By Sarah N. Lynch
WASHINGTON, Oct 1 (Reuters) - In the two years since U.S.
market regulators launched programs to encourage whistleblowers
to report corporate wrongdoers, all of five people have been
rewarded, but officials are bolstering their efforts and predict
lucrative payouts for tipsters.
Both the Securities and Exchange Commission and Commodity
Futures Trading Commission launched their offices in 2011 as
part of post-crisis reforms laid out in the 2010 Dodd-Frank
Lawmakers hoped the allure of financial windfalls would
encourage witnesses to turn in fraudsters or other corporate
wrongdoers. But the initial tips and payout numbers have been
The SEC had paid a total of four whistleblowers $170,000
despite receiving 3,001 tips in fiscal year 2012 alone, while
the CFTC paid nothing after getting 58 tips in the same time
But on Tuesday the SEC announced its largest award yet - $14
million to an anonymous whistleblower - and the official in
charge of the agency's office said high-quality tips that could
lead to big payouts are now being submitted routinely.
"We have some very interesting ongoing investigations that,
depending on how they play out, could, given our historical
recovery in these kinds of cases, mean very big numbers," SEC
Whistleblower Office Director Sean McKessy said in an interview
with Reuters last week.
"I think logically speaking, in the years to come, I expect
there will be more frequent and continuous payments on a more
rolling basis," he added.
The SEC provided few details about how the latest
whistleblower helped assist SEC investigators, citing
confidentiality concerns by the whistleblower.
Under SEC rules, if the tip proves vital to a case, a
whistleblower can receive anywhere from 10 to 30 percent of the
monetary sanctions collected if they exceed $1 million.
The SEC said the person's tip allowed the agency to bring an
action against the perpetrators in less than six months and
recover investors' money.
While the SEC's office has received the bulk of the tips so
far, the CFTC's program is gaining traction.
In July, the CFTC hired SEC enforcement veteran Christopher
Ehrman to head its whistleblower office. In an interview with
Reuters, Ehrman said the program is thriving.
As of late September, he said, the CFTC had received more
than double the tips for fiscal 2013, jumping from 58 to 137.
"The overall visibility of the agency I think has increased
significantly," he said, noting that the CFTC's blockbuster
cases against banks like UBS, The Royal Bank of
Scotland and Barclays, settlements over the
rigging of Libor interest-rates and the ongoing litigation
against ex-MF Global Chief Executive Jon Corzine have been a
"game-changer" for the agency.
The offices have their critics.
Corporate interest groups, including the U.S. Chamber of
Commerce, warned that the rules governing the offices could kill
company compliance programs, especially if whistleblowers were
not required to report internally first.
They say regulators could be swamped with an avalanche of
possibly less-than-stellar tips from insiders who have a beef
with management and were looking for a big payday.
In a concession to companies, the final SEC rule included a
provision that improved a whistleblower's chances of receiving a
higher percentage award by reporting problems internally first.
But the rule only protects the whistleblower from retaliation if
the employee also reports wrongdoing to the SEC.
Tom Quaadman, vice president of the Chamber's Center for
Capital Markets Competitiveness, said in an interview that it is
too soon to know if the program has had adverse effects and that
more data is needed.
Other groups, namely whistleblower lawyers, have been fierce
advocates of the offices' potential.
Lawyers in private practice who specialize in whistleblower
cases say they have clients, including high-level people from
well-known companies, who have strong potential to reap the
benefits of the new Dodd-Frank whistleblower programs.
"We have 26 cases pending before the SEC right now and of
that number, close to half have had some enforcement interest,"
said R. Scott Oswald, a lawyer with the Employment Law Group.
"Of that number, I'd say about six or seven are very
significantly down the track in the enforcement action."
Regulators and lawyers say few awards have been handed out
so far due to the time it takes to investigate, litigate and
determine whether whistleblowers should be rewarded.
"An SEC investigation can take two to four years to
develop," said Jordan Thomas, a partner at Labaton Sucharow LLP,
who previously worked at the SEC helping to create the
Because the rules took effect only in 2011, that means most
cases have not yet run their course, he added.
"In the coming years, I predict that many of the SEC's most
significant cases will be the result of whistleblowers," Thomas
As for the CFTC's program, experts say they believe there
have been no payouts yet for a variety of reasons.
In addition to the time it takes to check out tips, the CFTC
investigates a narrower swath of issues than the SEC and is not
as well known a regulator on Wall Street.
"I think that office should go on a massive public relations
campaign to explain what they do and how whistleblowers can
help," said Stephen M. Kohn, the executive director at the
National Whistleblowers Center and author of "The
The CFTC's Ehrman, for his part, said he could not agree
He plans to go on a road show of sorts, visiting CFTC and
FBI regional offices, bar association events and trade group
gatherings. In November, he will set up a table at the Future
Industry Association's popular annual conference in Chicago.
"We are redoubling our efforts," he said.