Thursday, April 8, 2010

Not Much Bounty for SEC Whistleblower Program - SEC's Enforcement Division - Peter Sivere - Whistleblowers Are Ignored

"" For more than 20 years, the Securities and Exchange Commission (SEC) has had a program in place to reward whistleblowers who provide the agency with information about insider trading. But a new audit by the SEC Office of Inspector General (OIG) reveals that the program has almost never been used, is barely recognized inside or outside the SEC, and has fundamental design flaws.

It turns out the SEC has received very few applications in the past two decades for bounties under the program -- and only five people have actually received payments since the program first began:

Design Flaws in the Bounty Program

The OIG also found that the program suffers from the following deficiencies: it's poorly recognized by the public and even within the SEC; the criteria for judging bounty applications is overly vague; the SEC does not have good internal policies to guide staff in reviewing bounty applications; the SEC rarely provides whistleblowers with status reports on their applications (a problem we've also heard about at other IG offices); once the applications are passed on, there are no systems in place to ensure that they are processed in an adequate and timely fashion; and the documentation for bounty referrals is often incomplete.

Many Whistleblowers Are Ignored or Even Subjected to Retaliation

POGO previously reported on anecdotal evidence of the problems described by the SEC OIG.

Writing for Politics Daily, we described how one whistleblower was retaliated against after inquiring whether he would be eligible to receive a bounty payment under the SEC's program. Peter Sivere, who at the time was working as a compliance officer at JPMorgan, first approached the SEC with evidence showing that his employer had failed to disclose documents sought in a wide-ranging SEC probe into a practice known as market timing. He was told that he didn't qualify for a bounty payment, but he provided the information anyway.

But instead of protecting Peter Sivere, the SEC enforcement attorney investigating the matter told JPMorgan's counsel about Peter Sivere's initial inquiry about a cash payment. JPMorgan's counsel then used this information to disparage Peter Sivere's whistleblower credentials at a proceeding before the Occupational Safety and Health Administration, in which Peter Sivere had contended that JPMorgan retaliated against him after he went to the SEC.

A subsequent investigation by the SEC OIG found that the enforcement attorney, George Demos , had violated agency rules by disclosing non-public information in an ongoing investigation, and recommended that disciplinary action be taken. George Demos left the SEC shortly thereafter and is now running for Congress.

OIG's Recommendations

To help correct the many deficiencies in the whistleblower bounty program, the OIG's latest audit recommended that the SEC's Enforcement Division develop a communications plan to publicize its existence; post the application on its website with clear instructions for the whistleblower; establish better policies to follow up with the whistleblower once the complaint is received; develop specific criteria for recommending bounty awards; improve its internal controls for tracking tips and complaints; require that a bounty file with minimum documentation be created for each application; and incorporate best practices from comparable programs run by the Department of Justice (DOJ) and Internal Revenue Services (IRS).

Congressional Reforms and Problems with Other Bounty Programs

In the meantime, Congress is also considering legislation to improve the SEC's whistleblower bounty program. The financial regulatory overhaul bill passed by the House last fall included a provision to authorize the SEC to award bounty payments tied to any judicial or administrative action brought by the SEC (i.e., not just insider trading cases) that results in monetary sanctions of over $1 million.

The provision also enables the whistleblower to receive up to 30 percent of the amount recovered (the current limit is 10 percent).

Senate Banking Committee Chairman Christopher Dodd's (D-CT) bill would go even further, ensuring that the whistleblower receives no less than 10 percent of the monetary sanctions, and allowing the whistleblower to appeal any aspect of the SEC's decision, including whether, to whom, and in what amount to make the award.

We applaud these legislative fixes and hope that the final bill reflects the stronger language proposed by the Senate. However, the SEC should also learn from the shortcomings in comparable whistleblower reward programs run by other agencies.

While the False Claims Act has resulted in over $20 billion in recoveries since 1986, the IRS's program to reward whistleblowers who spot tax problems in their workplace shares some of the same problems uncovered by the SEC OIG.

The IRS program, which was established under the Tax Relief and Health Care Act of 2006, enables whistleblowers to receive between 15 and 30 percent of the collected proceeds.

However, a recent audit by the Treasury Inspector General for Tax Administration found that the IRS's Whistleblower Office does not have a good system in place to manage and track cases, and that no awards have actually been paid out under the new program, in part because the claims can take over a decade to process.

One well-known whistleblower who's still waiting to hear whether he will receive an award is former UBS employee Brad Birkenfeld, who was sentenced to 40 months in prison after he attempted to inform the IRS and DOJ about his role in soliciting wealthy Americans to evade taxes through services provided by the Swiss bank.

Although his ordeal isn't necessarily a reflection on the IRS program, it does highlight the dangers often faced by individuals who blow the whistle on corporate wrongdoing.

In any event, the SEC could use all the help it can get when it comes to handling whistleblower complaints, and we hope that the OIG's recommendations and Congress's legislation will finally enable the SEC to give whistleblowers the protection and recognition they deserve.

-- Michael Smallberg  ""Sourcehttp://pogoblog.typepad.com/pogo/2010/04/if-the-sec-has-a-whistleblower-program-but-nobody-ever-uses-it-does-it-really-exist.html