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Would-Be Whistleblowers

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Last Wednesday, the Securities and Exchange Commission made its second award determination under its Dodd-Frank whistleblower program. Three whistleblowers will get five percent each of whatever monetary sanctions are ultimately collected in connection with the SEC's enforcement action against Audrey C. Hicks and Locust Offshore Management. The SEC alleged that Mr. Hicks and Locust stole over $2.7 million from investors and the court ordered the defendants to pay more than $7.5 million. A fourth whistleblower attempted to get a share of the bounty, but was turned down by the SEC and may now be headed to federal appeals court. If this case is representative, the whistleblower program--even if it produces some good leads--also could end up costing the SEC a lot of time and trouble.

Under Dodd-Frank's whistleblower program, anyone who provides original information about a securities violation that leads to a successful SEC enforcement action resulting in monetary sanctions of more than $1 million is eligible for an award. The SEC must award between ten and thirty percent of monetary awards collected from the wrongdoer. As in this case, sometimes multiple whistleblowers share the award.

Whether a whistleblower gets an award depends on a number of factors, including the nexus between the information provided and the success of the SEC's action. In this case, according to the SEC's order, the rejected whistleblower provided "vague or insubstantial" information about "securities fraud committed by many brokers/dealers/traders involved with naked shorting" of a company's securities. The SEC's Division of Enforcement did not act on this tip or two subsequent tips. None of them related to the Hicks and Locust Asset Management matter, a case that did not involve naked short selling claims.

As people realize how potentially lucrative SEC whistleblowing can be, they are likely to submit broad, useless tips in the hopes of cashing in on future SEC cases. There's not much of a cost for the would-be whistleblowers. The SEC will try to deny invalid claims, but it will require a lot of work on the SEC's part and will divert the agency's resources from the many better things it could be doing.

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Rafael Mangual
Project Manager,
Legal Policy

Manhattan Institute


Published by the Manhattan Institute

The Manhattan Insitute's Center for Legal Policy.