The Wall Street Journal has just published a story on how the SEC is way behind on paying whistleblowers awards for information submitted to the agency under a program established as part of Dodd Frank reforms. The impetus for the initiative was that the SEC had ignored Harry Markopolos’ warnings of the Bernie Madoff Ponzi scheme. Congress tried to assure that the agency didn’t have a disincentive to paying whistleblowers by establishing a separate pot of money for the awards that is outside the SEC’s budget.
While the Journal does do a service of sorts in outing that the SEC is way behind on processing whistleblower award claims, it then misleads the public and Congress by not taking a hard look at the SEC’s excuses for this poor performance. The spin starts with the headline: SEC Whistleblower Payouts Slow Amid Deluge of Reward Seekers. In other words, the reader is to believe the agency’s delays are due to it being overburdened by way too many pesky claimants.
We’ll discuss in more detail later that the SEC is almost certainly accurate in saying it does get lots of claims. But many of them are obviously spurious or otherwise invalid and could be dispatched quickly with clerical-level staff if the agency were serious about the program.
Worse, it gives air cover for the SEC’s proposed gutting of the whistleblower program, some of which look to be a violation of statue, by parroting the agency’s claims that they will help speed award processing. The article’s subhead states: “Agency proposes ways to speed up decisions that now take more than two years to make”.
In fact, those measures are ones the SEC can implement now and do not require any rule changes. That raises the question as to why the agency has and continues to sit on its hands regarding whistleblower claim processing.
In other words, the SEC appears to have thrown these unnecessary “speed it up” tweaks in to provide air cover for the ones that do represent actual changes. As we discussed at length in an earlier post, those have the effect of substantially weakening the program and thwarting Congressional intent. That isn’t our opinion. SEC Commissioner Kara Stein, in her dissent, described how the many of the proposed changes to the whistleblower program violate Dodd Frank and hence are not permissible as SEC rules, which can only promulgate statute, not vitiate it.
The bone of contention is that the SEC has not been devoting enough resources to processing whistleblower award claims. It may come as a surprise to most readers, but when whistleblowers submit tips under the SEC’s program, the agency does not automagically determine who and how much to pay out after it undertakes a successful enforcement action. Whistleblowers have a set time period after the SEC has undertaken a successful enforcement action that resulted in the payment of fines and/or the disgorgement of fees and expenses to submit documentation to the SEC showing that information they submitted to the agency was important to the SEC’s action.
The Journal does do a service in documenting how long the delays have become. From its article:
Wall Street’s top regulator now takes more than two years to hand rewards to tipsters who report wrongdoing, a process that lasts longer than the average time it takes to investigate and close an enforcement case….
In 2012 and 2013, the early years of the program, the SEC took about a year to decide if a whistleblower’s tip merited a reward. The average time rose to over two years in the period from 2014 through 2017, when it exceeded four years….
Over the life of the program, people who got awards waited on average about 210 days for a decision, while a rejected application got word within 730 days, according to the Journal’s analysis.
The time it took for the SEC to make a decision on whistleblower claims averaged more than two years from 2014-2017, with some decisions taking more than 1,000 days, according to a sampling of claims.
The process, even for legitimate tipsters, can take much longer, according to attorneys who deal with it.
Stephen Kohn, an attorney whose whistleblower clients have included former UBS Group AG banker Bradley Birkenfeld, said he has one client who was told by the SEC that an award is forthcoming. But it has been over four years since the client sought the reward, Mr. Kohn said.
“I believe they have a massive backlog,” Mr. Kohn said. “The SEC has operated a professional program, but their decision-making process hasn’t taken into consideration the devastating impact on the whistleblowers of these long delays.”
However, the article does not do an adequate job of ferreting out why the agency is so far behind. Based on reports from insiders, a big chuck of the bogus award claims were based on allegations of the “Everything JP Morgan does is crooked” sort. A second category is submissions by securities class action attorneys based on lawsuits they’ve filled. Virtually all of these claims are invalid by virtue of the law firm not having submitted a whistleblower filing, as required by statute. Even if they are correct and the information they provided in their lawsuits helped the SEC, they can’t make an award claim if they didn’t make a whistleblower filing (journalists that publish stories that are critical to SEC enforcement actions but didn’t make a whistleblower application before they published their account would be in the same boat). A third category is individuals who submitted award claims after the deadline had passed.
All of these sorts of award applications could be handled by an intern with appropriate form letters. Even most pushback letter to the denials could be handled by an intern-level person. For instance, if a securities class action law firm were to object to a denial for the lack of having made an initial whistleblower filing, the next round response would be a form letter asking them to provide a copy of their whistleblower filing and proof of submission.
The bigger point is the SEC could easily clear out this backlog if it wanted to. The implication is that the agency is either incompetent in managing paper flows or is choosing to slow-walk award applications because it is cognitively captured by securities firms and the big-building lawyers who represent them.
But you never learn that from the Journal article. Indeed, one of its early claims, that big awards have led to more filings, appears to be included to support one of the very worst features of its proposed “reform,” which is to cap awards. Since insiders in the securities arms of top banks often have $1 million a year and up compensation, and face a future of greatly diminished (if any) pay, there’s no reason to cap awards, given that the best placed insiders (as in particularly senior people) have a great deal to lose. And in general, any consultant will tell you that a rule of sales management is never to cap commission-based payout. The same logic applies here.
Here is the Journal’s unwitting promotion of the SEC’s scheme to cap awards. From its second paragraph:
The Securities and Exchange Commission has become a magnet for tips—both good and bad—after publicizing its mega-bounties, including an $82 million award given in March to three tipsters who told regulators about a complex scheme at Bank of America Corp. involving misused customer cash and securities.
Translation: those pesky big awards are attracting more riff-raff! So the solution clearly is to pay less.
This Procrustean bed approach is reminiscent of an old management joke, which is allegedly based on a true story. A bus operator in England got complaints because its drivers were skipping stops where passengers were waiting to be picked up. When the supervisors asked the drivers why they were skipping stops, they were told, “We couldn’t meet our schedule if we picked everyone up.”
This part of the story is disingenuous:
Deciding who gets paid is a demanding process that involves vetting each request to determine how important the person’s tip was, according to current and former officials. When multiple whistleblowers are involved, decisions are more challenging because the SEC has to measure each tipster’s value to the case.
That is bollocks. A significant majority of claims do not warrant a “demanding process” of “vetting each request”. Whoever talked to the reporter did or should have known that to be the case. The SEC is engaging in deliberate obfuscation in conflating the process required for determining what to do with valid or arguably valid claim, versus the minimal effort required to eliminate the rest and tell the applicants their award was nixed.
The SEC even told the reporter how few claims it deems to be worth serious consideration:
The SEC receives about 110 whistleblower reward applications a year that meet all of its documentation and processing rules, according to agency records.
We are to believe that 110 bona fide applications is some sort of ginormous burden? At best, what the agency has effectively admitted is that it hasn’t bothered to triage its award applications. And so its proposed remedy is to make the awards less enticing so as to reduce the inflow and accommodate the SEC’s failure to get its act together. Help me.
Most award claims are invalid and can be dispatched with review by low-level trained staff with review protocols and suitable form letter responses. The SEC simply hasn’t bothered doing the work to streamline this process. And sadly, the Journal is legitimating its defense of at best incompetence or at worse, bad intent.