SEC Awards Outside Whistleblower

The SEC's whistleblower program, as outlined in the Dodd-Frank Act, has a very simple origin story. Work by an outside analyst, which was presented repeatedly to the commission and could have brought the Madoff fraud to light, was repeatedly ignored. That analyst, Harry Markopolos, recommended in his testimony before congress in 2009 that (among many other things) the SEC include an "Office of the Whistleblower" to ensure that tips from both outside and inside parties were taken seriously and given a credible review before they were dismissed. Today that office is a reality, headed by Sean McKessy. Since the program's founding in 2011, more than $55 million has been awarded to 23 whistleblowers, but none of them have matched the profile of Mr. Markopolos -- that is to say, none of them have been company outsiders. The SEC has typically received information that led to an enforcement action from company insiders, regardless of the intentions of the program when it was designed.

That changed recently when the SEC awarded $700,000 to an outside whistleblower. Significantly, this is a whistleblower who provided multiple analyses and tips to the commission, spanning the period both before and after Dodd-Frank created the program. This is an example in the spirit of Mr. Markopolos: an outsider whose independent analysis, and tenacity in presenting that analysis to the commission (even before there was a financial incentive to do so), led to an enforcement action. With the abundance of analysts in the market today, all charged in one way or another with reviewing the investment performance of a manager, fund, or company, there certainly would seem to be many candidates who could provide "in-depth market knowledge and experience" that would shine a light on unsavory activity.

Andrew Ceresney, Director of the SEC’s Enforcement Division acknowledged the value of all forms of information in prosecuting these cases, saying, “The voluntary submission of high-quality analysis by industry experts can be every bit as valuable as first-hand knowledge of wrongdoing by company insiders."

Companies have generally only had to worry about tips originating from current or former employees, but now must consider the possibility that outside analysis may reveal fraud. Analytical analysis, said Sean McKessy, "...may provide the springboard for an investigation."

Because the commission protects the confidentiality of whistleblowers, the identity of the analyst awarded the $700,000 remains unknown. Given the uniqueness of this award compared to those that came before it -- and the attention it has gotten -- it will be interesting to see if this encourages other independent analysts to present their findings to the SEC in the coming year. In general, whistleblower awards and tips were already way up in 2015: the commission awarded $37 million that year alone and continued to enjoy a roughly 10% increase in incoming tips, the same growth trajectory it has been on since 2012.