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SEC’s whistleblower program is off to a fast start

Brandon Purcell

Charles Polk famously said, “There are no financial incentives for nefarious activities.” That may be true, unless, of course, you happen to be the whistleblower reporting the nefarious activities.

In the months following the implementation of the Securities and Exchange Commission’s new whistleblower rules as required under Section 922 of the Dodd-Frank Wall Street Reform and Consumer Protection Act in August 2011, whistleblower tips have come rolling in at unprecedented levels.

The rules implemented the SEC’s heavily debated new whistleblower bounty

Matthew Purcell

 program that rewards individuals who provide the SEC with information leading to successful enforcement actions that exceed $1 million in monetary sanctions. Eligible whistleblowers can earn a payout of 10 percent to 30 percent of any monetary sanctions collected because of the tipster’s “original information” about a possible securities law violation that has occurred, is ongoing, or is about to occur. The rules require this original information to be based on the whistleblower’s independent knowledge or analysis and not on information that has already been provided to the SEC by another source.

The SEC whistleblower program is based upon the Internal Revenue Service’s whistleblower program, which pays informants up to 30 percent of the additional tax, penalty, or other amounts the IRS collects.

In November 2011, the SEC issued its annual report on the Dodd-Frank whistleblower program for fiscal year 2011. Because the rules did not become effective until August 12, 2011, only seven weeks of whistleblower tip data is presented in the Report. For the period August 12, 2011 through September 30, 2011, the SEC received 334 tips. The three most common complaints of whistleblowers were market manipulation, corporate disclosures and financial statements, and offering fraud.

Notably, the SEC did receive one complaint from within the state of Idaho. However, the report did not identify the allegation type.

More recently, on February 24, Sean McKessy, chief of the SEC’s office of the whistleblower, reported that the SEC, since August 12, 2011, has successfully returned more than 2,000 calls (in each case, the SEC returned the call within 24 business hours) on the whistleblower hotline, resulting in hundreds of high-quality tips.

Although there is no similar state-wide whistleblower program in Idaho for securities fraud, Idaho public and private entities have used internal tip hotlines for many years as a tool to combat fraud. The difference between these hotlines and the SEC’s whistleblower program is the latter’s heavy emphasis on financial rewards given to those who provide information.

The SEC whistleblower program continues to garner criticism from many corporations who contend that the program undermines internal reporting systems. However, in implementing the program, the SEC hoped to address heavy criticism over the past decade for its inability to preserve the integrity of the U.S. capital markets and to sufficiently protect investors.

In the last several years, the corporate landscape has been littered with multi-billion dollar Ponzi schemes, mortgage fraud and financial statements fraud. By offering significant financial incentives to whistleblowers, it appears the SEC has gained traction in its fight against fraud and securities law violations.

Brandon Purcell is an accountant for the Idaho State Controller’s Office and a Certified Government Finance Manager and Certified Fraud Examiner. Matthew Purcell is an associate in the Business Group at the Boise office of Perkins Coie LLP.

About Brandon and Matthew Purcell