SEC's Whistleblower Program Runs into Crosswinds

Sunday, 28 Apr 2013 12:34 PM

By Michael Kling

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The SEC's whistleblower program is facing difficulties and an unclear future, The New York Times reports.

"The SEC's program hangs in the balance right now," David K. Colapinto, general counsel of the nonprofit National Whistleblowers Center, told the Times. "Everybody is waiting to see what they do — and nobody really knows what the track record of this program is going to be."

Whistleblowers have led to many success SEC enforcement actions, the Times notes. Whistleblowers helped expose overstated equity performance of an Oppenheimer & Co. private equity fund, revive an investigation into a Texas Ponzi scheme, and expand the SEC's investigation into Knight Capital, which almost failed after software glitches sent out erroneous trades.

Editor’s Note: Put the World’s Top Financial Minds to Work for You

Under the SEC's new program, whistleblowers get up to 30 percent of the fines the SEC collects if they provide new information leading to more than $1 million in fines. The agency can also give rewards to tipsters who report wrongdoing to their employers first.

The reward money has opened a flood of tips — more than 3,000 last fiscal year, the Times reports. The agency paid its first whistleblower reward, to a woman who revealed a Ponzi scheme at China Voice Holding, according to the Times. The whistleblower, a consultant doing the company's tax return, has received $46,000 so far.

However, many challenges confront the program, the Times reports.

Some companies require employees to sign documents saying they know of no fraud at work. Companies may also ask them to sign severance agreements that forbid them from whistle blowing. Some firms are encouraging employees to alert management about possible wrongdoing and not notify the government, and some have allegedly harassed
whistleblowers.

The agency is being criticized for taking too long — weeks or months — to respond to whistleblower tips. Harry M. Markopolos, a securities analyst who was ignored when he told the SEC about Bernard Madoff's Ponzi scheme, praised the program. "The question is whether they can turn it into successful enforcement actions," he told the Times.

“The whistleblower program is already becoming a success,” said SEC Chairman Mary L. Schapiro, in an SEC announcement. “We’re seeing high-quality tips that are saving our investigators substantial time and resources.”

Sean McKessy, chief of the SEC’s Whistleblower Office, said that since the program was established in August 2011, about eight tips a day are flowing into the SEC. “The fact that we made the first payment after just one year of operation," he said, "shows that we are open for business and ready to pay people who bring us good, timely information.”

Editor’s Note: Put the World’s Top Financial Minds to Work for You

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