Ten years after his arrest, the words, “Bernie Madoff,” have become ingrained in American lexicon as shorthand for massive fraud that ruins lives and costs billions in investments and retirement income.
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But also associated with that term is recognition of the value of Wall Street whistleblowers and how important it is that enforcement agencies listen and effectively respond to what they say. The failure of the Securities and Exchange Commission to follow up on whistleblower information that Madoff’s golden touch was actually an elaborate Ponzi scheme was a serious embarrassment for the agency.
Since Madoff was arrested on Dec. 11, 2008, much has changed at the SEC and how it handles whistleblower information. That is largely because of the SEC whistleblower program Congress created as part of the Dodd-Frank Act in 2010 at the urging of then-SEC Chair Mary Schapiro.
Now whistleblowers are welcomed, protected and lauded at the SEC, and whistleblowers have gotten the message.
Last fiscal year, the SEC received an all-time high of 5,200 whistleblower submissions, which was an 18 percent jump over the previous year. And the agency awarded more money for whistleblower rewards in fiscal year 2018 – $168 million to 13 individuals – than it had in all prior years combined.
So far, based on whistleblower information and assistance, the SEC has ordered monetary sanctions totaling more than $1.7 billion, of which $452 million has been or will be returned to harmed investors.
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Three elements of the SEC whistleblower program have been key reasons for its success: confidentiality, anti-retaliation protections and financial rewards.
The SEC keeps the identities of whistleblowers confidential, even after cases are resolved and whistleblower awards are announced. Whistleblowers may even file reports with the SEC anonymously, if they do so through a lawyer.
The agency also has been very aggressive at protecting whistleblowers from retaliation, including where a whistleblower’s good-faith suspicion of a securities law violation turned out to be unfounded. Under Dodd-Frank, employers are prohibited from retaliating in any way against SEC whistleblowers, who have the right to sue for back pay, reinstatement and damages.
In addition, the SEC has penalized a number of companies for employment and severance agreements with language that might discourage current or former employees from reporting securities law violations to the agency. It also has argued in many court cases for strong whistleblower protections.
The critical reason for the SEC whistleblower program’s success, however, is the rewards provision in Dodd-Frank. Whistleblowers receive rewards of 10 percent to 30 percent based on the amount the SEC collects as a result of the whistleblower’s information, when over $1 million in monetary sanctions are imposed. Rewards come out of a fund financed through monetary sanctions paid by securities law violators.
Whistleblower rewards set the SEC program apart from almost all other whistleblower programs in the world. It’s the reason the program has consistently attracted whistleblowers from every state in the US as well as thousands in other countries.
The SEC has awarded whistleblowers more than $326 million. That total includes awards earlier this year of $50 million and $33 million, which are the largest whistleblower awards so far.
The SEC whistleblower program may be one of the few programs in Washington where there is bipartisan support. Both Republican and Democratic SEC commissioners recognize that whistleblower information has become a very important enforcement tool.
FILE Fmr. Commissioner of the U.S. Security Exchange Commission Mary Jo White (AP Photo/Seth Wenig, File)
Former SEC Chair Mary Jo White called the program a “game changer” for enforcement, and current Chairman Jay Clayton noted that, “The Commission’s whistleblower program has contributed significantly to our ability to detect wrongdoing and better protect investors and the marketplace, particularly where fraud is well-hidden or difficult to detect.”
As someone who helped build the SEC whistleblower program from scratch and ran it for five years, I saw first-hand how whistleblower information stopped burgeoning Madoff-type schemes and prevented companies from becoming the next Enron or WorldCom. Thanks to the SEC program, the anonymous heroes who are whistleblowers now are getting their due.
Sean McKessy was Chief of the SEC Office of the Whistleblower from 2011-2016 and now is a partner at Phillips & Cohen LLP, where he represents whistleblowers.
