The SEC's new whistleblower bounty program has provoked significant controversy. That controversy has centered on the failure of the implementing rules to make internal reporting through corporate compliance departments a prerequisite to recovery. This Article approaches the new program with a broader lens, examining its impact on the longstanding debate over fraud-on-the-market (FOTM) class actions. The Article demonstrates how the bounty program, if successful, will replicate the fraud deterrence benefits of FOTM class actions while simultaneously increasing the costs of such suits -- rendering them a pointless yet expensive redundancy. If instead the SEC proves incapable of effectively administering the bounty program, the Article shows how amending it to include a qui tam provision for Rule 10b-5 violations would offer several advantages over retaining FOTM class actions. Either way, the bounty program has important and previously unrecognized implications that policymakers should not ignore.
As Rose correctly notes, FOTM suits rarely actually provide compensation: they involve transfer payments between sets of innocent shareholders—with a huge inefficient windfall commission paid to the attorneys. Nor do these suits provide deterrence: nearly all of FOTM suits are piggybacking off of public disclosures made by others. Replacing shareholder litigation with whistleblower qui tam suits would maintain or increase the deterrent effect without the social costs of securities litigation. Of course, whistleblower laws can produce their own distortions in the marketplace (already, a Fifth Circuit ruling and SEC regulations create the perverse incentive to hide wrongdoing from internal investigators), and if bounties are too high, there wouldn't be any savings to shareholders. More: Frankel; Rose @ Blue Sky Blog.
Rose already has an impressive collection of interesting papers and bears watching.