August 26, 2011 by Joshua Horn
On August 12, the SEC's final whistleblower rules went into effect pursuant to which the SEC is
authorized to provide whistleblower who provide "original information" 10 to 30 percent of
monetary penalties where those penalties exceed $1 million; other known as the bounty
program. The SEC whistleblower rules have not been without controversy.
Among other things, the corporate community has expressed its concern that the rules undercut
internal compliance programs that have been developed at high expense and, in turn, generate
additional litigation and costs. The industry has also expressed concern that the program allows
a whistleblower to go directly to the SEC without first reporting a violation to the company, even
though there are incentives for informants to internally report first. The ability to avoid internal
reporting, it is argued, defeats the very purpose of internal compliance programs. In other words,
what is the point of having an internal reporting compliance program where a whistleblower can
circumvent that process altogether.
Yin Wilczek, of the BNA Securities Regulation & Law Report, recently reported on comments by
Sean McKessy, Chief of the SEC's Office of the Whistleblower, made contemporaneously with
the implementation of the SEC whistleblower rules. These comments were meant to quash some
of the concerns that the industry has raised. Unfortunately, his comments only lead to further
concern that informants may abuse the program with the implicit endorsement of the SEC.
According to Wilczek, McKessy represented that the SEC will carefully monitor the program for
"unintended consequences" and will ultimately implement "improvements" and "tweaks" where
necessary. Although the SEC is committed to monitor and improve this program, McKessy also
stated that he did not "have any preconceived notions about how that may play out". As such,
McKessy has left a large door open as to what he meant by monitoring the program for
unintended consequences.
McKessy's further comments, however, should raise grave questions regarding the "monitoring,"
"improvements" and "tweaks" that the SEC may contemplate. McKessy stated that, "If even one
fraud is stopped before it gets to the Madoff situation, the effort would have been worth it." This
statement can be seen as simply as a perverse twisting of the old criminal maxim paraphrased
as: better a guilty man go free than an innocent man go to jail. The SEC's version, however,
should state, better a company be improperly charged with securities violations so that the SEC
will no longer be faced with the embarrassment it sustained when it failed to act on the tips of
whistleblowers regarding the Madoff Ponzi scheme.
Taking McKessy's comments to heart, the corporate community should be concerned how the
SEC will monitor and improve a program where it appears as though the SEC's primary concern
is avoiding future embarrassment. In the end, the unfortunate consequence of an overly
aggressive program will be unnecessary costs for the corporate community in dealing with bounty
hunters instead of true whistleblowers. The only way to protect yourself is to make sure your
corporate governance policies and procedures are kept current and enforced so that you can
address issues as they arise so that you can avoid becoming the next trophy on the SEC's
mantle.
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