Friday, August 24, 2012

SEC’s Whistleblower Rewards Program – Who are the Real Bounty Hunters?

The U.S. Securities and Exchange Commission (“SEC”) made its first payout of $50,000 to a whistleblower since a program was created last year to reward people who provide regulators with evidence of securities fraud. 

The SEC set up a whistleblower program in August 2011 to reward individuals who provide evidence of securities law violations which lead to SEC sanctions of more than $1 million. The program was authorized in the 2010 financial-regulation overhaul. Potential awards could range from 10 percent to 30 percent of the money collected. 

The unnamed whistleblower helped the SEC bring an enforcement action that resulted in more than $1 million in sanctions.  The SEC rewarded the anonymous whistleblower 30% of the recovery.  So far the SEC has only collected $150,000 but as more of the sanctions are recovered, the whistleblower’s reward will increase.  The SEC believes the announcement of its first reward payout will give the program a boost.  However a second person in the same matter was denied a whistleblower reward because the information provided by the person did not lead to or significantly contribute to the enforcement action. 

While the program is supposed to encourage individuals to come forward with information relating to securities fraud, Peter Sivere, a former compliance officer at JPMorgan Chase had a much different experience with his efforts to “do the right thing.”  To be clear, the story of Peter Sivere occurred from 2003 to 2005 before the whistleblower program was adopted by the SEC. 

During an SEC investigation of whether a New Jersey hedge fund, a big client of JPMorgan, was late trading mutual funds, Sivere was allegedly terminated from JPMorgan for turning over emails to the SEC and expressing concerns that JPMorgan was not fully cooperating with the investigation.  The emails indicated that JPMorgan had provided a $105 million line of credit to the hedge fund that it used to facilitate its late trading in mutual funds.  Late trading occurs when one buys shares at the day’s final price even though the market has closed. 

Before his termination, Sivere contacted SEC lawyer George Demos by email seeking to become a whistleblower and inquiring whether he would be able to collect a reward for his information.  Even though Demos informed him that a “bounty” would not be available, Sivere turned the emails over to the SEC anyways.  Sivere was later fired and JPMorgan reported on his U-5 that he was terminated for “accessing e-mails without authorization.”  JPMorgan later agreed in a settlement to amend his U-5 to state his employment ended as a result of a “disagreement regarding the scope of [Sivere’s] authority.” 

Sivere reported the alleged retaliation to the Occupational Safety and Health Administration (“OSHA”) and it was discovered during their investigation that Demos informed JPMorgan’s lawyers that Sivere had asked the SEC for a whistleblower bounty and Demos even encouraged JPMorgan to use this information in the lawsuit between Sivere and JPMorgan.  While Demos’ behavior violates SEC protocol, and the allegations were confirmed by the SEC’s inspector general, no disciplinary action was taken against Demos.  In fact, Demos held his position with the SEC until 2009.
More recently, a whistleblower’s identity was inadvertently revealed during an SEC investigation of Pipeline Trading Systems, LLC when an SEC lawyer shared the whistleblower's notebook with one of Pipeline’s executives.  The executive recognized the whistleblower's handwriting.  The whistleblower, Peter Earle, was a former employee of one of Pipeline’s trading affiliates and expressed his disappointment in the SEC’s failed efforts to keep his identify private.

The new whistleblower rewards program is supposed to guarantee anonymity, yet the SEC has scars from the past which might be counter intuitive for the program, especially since no action was taken against Demos for the confidentiality violation. 

If you think you have information that may lead to a recovery under the whistleblower program, contact the attorneys at Cosgrove Law Group, LLC to have your rights represented and your identity protected.

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