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July 12, 2019 | BusinessFrom the blog

A Note for Potential Financial Industry Whistleblowers: The Makings of a Good Tip & The Financial Rewards of Outing Fraud

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By: Sarraf Gentile LLP

The government encourages, rewards and empowers individuals who publicize fraud in the financial industry.

The two most powerful and lucrative tools for outing fraud in the financial industry are the SEC Whistleblower Program and the CFTC Whistleblower Program.  Both programs were created in 2010 as part of the Dodd-Frank Wall Street Reform and Protection Act. These programs are part of the federal government’s effort to reform the nation’s financial regulatory system following the financial crisis of 2008.

Those who work in the financial industry stand to gain the most from these programs because they are experienced enough to identify fraud, are best able to explain it to the government and are the most likely to receive a bounty. Hundreds of millions of dollars in bounties have been paid out since the passage of Dodd-Frank.

SEC & CFTC Whistleblower Programs

Dodd-Frank incentivizes individuals to blow the whistle on securities or commodity law violations by offering substantial financial rewards and benefits.

Under Dodd-Frank, whistleblowers who inform the SEC or CFTC of wrongdoing that leads to sanctions exceeding $1 million are entitled to rewards of 10% to 30% of the amount collected by the government. The government also pays a share of any fines collected under a related action such as a concurrent criminal prosecution.

The law contains other important benefits for whistleblowers, such as protections in the event of retaliation – providing for reinstatement, legal costs reimbursement and compensation of up to twice the amount of the back pay owed. If an employer fears or suspects that a departing employee may want to tip the government of a fraud, employees should rest assured that “releasing” the right to tip to the government is not permitted.  In other words, an employee can’t give up the right to let the government know about a fraud and collect a reward for doing so. 

Dodd-Frank also allows the SEC and CFTC to keep whistleblowers anonymous. To do so, whistleblowers need to be represented by a lawyer, which is sound advice for any potential whistleblower given the complexity of the program rules and subject matter. In fact, because the SEC and CFTC have limited resources to investigate the thousands of claims submitted by whistleblowers each year, working with knowledgeable counsel familiar with the programs and relevant law can help get the government’s attention and secure a reward if enforcement sanctions are levied.

The Rewards to Whistleblowers

The programs have paid out some very substantial rewards in recent years.  In fiscal year 2018 alone, the SEC whistleblower program awarded more money to whistleblowers – $168 million to 13 individuals – than it had in all the prior years combined. (For the 12-month period ending September 30, 2018, the CFTC awarded more than $75 million to whistleblowers, including a record-breaking single award of $30 million.)

But as whistleblower awards have grown, so have the number of submissions. In 2018, for example, the SEC received more than 5,000 whistleblower submissions. Knowing what makes a good case and properly framing it – so that the government will devote the resources necessary to investigate and levy a fine – is critical.

Identifying and Presenting a Good Tip

Given the government’s limited resources, it’s important to know how to get the government’s attention. Crafting a good tip is critical. And good lawyering plays a big role. 

The best tips are timely (i.e., fast – ideally in real-time while the fraud is ongoing) and submitted by eligible individuals (this usually excludes company lawyers and outside auditors). Substantively, good tips are able to identify a “material” violation, meaning the fraud has a high-dollar value or involves an important rule violation (such as government corruption or an intentional violation of law).

A few types of cases that the government has historically tended to prosecute are those that involve accounting violations (e.g., financial restatements), broker-dealer misconduct, market manipulation, public company frauds, FCPA violations and money laundering.  Ticky-tack misconduct are generally not pursued and activities that fall in a “gray-area” will largely depend on whether the government is interested in leaving the area gray or not.

Also, good tips have corroborating “evidence” usually in the form of documents (emails, texts, memos, presentations, spreadsheets, etc.) that help explain the fraud. If having actual “proof” is not possible, equally good is letting the government know where they can find it.  This means being able to identify the people who orchestrated and carried out the fraud, as well as letting the government know where critical documents and information about the fraud are kept (so that the government can easily and quickly get them).

In the end, the odds of identifying the makings of a valid claim, crafting the best tip possible and being able to back it up with the right kind of proof, increase substantially with experienced and dedicated counsel on your team.

More Information

For more information about the programs, the rules and various resources regarding why, when and how to blow the whistle, call or visit our firm or visit the website of our colleagues at www.sarrafgentile.com

Feature image by Warren Wong

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