Recovering Losses caused by Investment Misconduct

Critics of the SEC's Whistleblower Program May Be Blowing Hot Air

In a recent Forbes.com article, James Kaplan, of Audit Integrity, tore down the arguments voiced by critics (such as former SEC chairman Harvey Pitt) of the SEC's revised whistleblower program. Pitt's concern, as quoted in a November NY Times article, was that the SEC's new program would undermine the internal compliance departments of various corporations. As argued by Kaplan, Pitt's concern is invalid at best and intentionally deceptive at worst.

The 2002 Sarbanes-Oxley Act, a legislative effort to reduce corporate fraud that came on the heels of the Enron and WorldCom scandals, has done little to combat malfeasance in the financial and corporate worlds, a fact that comes as no surprise to Kaplan.

"Is it really likely, as Pitt suggests, that corporate compliance departments will rat out their own executives? Should we continue to rely on them to act as anti-fraud monitors and keep an eye on their own executives--a task they have proven incapable of performing?" he wrote.

The statistics say no. In fact, according to Kaplan, over 90% of the SEC's enforcement actions have come from whistleblower tips, the exact things the SEC's revised program aims to increase - a goal that many see as easily achievable as long as the program stays funded.

The new whistleblower program already has $475 million set aside to reward eligible whistleblowers whose tips lead successful enforcement actions. Compared to the meager $160,000 that was awarded by the SEC over the last two decades under the old program, the new program is clearly intended as a major and wide-reaching response to the continued increase in investment fraud.

As such, the provisions of the improved program are expected to lead to regular and consistent enforcement actions by the SEC based on solid whistleblower tips. In fact, many in the industry expect the number of tips reported to the SEC to increase dramatically over the next few months. It is easy to understand, then, why so many corporate managers and lobbyists are arguing against the program's implementation.

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