Markets & Finance

More Financial Whistleblowing Is On the Way


More Financial Whistleblowing Is On the Way

Photograph by Akio Kon/Bloomberg

A whistleblower just helped the government force Citigroup to pay $158.3 million to settle claims that it falsely portrayed mortgages as meeting the standards for government insurance. Using info from Sherry Hunt, a quality-assurance worker at CitiMortgage, the U.S. Department of Justice built a case that said Citi cost the government millions when the mortgages soured.

Brace yourself, there’s more whistleblowing to come. That’s because the Dodd-Frank financial reform act created the first large-scale whistleblower program at the Securities and Exchange Commission. It applies to U.S. companies that have cheated investors or broken securities laws, whether through insider trading, accounting shenanigans, misleading statements, or bribing foreign officials. That expands well beyond the False Claims Act, the Civil War-era law Hunt used in the Citigroup case, which only covers fraud against the U.S. government.

“The False Claims Act is a wildly successful program, and the SEC whistleblower program has the potential to surpass its success,” says Jordan Thomas, who heads up the whistleblower practice at plaintiffs’ firm Labaton Sucharow. “The False Claims Act is relatively narrow, whereas the breadth of securities violations is even greater.” Thomas, who helped set up the new program at the SEC before moving to the private sector, says the SEC issued $2.8 billion in sanctions last year—that’s before any of the new whistleblower cases have closed.

The SEC encourages tips by offering whistleblowers a 10 percent to 30 percent cut if the government collects more than $1 million and the tips provide useful and unique information in the investigation. That means paydays could be huge, starting at $100,000 and potentially reaching several times that amount.

The SEC received 334 tips in the seven weeks after the law took effect in August, with market manipulation, corporate disclosures, and offering fraud the biggest subjects, according to the new whistleblower office’s first annual report. That works out to a pace of more than 2,000 tips a year. “The quality of the information we are receiving has, in many instances, enabled our investigative staff to work more efficiently, thereby allowing us to better utilize our resources,” SEC Chairman Mary Schapiro said in December.

Corporations and the Chamber of Commerce are pushing back against the new SEC program. They particularly dislike that the rules don’t require whistleblowers to first report their concerns to internal compliance departments. They’re throwing support behind a House GOP bill called the Whistleblower Improvement Act, which mandates whistleblowers to report internally before going to the SEC. The bill is currently in committee.

Weise_190
Weise is a reporter for Bloomberg Businessweek in New York. Follow her on Twitter @kyweise.

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