plot to encourage consumers to put on a few extra pounds.

“Country music executives know that every song sounds exactly the same,” the whistleblower asserts. “But that’s the way supermarkets and gas stations and dentists’ offices want it. If country music went back to being twangy and daring, and sounded like it had something to do with the country or the West, bank managers would stop pumping it into the lobby.”

Manufacturers of “relaxed-fit” jeans. Relaxed-fit jeans, aimed at the slightly puffy, the middle-aged, or both are part of a Machiavellian plot to encourage consumers to put on a few extra pounds. Otherwise, the baggy, billowy jeans make you look as if you were wearing clown pants.

According to a highly placed whistleblower, jeans makers collude with ice cream companies and confectioners to trick the public into gaining weight so that their relaxed-fit jeans will look less stupid.

Kickbacks are rampant, with merchants encouraged to hide all the slim-fit jeans or only order them with a 24-inch waist. Faced with such adversity, consumers have no choice but to purchase excessively roomy jeans and then start slamming away the bacon-double-cheeseburgers.

Major League Baseball. The powers-that-be know how boring baseball is; they made it that way. A highly ranked MLB executive turned whistleblower has revealed all: Though the league keeps acting like it’s the players’ fault that games last four hours, in fact, pitchers receive under-the-table bribes to endlessly readjust their caps and fool around with the rosin bag between throws, and batters are instructed to step out of the batter’s box and foul off perfectly good pitches.

Baseball is engineered to be long and annoying because that makes fans drink more—not just in the stadium, but at home—and the alcohol-producing sponsors like that. MLB even has top-secret algorithms figuring out ways to make baseball even more annoying, like having Alex Rodriguez announce double-headers.

The leaf-blowing industry. The industry, which now employs 22 million people, has mountains of research proving that it is possible to build a noiseless leaf blower. But that information has been deep-sixed. A whistleblower with hearing and asthma issues reveals that the industry knows how annoying and harmful to the environment its products are.

What the public doesn’t know is that the industry is run by dystopian schemers that are just plain evil. It’s got nothing to do with money. These guys are just flat-out tools of Satan.

The DMV. People constantly wonder why DMV clerks are so abusive and mean. A whistleblower with a nice disposition reveals that states go out of their way to hire hostile, unhelpful people because otherwise these mean people would go to work for the U.S. Postal Service, which would make society even worse.

And yes, the DMV uses secret algorithms to track down the nastiest people in America and bring them on board. Though she can’t prove it, the whistleblower believes that the algorithms are supplied by Amtrak.

 

Deutsche Bank Whistleblower Gets $200 Million Bounty for Tip on Libor Misconduct

The payout is the largest ever by the Commodity Futures Trading Commission

A whistleblower whose information helped U.S. and U.K. regulators investigate manipulation of global interest-rate benchmarks by Deutsche Bank AG was awarded nearly $200 million for assisting the probe, according to people familiar with the matter.

The payout is the largest ever by the Commodity Futures Trading Commission, which along with the Justice Department and U.K. Financial Conduct Authority settled enforcement actions against Deutsche Bank in 2015.

The CFTC’s announcement didn’t name the bank or the case, but the reward is related to the bank’s manipulation of the London interbank offered rate and similar widely used benchmarks, the people said.

The whistleblower’s application for an award was initially denied by the CFTC, but the U.S. derivatives regulator ultimately decided that the individual’s information was helpful after the whistleblower submitted a request for reconsideration.

“We’re very happy that the CFTC was able to reverse an earlier decision and turn around their thinking,” David Kovel, a managing partner at law firm Kirby McInerney LLP who represents the whistleblower. “It says a lot about the people there that they don’t feel forced to stick with the wrong decision given the amount that’s at stake.”

The Wall Street Journal previously reported that the former executive had provided information that helped CFTC and Justice Department investigations that led to roughly $2.5 billion in settlements with Deutsche Bank in 2015, including $800 million with the CFTC.

They alleged that the bank manipulated Libor, a benchmark interest rate used to set short-term loans for global banks which traders and other bank employees could manipulate because it was based on oral submissions and not on actual transactions.

“The kind of information he provided was of the sort that was very hard to get if you don’t know where to look in a big financial organization,” Mr. Kovel said.

Rigging Libor was profitable for banks and other market participants because billions of dollars worth of derivatives known as swaps were priced off movements in the benchmark.

A spokesman for Deutsche Bank declined to comment.

The prospect of such a large payout pushed the CFTC whistleblower program into turmoil this year, as agency leaders contended there was no mechanism to pay the former bank executive and other applicants and keep funding the program. The agency averted a crisis after President Biden signed a bill in July to fund the program.

The CFTC investigation had already started by the time the whistleblower approached a separate agency, officials wrote in an order making the award. But the information proved valuable in interviews that authorities conducted as they expanded their probe, according to the order.

Dawn Stump, a Republican commissioner on the CFTC, said in a statement that she disagreed with basing the award partly on a fine levied by a foreign regulator. Like the CFTC’s announcement, Ms. Stump didn’t name the bank or the underlying case in her statement.

Ms. Stump wrote that the CFTC has never before given an award to a tipster based on an overseas regulator’s enforcement action.

“I believe we need to take an especially close look at cases where a whistleblower asks the commission to tap its limited Customer Protection Fund for an award relating to an action by a foreign futures authority to address harm outside the United States,” Ms. Stump wrote.

Thursday’s award is the largest issued to a single person since the 2010 Dodd-Frank financial overhaul law created the programs to help avoid another massive fraud like Bernie Madoff’s Ponzi scheme.

The Securities and Exchange Commission last year issued its biggest whistleblower payment ever of about $114 million to a tipster.

“It’s showing that the CFTC program, like the SEC program, over the past 10 years, has really reached its maturity,” said Mary Inman, an attorney representing whistleblowers at law firm Constantine Cannon LLP.


Updated: 10-24-2021

Is Whistle-Blowing Really Worth $200 Million?

It’s important that incentives be preserved, but an enormous recent award might mean it’s time to recalculate the math behind it all.

Good incentives for blowing the whistle on bad behavior are great. But $200 million is a hell of a big prize.

That’s the amount awarded to a single source of critical information that led to nearly $2.5 billion in fines for Deutsche Bank AG in 2015 for manipulating the discredited and soon-to-be-defunct Libor interest rate, according to reports. The Commodity Futures Trading Commission announced the award last week. It is a record payment to a whistle-blower.

Is it too much? A joke on Twitter last week was: Right, I’m going to find the dirtiest firm possible to work for, then snitch to the Feds! It’s the kind of sum that could go into the Urban Dictionary as the definition of “f*** you money.”

The $200 million is just a mind-bending amount of money. Good incentives are important and you need some way of calculating them, so the question is where, or if, we draw a line.

There have been several large payouts since 2010, when the reward program was created in the Dodd-Frank Act. In September, the U.S. Securities and Exchange Commission paid someone $110 million. Last year, it made its highest award of $114 million.

There have been eight other awards worth more the $30 million, including three of $50 million each. The remuneration is decided on a simple rule: The amount should be between 10% and 30% of the total penalties paid to federal regulators and foreign agencies, if overseas authorities also relied on the same evidence.

Whistle For It

Largest Whistleblower Awards Paid By The Securities And Exchange Commission And The Commodity Futures Trading Commission

Dawn Stump, one of the CFTC’s own commissioners, published a long argument saying she disagreed with the Deutsche Bank award in part because it wasn’t certain that the foreign regulator involved had actually relied on this whistle-blower’s evidence. If the CFTC had agreed with her, the award in this case would still have been enormous. Just 10% of the fines imposed only by the CFTC and New York Department of Financial Services would still have meant $140 million for the whistle-blower.

This year, the SEC celebrated having paid more than $1 billion in total awards — that’s a lot of bad behavior! But it’s also a lot of justice served. Other countries, like the U.K. or Germany, have their fair share of financial scandal but are often criticized for failing to nail those responsible. They also have weaker whistle-blower protection, impose smaller penalties on firms and don’t pay rewards.

But could such golden tickets make snitching seem like an opportunity rather than a last resort? Eugene Soltes, professor of business administration at Harvard Business School, says companies and people often make mistakes. Misconduct can take place anywhere, and companies with strong integrity and compliance programs will respond appropriately.

It is only when these are too weak or fail to respond that the financial cops should be called. Plus if regulators end up drowning in hopeful claims, that might make it harder to identify and pursue true crime.

Advocates of the reward program say such debates are a red herring. It is only very large fines that allow fractional payments to be so big.

Also, whistle-blowers rarely if ever have an easy time of it — whether they are driven by righteous indignation or resentment and vengeance.

Confidentiality at the official level may not hold within their industry and they may struggle to find work anywhere in their chosen field again. It may take years of stress and doubt before cases are adjudicated and any rewards decided.

Supersize awards are undoubtedly life-changing for many back-office and compliance workers, who often bring to light the evidence that stops terrible corporate behavior. But there’s also a limited amount of money in the rewards pot.

It’s replenished with the fines collected from corporate malpractice, but only to a certain level, the rest going to the Treasury. The SEC has considered making the awards more discretionary or limiting the largest to $30 million to preserve funds. But the 10%-30% rule has remained in place.

Still, would a maximum award of $30 million be incentive enough for someone who is on track to become a senior executive in finance, an individual who would expect to earn millions each year over a decade or more? It is a lot of money — but maybe not enough for that kind of person to risk everything when it might be simpler just to change firms and find one with a more ethical culture.

But then, people who are senior and already big earners ought to be invested in how their firm reacts to wrongdoing in the right way.

Some would argue that the Deutsche Bank award is still the exception and not the rule. It’s true that many more informers get much smaller amounts, just as many diligent hedge fund managers don’t become billionaires and most lottery tickets don’t mint plutocrats. But $200 million is a crazy amount of money for essentially just doing the right thing. Heck, $50 million would be a lot. It’s complicated, but a cap of some kind seems like a good idea.

Updated: 10-25-2021

Crypto Investments A Financial Backup For Facebook Whistleblower

Frances Haugen also received financial help from nonprofit organizations backed by Pierre Omidyar, a co-founder of eBay.

Frances Haugen, a former Facebook employee turned whistleblower, revealed that her refuge in Puerto Rico is currently being supported by an auspiciously timed cryptocurrency investment.

Haugen worked as a Facebook product manager before accusing the company of spreading controversial and insensitive misinformation. She allegedly possesses numerous confidential research documents, which, according to her, shows that “Facebook prioritizes profit over the well-being of children and all users.” Previously, Facebook has been accused of influencing the 2016 United States presidential election with the help of Russian agencies.

In A Follow-Up Interview With The New York Times, Haugen Was Asked About Her Financial Situation:

“For the foreseeable future, I’m fine, because I did buy crypto at the right time.”

The whistleblower also received financial help from nonprofit organizations (NPO) backed by Pierre Omidyar, a co-founder of eBay. However, Haugen clarified that Omidyar’s NPO fundings were only used to finance travel and related expenses.

According to Haugen, shifting to Puerto Rico helped her join her “crypto friends” who enjoy capital tax exemptions on Bitcoin (BTC) and cryptocurrency assets.

Iconic whistleblower and former U.S. Central Intelligence Agency agent Edward Snowden also continues to show support for the Bitcoin economy amid regulatory pressures from governments across the world.

On Oct. 4, Snowden tweeted about Bitcoin’s tenfold growth despite China’s blanket ban on crypto mining and trading.

 


Updated: 10-28-2021

More Tech Whistleblowers Are Expected, Experts Say

Silicon Valley is seeing an increasing number of employees speaking out against practices at their companies, whistleblower attorneys say.

More employees of technology companies are coming forward with concerns and information about their workplaces following the disclosure earlier this month of the Facebook Inc. whistleblower’s identity, attorneys working on whistleblowing issues said.

“We didn’t see a ton in Silicon Valley, and suddenly we did,” said Mary Inman, an attorney representing whistleblowers at law firm Constantine Cannon LLP in San Francisco and London. “It just became more of an acceptable path to be a whistleblower; there are role models now.”

Frances Haugen, a former Facebook employee, revealed herself to be the person who gathered documents that formed the basis of The Wall Street Journal’s Facebook Files series on issues within the social-media company. She has since gone public with her allegations and testified before Congress.

“You do see that, when someone very public comes forward, you are going to end up seeing more people in the tech industry potentially considering coming forward with what they are seeing in their own company,” said Jane Norberg, former chief of the U.S. Securities and Exchange Commission’s whistleblower office.

Whistleblowers have become a critical and effective way for companies and regulators to detect and investigate potential wrongdoing, such as bribery and financial fraud. Before Ms. Haugen, Jack Poulson, a former researcher at Alphabet Inc.’s Google, and Theranos Inc. whistleblower Tyler Shultz have spoken out publicly against practices within those tech companies in recent years.

When allegations are reported so publicly, it may spur others in similar fields or at the same company to come forward, a pattern Ms. Norberg said she saw during her nine years with the SEC program. She is now a partner at Arnold & Porter Kaye Scholer LLP and advises companies on whistleblower allegations.

This has happened in other industries. When a roughly $430 million settlement was made in 2004 after a whistleblower reported that Pfizer Inc.’s Warner-Lambert was promoting one of its prescription drugs for treatments unapproved by the U.S. Food and Drug Administration, it led to more employees stepping forward with information in the pharmaceutical industry, said Erika Kelton, a partner at law firm Phillips & Cohen LLP.

The Facebook whistleblower’s Congressional testimony also coincided with the publication of a website, called The Tech Worker Handbook. The website, created by former Pinterest Inc. employee Ifeoma Ozoma and funded by “philanthropic investment firm” Omidyar Network, is intended to serve as a guide to workers in startups and tech companies who want to speak out.

Groups such as the Signals Network, a non-profit supporting whistleblowers, and Lioness, a storytelling platform, are among the content contributors to the site.

Ms. Ozoma, who previously worked on the public-policy team at Pinterest and is now the founder of policy consulting firm Earthseed, said the timing was coincidental as she has been planning the launch of the handbook for more than a year. She said she heard from tech workers every week asking for advice after she went public in 2020, accusing Pinterest of having paid her less than male counterparts and retaliating against her after she made the allegation.

“It’s such a big decision to go against a multi-billion or trillion dollar company,” Ms. Ozoma said. “Before you do it responsibly, you need the information before you make that decision for yourself and your family.”

“We’ve been doing the work to ensure our culture, policies and practices are aligned with our commitment to be a diverse, equitable and inclusive workplace for all employees,” said Charlotte Fuller, head of corporate communications at Pinterest, in an email.

She added that the company has taken several measures in the past year, including increasing the percentage of women among its leadership ranks, providing employees with transparency in pay and supporting the Silenced No More Act, a California bill co-sponsored by Ms. Ozoma that expands protection for workers who speak out about discrimination and racism in the workplace.

Ms. Ozoma said workers in tech face the same kind of risk and potential industry blacklisting that may prevent people from speaking up. She signed a non-disclosure agreement when she quit her job at Pinterest and said her Slack messages were reviewed by the company.

“I think workers in any industry are susceptible to [being blacklisted], but I think one of the reasons that keeps people from becoming whistleblowers is because it’s so effective in the tech industry,” she said.

Mr. Shultz, the Theranos whistleblower, said the startup’s law firm threatened to sue him after he raised concerns and left the company. Another Theranos worker, Erika Cheung, said she received a threatening letter from Theranos’s lawyers delivered by a man who she said appeared to be following her after she spoke to a WSJ reporter about her experience at the company months after she left Theranos.

Ms. Ozoma hopes that the handbook can be a living document that helps people in the future—not just those working in the tech industry.

“Most people cannot afford to take that risk and end up in years of litigation with a company,” she said. “There has to be an ecosystem of support and resources in this space in order to see the flood of whistleblowing that I think we would all benefit from, because these folks are sharing information that impacts all of us.”

Updated: 11-5-2021

SEC Names Nicole Creola Kelly As Whistleblower Program Chief

Ms. Kelly, a senior special counsel at the regulator, takes over from Emily Pasquinelli, who has been the program’s acting chief since April.

The Securities and Exchange Commission has appointed Nicole Creola Kelly, a senior special counsel in the regulator’s general counsel office, as its new whistleblower program chief.

Ms. Kelly, who goes by Cree, has more than 20 years of experience with the SEC, the agency said Friday. She previously worked at the whistleblower office and served in other roles at the SEC, including as counsel to then-Chairman Mary Jo White and to then-Commissioner Kara Stein, as well as in the enforcement division’s complex financial instruments unit, the regulator said.

Emily Pasquinelli, the whistleblower office’s deputy chief since May 2017, has been serving as the acting chief of the program since the departure of Jane Norberg in April.

Ms. Kelly spent about a year working at the whistleblower’s office after serving as counsel to Ms. White, according to Ms. Norberg, who worked with Ms. Kelly at the time and is now a partner at Arnold & Porter Kaye Scholer LLP advising companies on whistleblower allegations.

Ms. Kelly was later part of the staff at the general counsel’s office that reviews recommendations on whistleblower awards made by the office before they are submitted to the commission for final determination. “She is very well-informed about the work of the office,” Ms. Norberg said.

Her appointment as the new program chief was welcomed by lawyers representing whistleblowers, who expect she will be a strong advocate for whistleblowers and for the program.

“Cree is a great pick; she has an excellent reputation and works very well with people throughout the commission, and that’s an important skill,” said Jordan Thomas, a former SEC assistant director who now chairs the whistleblower representation practice at law firm Labaton Sucharow LLP.

He added that the selection of someone who is familiar with the whistleblower program but not currently a member of its staff might reflect a view that SEC Chairman Gary Gensler is seeking the benefits of an outsider’s take on the program to take it to another level.

In her new position, Ms. Kelly will likely spearhead efforts to prepare a revision of two amendments to the whistleblower award program rules that were adopted in 2020. Mr. Gensler said this summer he was directing staff to prepare potential revisions to the two amendments for the agency’s consideration later this year to address concerns they would discourage whistleblowers from coming forward.

She also will need to maintain the momentum that the whistleblower program has in issuing awards while continuing to ensure confidence in it as a channel for people to report alleged misconduct, Ms. Norberg said.

“She will be a strong advocate for the changes that are helpful and would help amend the ones that aren’t helpful,” said Sean McKessy, who was the first chief of the SEC whistleblower program and is now a partner at law firm Phillips & Cohen LLP representing whistleblowers. He added that the office’s chief job is a tough one with many behind-the-scenes responsibilities, but that the appointment “is a testament to her skills and work ethic.”

The appointment comes as the SEC whistleblower program, which was created by the 2010 Dodd-Frank Act, grows and matures. The whistleblower office received around 6,900 tips in the fiscal year ended in September 2020, the highest tally for any year since the program began. As of late October, the SEC whistleblower program had paid out about $1.1 billion to 224 people since issuing its first award in 2012, the agency said.


Updated: 12-9-2021

Hyundai Whistle-Blower Who Was Fired After Taking On ‘The King’ Wins $24 Million

Ultimate Resource On Government And Corporate Whistleblowers (#GotBitcoin)

Kim Gwang-ho In New York City

Kim Gwang-ho spent 25 years at Hyundai Motor Co., ultimately helping make decisions about recalls — a role that required technical expertise and sound judgment.

Then in November 2016, the engineer was fired for doing the almost unthinkable.

Kim revealed to U.S. and South Korean regulators safety lapses at the giant automaker. The company hit back, suing him for leaking trade secrets, while his house was raided by police investigating the matter.

In the U.S., blowing the whistle on corporate misdeeds is big business, with federal agencies getting thousands of tips a year, and recent payouts exceeding hundreds of millions of dollars. But in the rest of the world, it’s rare, something that’s especially true in South Korea, where speaking up about misconduct in organizations is considered taboo. A big reason why is because the country is dominated by family-controlled conglomerates, the chaebols that are known for their cutthroat, hierarchical corporate cultures.

“Conglomerates are like an empire where an owner family is acting like a king,” Kim, 59, said in a video interview from Seoul. “Whistle-blowing is an act of betrayal and denial against the king. Raising an issue is equivalent to asking to get fired.”

For Kim, it was a calculated gamble that eventually paid off.

Last month, the U.S. National Highway Traffic Safety Administration awarded him more than $24 million for providing information related to safety violations at Hyundai Motor and its affiliate, Kia. Their lapses led to the recall of almost 2 million vehicles in the U.S. and South Korea between 2015 and 2017.

A Hyundai Motor representative declined to comment on whether there were more recalls, while adding that the company’s U.S. subsidiary created the role of chief safety officer in late 2019 to enforce safety across the organization.

“Hyundai takes safety seriously and fosters a culture of transparency and accountability,” the spokesman wrote in an email.

Kim’s win against a conglomerate led by one of South Korea’s richest families — the Chungs — is another blow to the chaebols, which have come under fire in recent years for corruption scandals. Samsung Group heir Jay Y. Lee was released on parole from prison earlier this year after a bribery conviction.

Kim was initially reluctant to bring the matter to public attention. He first reported the issue to the company’s auditors, informing them that his colleagues were trying to reduce the size and scope of recalls because of their high cost. After a year of inaction, he reached out to regulators in the U.S. and South Korea, he said. Hyundai Motor declined to comment.

“Of course I had fears, but I felt like it was something I had to do,” Kim said. “I had a good life and benefits while I was working at Hyundai Motor. But customers buying our cars were exposed to potential dangers and had no idea about them.” Kim said he made about $102,000 a year working at the company.

Kim traveled to Washington in August 2016 to deliver a cache of internal records that showed Hyundai Motor wasn’t doing enough to address engine defects. He then shared the same information with South Korean regulators and media.

There were about 1.2 million U.S. recalls by Hyundai Motor and Kia in March 2017, and more than 170,000 in South Korea the following month. They came on top of Hyundai Motor’s 470,000 recalls in the U.S. in 2015. In May 2017, the U.S. safety regulator opened an investigation to determine whether the recalls had covered sufficient vehicles and were carried out in a timely manner.

The results showed that both Hyundai Motor and Kia “conducted untimely recalls” and “inaccurately reported certain information,” resulting in a $210 million fine.

Kim’s payout is the first NHTSA awards to a whistle-blower and represents the maximum allowed by law. Under the Vehicle Safety Act, which Congress passed in 2015 to encourage the reporting of problems, a tipster who gives significant information resulting in action with penalties of more than $1 million can get as much as 30% of the fines collected.

Kim said he was motivated by the reward system in the U.S.

In stark contrast to the millions of dollars he received there, South Korea offered him 200 million won ($170,000).

His case is the latest in a string of spectacular awards in the U.S. for those willing to risk their livelihoods and reputations to reveal wrongdoing. The Securities and Exchange Commission whistle-blower program, created five years before the NHTSA’s, has paid a combined $1.2 billion to more than 200 tipsters since its first award in 2012. In October, the Commodity Futures Trading Commission announced a record $200 million payment.

While the agency didn’t identify the tipster, the individual was a former Deutsche Bank AG executive who provided information on the rigging of Libor, according to people familiar with the matter.

In South Korea, where the nation’s anti-corruption body received more than 5,500 reports in 2020, the average reward for a whistle-blower who reported corruption practices was less than $18,000 from 2008 to 2020, according to government data.

“You can’t be a whistle-blower in South Korea unless you’re from a rich family like a chaebol. Your life will be ruined,” Kim said. “It requires too much sacrifice and risk. I have a family to support and can’t give up my life just to help the public. There should be enough reward that motivates you to endure all the hardships.”

In South Korea, hierarchical structures at traditional corporate giants prevent employees challenging authority, according to Park Ju-gun, head of corporate research firm Leaders Index in Seoul.

“Kim’s case is extremely rare because it’s something unthinkable here,” he said, adding it’s even harder to call out wrongdoing when the country is accustomed to seeing chaebol chiefs who have been found guilty of criminal practices going back to running their businesses. “What’s more valued at chaebol companies is loyalty, not how well you do at work.”

In March 2017, South Korea’s Anti-Corruption and Civil Rights Commission ordered Hyundai Motor to reinstate Kim. He rejoined the company, but the automaker protested the ruling with an administrative court, Kim said. After discussions between the two sides, Kim left the job less than a month following his return, and Hyundai Motor dropped the lawsuits against him that same year, he said. The automaker declined to comment.

Kim will use part of his newly earned fortune to set up an organization that helps consumers get a better knowledge of recalls. He also plans to help others who want to speak up have a successful whistle-blowing experience, he said.

“Everyone would agree that whistle-blowing is necessary for the society’s sustainable growth,” he said. “But such thoughts can’t be supported without good conditions. I want to give them hope.”

Updated: 1-21-2022

SEC Pays Whistle-Blowers $40 Million For Tips On Multiple Frauds

* Four Tipsters Provided Documents, Identified Key Individuals
* Regulator Has Paid Out $1.2 Billion Since First Award In 2012

The U.S. Securities and Exchange Commission will pay more than $40 million to four tipsters for helping the agency bring successful enforcement cases by providing documents and identifying people involved in misconduct.

The agency awarded $37 million to two whistle-blowers who provided evidence that helped the SEC advance its investigation of securities violations. Another tipster received $1.8 million for information that prompted a probe, while a third whistle-blower got $1.5 million for helping shape the agency’s strategy.

“Credible tips of securities laws violations are a valuable component of the Commission’s enforcement program,” Creola Kelly, head of the SEC’s whistle-blower office, said in a Friday statement. Neither the whistle-blowers nor the companies involved were named by the SEC, in keeping with the federal government’s policy of withholding information that could reveal a tipster’s identity.

The SEC has paid about $1.2 billion to 245 tipsters since issuing its first whistle-blower award in 2012. People are eligible for awards ranging from 10% to 30% of the amount of money collected in enforcement cases where penalties exceed $1 million.

Neither the whistle-blowers nor the companies involved were named by the SEC, in keeping with the federal government’s policy of withholding information that could reveal a tipster’s identity.

 

Updated: 2-10-2022

SEC Says It Won’t Limit Whistleblower Payouts

Regulator proposes changes to two amendments adopted during Trump administration that it says could have been used by future commission to reduce awards.

The Securities and Exchange Commission said Thursday that it was revising two amendments governing the rules of its whistleblower program to address concerns that they would discourage tipsters from coming forward.

The two amendments were adopted in September 2020, during the Trump administration. SEC Chairman Gary Gensler, a Democrat tapped by President Biden, said last year that one amendment could be used by a future commission to lower an award because of its size.

Another amendment could prevent the SEC from making an award in related enforcement actions brought by other authorities if another whistleblower award program might also apply to the action, he said.

The SEC said the proposed changes to the two amendments would allow the regulator to increase a possible award, but not lower it, and to pay whistleblower awards for actions that would be otherwise covered by a non-SEC whistleblower program.

“These amendments, if adopted, would help ensure that whistleblowers are both incentivized and appropriately rewarded for their efforts in reporting potential violations of the law to the Commission,” Mr. Gensler said in a statement Thursday.

The proposed change regarding the SEC’s discretion to consider the dollar amount of an award would “give whistleblowers additional comfort knowing that the SEC could consider the dollar amount of the award” only to increase it, Mr. Gensler said.

The other change would “ensure that a whistleblower is not disadvantaged by another whistleblower program that would not give them as high an award as the SEC would offer,” he said.

The proposed changes come after the SEC signaled last summer that it would look into revising the two amendments, which were adopted with a vote of 3-2, with Democratic members opposing. The SEC said in August that it would largely pause enforcement of parts of the two amendments in the interim.

The SEC’s whistleblower program was enacted in 2011 as part of the 2010 Dodd-Frank Act. Under the program, a whistleblower can receive an award totaling between 10% and 30% of the fines levied in SEC civil enforcement actions stemming from a tip, assuming the fines total more than $1 million. The SEC said its whistleblower program has issued more than $1.2 billion to 245 individuals since it launched.


Updated: 4-12-2022

Major Insurers Are Scamming Billions From Medicare, Whistle-Blowers Say

Billing for illnesses that don’t exist, like prostate cancer in a woman.

Teresa Ross had been raising objections at work for months when her bosses brought in a psychologist hoping to make her question her own sanity.

A longtime manager at a Seattle health plan called Group Health Cooperative, Ross had opposed changes to the way the company billed Medicare. With the help of a new vendor, the insurer identified new diagnoses for patients, bringing in millions of extra dollars from the government. Ross insisted much of it was fraud. She says she was cut out of meetings.

Then she was invited to one with the psychologist. He asked how she was feeling and revealed that a senior executive had sent him to discuss her objections.

“People aren’t seeing you as a team player,” she recalls him saying. “They’re concerned that you have a loud voice within the organization. And you’re objecting to this thing that’s making us lots of money and everybody’s happy.”

Ross felt blindsided and insulted. The visit made no difference.

Ross had already filed a sealed whistleblower suit against the company, which later merged with Kaiser Permanente in 2017.

After years of investigating, the Justice Department took up her case last year. Other whistleblowers came forward too, with allegations accusing Kaiser and some of its competitors of inflating how sick their members appeared to be to get higher payments from Medicare.

The industry vehemently contests the allegations and says that plans get paid appropriately for the risk they take on. But the disputed billing practices at the heart of Ross’s case have become central to the health-care business and, as baby boomers retire, to America’s fiscal future. Medicare covers 64 million people and will spend $900 billion this year, or 4% of U.S. gross domestic product.

Almost half of people on Medicare now get their benefits through Medicare Advantage — private plans like the one Ross worked for, which get paid more for patients with more severe illnesses. That means a growing share of Medicare’s billions flows through arrangements susceptible to the kind of manipulation that Ross described.

Each year, the plans submit giant data files to Medicare with diagnostic codes meant to reflect their members’ illnesses. Those codes determine how much they get paid.

A federal watchdog warned in March that coding differences brought Medicare Advantage plans $12 billion in excess payments in 2020, compared to what traditional Medicare would have paid to cover the same population. The cumulative extra payments since 2007 will soon top $100 billion, according to the Medicare Payment Advisory Commission, or MedPAC.

Those payments mounted as American seniors flocked to the private version of Medicare. Enrollment in Medicare Advantage doubled in the last decade to more than 26 million people, on pace to cover a majority of Medicare beneficiaries.

Insurance companies have built billion-dollar businesses propelled by this growth. UnitedHealth Group Inc., Humana Inc., and CVS Health Corp.’s Aetna unit combined enroll more than half of Medicare Advantage members. Kaiser Permanente, with about 7% of the market, isn’t far behind, according to data from the Kaiser Family Foundation, a research group unaffiliated with the health plan.

The industry calls the program a win-win. Medicare Advantage caps members’ out-of-pocket costs and offers extra benefits like dental, vision and hearing coverage that traditional Medicare doesn’t. Private plans also send clinicians on house calls, deliver meals and offer rides to medical appointments, stitching together medical care with services intended to address members’ social needs.

The program’s growing popularity has made it politically powerful. Republicans extoll its private-sector innovation while Democrats know that enrollees are disproportionately low-income and people of color.

An industry coalition recently touted a letter signed by 346 U.S. representatives — more than 80% of the House — urging the Biden administration to “provide a stable rate and policy environment” for the program. Soon after, Medicare proposed payment rates for 2023 that an analyst for Veda Partners called “surprisingly good news for industry.”

Yet rising Medicare Advantage enrollment has also prompted warnings about the cost. The program’s hospital trust fund is projected to be depleted in 2026. “Failure to stem the excess spending created by coding intensity further jeopardizes the Medicare program’s already challenging fiscal sustainability,” MedPAC wrote in a comment letter to Medicare officials in March.

The industry has billions at stake in how the payments are calculated. In February, UnitedHealth asked the Supreme Court to review a case it lost on appeal challenging a policy to make insurers return payments for unsupported diagnoses.

The policy “imposes potentially billions of dollars in additional payment obligations” on plans and would destabilize the Medicare Advantage program, the company said in its petition. Letting the decision stand threatens to reduce benefits and increase costs for seniors in the program, UnitedHealth argued.

Official scrutiny is growing. The Department of Justice called policing Medicare Advantage an important priority on its anti-fraud agenda. The agency said in February that it pursued health plans that gamed the system “by submitting unsupported diagnosis codes to make their patients appear sicker than they actually were,” and cited Ross’s case as an example. Ross’s attorneys estimate the scope of such frauds reaches into the billions of dollars.

Ross filed her complaint against Group Health under seal a decade ago, and it remained a secret for seven years. With the aid of other whistleblowers, the Justice Department has also sued industry giants including UnitedHealth, Anthem Inc. and Cigna Corp. over similar allegations in recent years. The companies are fighting the cases.

Now it’s up to the courts to decide which practices are legitimate and which constitute fraud. Ross remains shaken by her experience. Coming forward wasn’t easy, she said. “The easy thing would’ve been to sit down and just let it happen.”

Ross, 57, grew up outside Seattle, a math whiz in a family that kept busy with music lessons and school activities. Her father had a heart attack while she was in high school, and she spent a lot of time at the hospital, pressing his doctors for information.

That early exposure coupled with her mathematical acumen led Ross into a career in an obscure corner of the health-care industry. In 1998, she arrived at a nonprofit insurer called Group Health Cooperative to lead a division building statistical models of patient risk.

In the 2000s, these models became central to the growing Medicare Advantage industry. Money hinged on the illnesses that plans documented for their members. Traditional Medicare pays doctors and hospitals directly for each test or service. In Medicare Advantage, health plans get a fixed payment from the government for each member they take on. The program will spend on average about $14,000 per enrollee this year.

Through a process called risk adjustment, added diagnoses typically bump payments by $1,000 to $5,000, sometimes even $10,000, according to MedPAC. It’s meant to compensate insurers for taking on sicker patients and discourage them from cherry-picking healthy people.

Health-care companies developed increasingly sophisticated methods to maximize payments. A cottage industry of vendors emerged to help them. They mine data from patient charts, send staff to do health-risk assessments in patients’ homes and prod doctors to review potentially missed diagnoses.

“The company that I had known to be ethical all of a sudden wasn’t”

Ross said she and Group Health originally embraced the system as a way to identify patients who needed care but weren’t getting it. “It’s not just digging for dollars,” she said. “It’s improving care.”

Her whistleblower suit and the Justice Department complaint that followed describe a growing pressure within the company to engineer higher risk scores for greater payments. She rebuffed one vendor called Leprechaun LLC hired in 2008 that wanted to submit claims “based on documentation that was clearly inadequate,” according to Ross’s complaint.

By 2011, Group Health’s finances deteriorated, and it was facing downgrades from credit raters. That fall, Group Health’s chief executive officer met a counterpart from a Buffalo plan called Independent Health, which had just formed a new subsidiary focused on risk adjustment called DxID, according to Ross’s complaint.

In an early pitch, DxID CEO Betsy Gaffney told one of Ross’s colleagues that Group Health’s internal approach to risk-adjustment “is really putting you back financially,” according to the Justice Department complaint. “I get what the purpose of the policies are theoretically, and even kind of agree philosophically, but it is very restrictive,” she wrote in a November 2011 email.

Group Health hired DxID the next month on a contingency basis. The vendor would keep 20% of any new revenue it brought in from combing old patient charts to uncover missed diagnoses. Gaffney proposed new ways to identify patients who suffered from illnesses like chronic kidney disease or low oxygen levels, a condition called hypoxia, according to the Justice Department complaint.

Ross recalls her managers lit up when they realized how much money it might bring in. Reviewing two years of data, DxID added thousands of potential diagnoses that increased Group Health’s revenue by $32 million, the U.S. alleged.

But when Ross checked DxID’s work, she found that three-quarters of the diagnostic codes it submitted for payment lacked proper documentation and didn’t stand up to scrutiny, according to her complaint.

The plan got paid for one patient’s depression diagnosis even though a physician said it had resolved and the patient now had “an amazingly sunny disposition,” according to Ross’s complaint. It claimed another patient had kidney complications from diabetes even after a doctor had explicitly ruled that diagnosis out.

DxID would pull illnesses from the “problem list” doctors maintained in electronic medical records, a section of the chart that sometimes contained old or resolved conditions, Ross said.

The company also used lab tests or other orders as proxies to infer diagnoses, even when clinicians had not documented the illnesses. For example, patients getting supplemental oxygen were assumed to have hypoxia, even though oxygen can be prescribed for less serious problems like sleep apnea, the complaint says.

Later DxID would send physicians “addendum” forms to update charts with suggested diagnoses, paying them $25 to fill them out, the U.S. alleged.

This approach produced some unlikely results. One patient’s depression was supposedly documented during a visit to an ophthalmologist, according to Ross’s complaint. In another case, when Gaffney was working for Independent Health, a woman was coded for prostate cancer, because “when a married couple has any disease, both were assigned to that disease,” she wrote in an email, according to the Justice Department complaint.

As Ross and her colleagues reviewed the submissions, they found DxID was adding diagnoses that doctors hadn’t made.

“Coders are not allowed to diagnose anything,” Ross said. “That’s for doctors.”

Despite Ross’s protests, Group Health adopted most of the coding policies DxID proposed, Ross and the Justice Department allege. Her managers spurned her, she said, and eventually brought in the psychologist.

Ross’s attorney, Mary Inman, a partner at whistleblower law firm Constantine Cannon, said Ross’s experience fits a pattern of tactics used to isolate corporate dissenters. “This is where you get the whistleblower to start to doubt herself,” Inman said.

“That’s part of the corporate playbook that we see in these cases.”

Ross wasn’t dissuaded. In April 2012, after 14 years in a job she loved, she filed her complaint in federal court for the Western District of New York, where DxID was based. “The company that I had known to be ethical all of a sudden wasn’t,” she said.

“They didn’t care about whether or not it was compliant. At least in my eyes, they were more concerned about what Betsy Gaffney was hanging out in front of them, which was millions and millions of dollars.”

Attorneys for Gaffney didn’t respond to multiple requests for comment. In a statement to the Buffalo News last year, they said she was “unfortunate victim of an ancient lawsuit premised on inaccurate allegations.”

In legal filings seeking to dismiss the case, the defendants characterized the dispute as “good faith disagreements over objectively ambiguous coding criteria” and said that the allegations from Ross and the Department of Justice don’t meet the standards of a False Claims Act claim.

Whistleblowers file their initial complaints under seal to give the government time to investigate and decide whether to proceed. In Ross’s case, it lasted years. She left Group Health the year after she filed her complaint and moved on to other jobs while her case sat sealed on the docket.

Mostly unknown to Ross, other whistleblowers were coming forward with similar accounts at other companies, and federal investigators were building cases of their own. Both targeted some of the largest companies in the industry, which increasingly relied on Medicare Advantage as a source of profitable growth.

In 2017, the Justice Department intervened in a case against UnitedHealth, the largest Medicare Advantage provider. It sued Anthem in 2020. A whistleblower suit against Cigna was also unsealed that year. The companies are fighting the cases and have disputed allegations of wrongdoing.

CVS Health and Humana have also both disclosed investigations into their risk adjustment practices and said they’re cooperating with the probes. UnitedHealth and CVS declined to comment for this story. Representatives for Anthem, Cigna and Humana didn’t respond to requests for comment. The Department of Justice declined to comment.

In 2017, Group Health was acquired by Kaiser Permanente, the giant California-based HMO. Ross’s own suit was unsealed in 2019, when the U.S. initially said it would not intervene but would keep investigating.

Kaiser Permanente’s Washington state subsidiary denied Ross’s allegations. Without admitting liability, the health plan resolved the lawsuit in 2020 in a settlement for $6.3 million — about one-fifth of the revenue increase Ross attributed to the practices in two years of its engagement with DxID. Ross was awarded $1.5 million, with the rest recovered by the government.

Kaiser Permanente spokesman Marc Brown said in an email that Group Health “submitted its data in good faith and in reliance on recommendations by DxID, its contracted risk adjustment vendor, which purported to be an expert in this area.”

DxID ceased operations last summer. But the U.S. attorney in the Western District of New York is pursuing the civil fraud claims Ross initiated against the vendor, its parent company Independent Health, and Gaffney as an individual defendant.

Independent Health and DxID deny wrongdoing and have moved to dismiss the lawsuit. “We believe the coding policies being challenged here were lawful and proper and all parties were paid appropriately,” Independent Health said in a statement.

“Independent Health and DxID diligently navigate complex and vague coding criteria to ensure that all diagnosis and billing codes properly reflect our members’ medical conditions and are supported with documentation in the members’ medical records.” The company also said its plans received high ratings from Medicare.

Last summer, the Department of Justice intervened in six other cases against Kaiser Permanente filed by separate whistleblowers alleging that it defrauded Medicare through inflated risk codes. The health system says it will fight the suits and defended its audit record with Medicare.

“Our policies and practices represent well-reasoned and good-faith interpretations of sometimes vague and incomplete guidance,” Kaiser Permanente said. The company declined interview requests.

The cases could take years to resolve. Ross, who struggled initially with her decision to come forward, has been heartened by the number of counterparts across the industry who raised similar concerns. “It took a long time for the government to really understand what was happening to them in this space,” she said.

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