Europeans lead foreigners in reporting US financial crime

Europeans proved themselves to be most keen foreigners to inform America’s regulators of suspected financial crime over the past year, and could earn at least $1.6m from their willingness to ‘blow the whistle’.

The fact of Europeans’ readiness to inform came from the first annual report on the Dodd-Frank Whistleblower Program from the Securities & Exchange Commission.

The program stemmed from “a series of scandals that were either undetected or unreported, from Enron until the legislation was passed, including the Madoff scandal,” explained Jordan Thomas, chair of the whistleblower representation practice at lawyers Labaton Sucharow,

After regulators and politicians asked themselves what would most help law enforcement be more efficient and effective, Thomas said the answer decided upon was “having actionable intelligence from insiders”.

He said the resulting program facilitating this “will deter people from engaging in fraudulent conduct, because the potential to be caught [with these laws in place] is so much higher”.

The laws took form in mid-August 2010, to allow people suspecting criminal financial activity to report this anonymously.

They have a wide catchment: “Beyond those entities that are registered with the SEC, other entities and individuals may be subject to the SEC’s jurisdiction; for instance, those with clients, investors, investments, operations or employees in the United States. If you commit fraud in the US that is the ultimate invitation for an SEC enforcement action, regardless of your status.”

Thomas was also an assistant director in the Enforcement Division of the SEC, where he spearheaded the development of the SEC’s whistleblower programme.

The rules only took full effect in August 2011, so the 334 hotline tip-offs registered in the program’s first annual report actually came in barely seven weeks to 30 September.

The highest proportion (16%) related to market manipulation, followed by offering fraud (15.6%), corporate disclosure and financials (15.3%),and insider trading (7.5%).

Not surprisingly Americans made most (215), with Europeans including Britons next (16). Criticis of China’s corporate governance standards might note the Chinese came next, giving 10 tips.

Thomas said: “Given the global nature of the business, it’s not surprising that we’re seeing tips from outside of the US.”

The 334 tip-offs in seven weeks works out to over 2000 annualised.

“That is a significant number particularly when you consider the high-quality of submissions.” He said reports were coming from high level and well-placed individuals, who have furnished strong corroborating evidence, such as contemporaneous emails and other important documents.”

Thomas assists clients to decide whether or not to report, to organise and present effectively their claim, and then can stand for them when arguing for the size of any reward.

He added the SEC investigates more than 2000 cases at any point in time, and brings approximately 700 enforcement actions every year.

“In the coming years, the SEC will break all prior records for number of enforcement of actions and monetary sanctions, because insiders are finally breaking their silence and reporting a wide variety of significant securities violations to the SEC.

“In the coming years, I predict (admittedly an educated guess) that many of the SEC’s most significant cases will be the result of whistleblowers.”

Under the program, whistleblowers whose tips lead to fines of at least $1m can receive from 10% to 30% of the total.

Based on admittedly optimistic expectations that all 16 European tip-offs end in sanctions of at least $1m, Europeans could reap at least $1.6m, or 10% of total sanctions, from their actions.

So far, the SEC has published a list of 170 applicable enforcement judgments and orders that carried sanctions high enough to qualify. The fund to reward whistleblowers has $453m in total.

Thomas expects the SEC to be even-handed in rewards it hands to whistleblowers over time, “but in cases where it a close call regarding whether someone is eligible or not [for a reward], the SEC is likely to err on the side of the whistleblower.”

The financial incentives for whistleblowing can be substantial – in each of the last two years, the SEC has secured over $2.8bn in monetary sanctions and many cases exceeded $100m.

The latest laws are so new, however, the SEC has not yet had time to make rewards under the Whistleblowers legislation. Investigations and related enforcement actions last, on average, between two and three years.

In deciding on the level of reward, the SEC will consider matters on the negative side such as whether there was unreasonable delay in reporting, or interference by the whistleblower with internal compliance reporting systems.

On the positive side it will regard the significance of the misconduct reported; the extent of assistance from the whistleblower; the need for an individual to be held accountable; and the law enforcement’s interest in deterring violations of securities laws by encouraging more reporting in future.

Thomas said whistleblowers would have their identities shielded from public view if they had enlisted counsel, but it was still brave of people to come forward.

“There are no guarantees that once the investigation commences people will not suspect it may be you who has reported it, and also people struggle with the idea their organisation cannot be fixed from within.”

He added human resource well beyond the staff just in the SEC’s whistleblowing office – fixe lawyers and one senior paralegal under head Sean McKessy – mean the regulator is unlikely to be overwhelmed if large numbers of whistleblowers come forward.Thomas was impressed by the early reporting numbers for the program.


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