I didn’t notice this SEC enforcement until now, but 10 days ago the agency doled out a whistleblower award—and trimmed the final prize to the tipster, because that person both participated in the misconduct and took his sweet time before alerting the SEC.
Alas, we don’t know many more details about this case. We don’t know the company involved, nor the type of misconduct. We don’t even know exactly how the whistleblower was involved in the scheme. But the SEC did say this:
In making this preliminary award assessment, the [SEC] reduced the award below from what it might otherwise have been because of both the claimant’s culpability in connection with the securities law violations at issue in the covered action and the claimant’s unreasonable delay in reporting the wrongdoing to the Commission. The claimant did not submit a response challenging the preliminary determination.
In other words, the whistleblower decided not to push his luck, and take what money he could. All criminals should be so wise.
This is not the first time the SEC has granted a whistleblower reward to a somewhat sketchy whistleblower. In 2014 the SEC gave a $30 million award (its largest ever) even though “We also considered claimant’s delay in reporting the violations, which under the circumstances we find unreasonable.” And in 2016 the SEC gave an award of $275,000, but part of that award would be offset against a judgment against the whistleblower for his role in the misconduct he reported.
In other words, the SEC can and does apply judgment to the people reporting misconduct and looking for money. (The SEC already bars rewards for whistleblowers who have been criminally convicted for the misconduct they’re reporting.)
A More Modulated Future?
I suspect we’ll see more rewards like this in the future: where the SEC wants to show compliance officers (and the corporate community at large) that the whistleblower rewards program will continue, but won’t run wild. Examples of the SEC exercising judgment and trimming the bounty to whistleblowers with questionable motives will send that message.
Consider the SEC’s delicate position with the whistleblower program right now: it’s a fantastic vehicle for the Enforcement Division, but numerous voices within the Trump Administration view whistleblowers as pests who ideally should report internally and then be quiet. Paul Atkins, a former SEC commissioner and one of the invisible hands guiding Donald Trump on financial regulation, is in that camp.
In all likelihood, the whistleblower program will survive any Republican efforts to revise the Dodd-Frank Act, because the program works and helps the SEC do its job. Even Republican leadership at the agency can see that. But a whistleblower program that intrudes too much on traditional enforcement turf—say, by fining companies for pre-taliation clauses, or never trimming rewards for shady whistleblowers at all—that’s the sort of behavior that might get tamped down.
That’s not necessarily a bad thing for compliance officers. The best situation for Corporate America is to a have a strong regulator, with powers that are broad but clearly stated, led by intelligent and (above all) prudent leaders, who know how to exercise good judgment. We have not always had such qualities with SEC leadership in the past.
P.S. A hat-tip to Ellen Hunt, head of ethics & compliance at AARP, for first noting this case on Twitter.
Speaking of Leaders…
Jay Clayton, the Trump Administration’s nominee to lead the Securities and Exchange Commission, finally had his financial disclosure report released by the Office of Government Ethics. Now we can all look up how much money he makes as a partner at Sullivan & Cromwell, and the Senate can get moving on his nomination hearing.
Clayton made $7.6 million at the firm last year, including income from numerous private investment vehicles available to Sullivan & Cromwell partners. The form does not disclose the income of his wife, an executive at Goldman Sachs, but we can assume she too makes more money than the average bear. She plans to resign from Goldman if Clayton is confirmed as SEC chairman, which is pretty much a certainty unless some political calamity strikes.
More interesting to compliance officers will be the many conflicts Clayton will face as chair of the SEC, given his past clients. Clayton has represented Valeant Pharmaceuticals, an accounting trainwreck currently under criminal investigation by the SEC. He has advised at least two more firms currently under investigation, whose names have not been disclosed.
Clayton has also represented Duetsche Bank and Goldman Sachs, banks that are probably at the top of the Enforcement Division’s speed-dial list. He would need to recuse himself from any case involving his old firm, Sullivan & Cromwell. We could keep going all day.
Supposedly the Senate Banking Committee will hold a confirmation hearing for Clayton later this month. The questions I had about Clayton’s intentions for the SEC still hold true. Let’s see what happens next.