On July 1, SEC Inspector General H. David Kotz provided Congressman Paul E. Kanjorski, the Chairman of the House Financial Services Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises, with a preview of his office’s recommendations for modifying the federal securities laws based on its ongoing investigation into the SEC’s efforts in the Madoff case.  Kotz’s full letter to Kanjorski is available here.

Among the modifications Kotz suggests is the ability to award a bounty for information leading to the recovery of a civil penalty from any violator of the federal securities laws.  Kotz explains that:

Bounty programs are an effective tool to encourage whistleblowers to come forward and would provide necessary incentives for outside entities to bring complaints about possible illegal activity. There is some evidence that the bounty program implemented by the Department of Justice (DOJ) has played a role in the increase of civil recoveries obtained by the DOJ over a 10-year period. The Internal Revenue Service (“IRS”) also has a system in place where it provides a bounty to individuals who present the IRS with information leading to the collection of federal taxes.

As Kotz briefly acknowledges in his letter, however, a bounty program is already in place at the SEC for insider trading cases, and it has been all-but-ignored and unused for its 20+ year history. The insider trading bounty program began in 1988, when Congress optimistically passed Section 21A(e) of the ‘34 Act authorizing the SEC to award a bounty of up to 10% of the civil penalty recovered in an SEC insider trading case. However, my research on the bounty program shows that only four bounties have ever been awarded, and only one known recipient exists: Mr. John L. Skipper, who received a check in the amount of $29,000 according to this SEC Litigation Release from 2002.

To date, the grand total of the four bounty payments made to date stands at an uninspiring $67,570, broken down as follows:

1989: $3,500
2002: $18,000
2002: $29,000 (to Mr. Skipper)
2005: $17,000

So while Kotz’s “all-purpose” bounty plan sounds promising in theory, let’s hope that it sees much more use and success than the insider trading bounty plan currently in place.