There is a distinct possibility that Congress' ongoing debate over reforming the financial regulation laws will result in new SEC whistleblower laws. Legislation passed by the House in December 2009, for example, provides for a
bounty program to compensate whistleblowers whose information leads to a successful SEC enforcement action with a monetary sanction exceeding $1 million. In such cases, the SEC may pay a bounty award of up to 30 percent of the sanction imposed.
In big SEC cases, where the settlements can end up being huge amounts (
e.g., AIG ($800 million); WorldCom ($750 million); Enron ($450 million)), a 30 percent award could be tens or even hundreds of millions of dollars. Thus, I was intrigued to see an
article in the NY Times yesterday noting that hedge funds have found a new market to invest in: whistleblowers.
The article focused on hedge fund "investments" in whistleblowers who turn tax cheats in to the I.R.S. I.R.S. whistleblowers usually must wait years to get their award, which has created a market for hedge funds and other investors to "buy a percentage of those future payouts in exchange for a smaller amount upfront to the whistle-blowers." Like the proposed SEC awards, the I.R.S. offers up to 30 percent of the money the government recovers, and awards can potentially be tens or even hundreds of millions of dollars, the NY Times reports.
One I.R.S. whistleblower reported that an overseas multinational corporation had underpaid its taxes by billions of dollars. The whistleblower received $4 million last month from a private equity firm and, in exchange, the firm will receive a portion of the award the informant expects to collect eventually. The informant's lawyer said the informant needed money up front to cover living expenses because he had had trouble finding work since filing his claim.
And so I wonder: Will the expected passage of legislation providing for huge awards to whistleblowers in SEC enforcement actions create one more market for hedge funds to invest in?