I have written a lot about the concept of "professional whistleblowers" through the years. Now, the WSJ reports, a new hybrid group of professional whistleblowers and corporate employees is about to get paid massive sums for their efforts to uncover securities law violations in the foreign exchange markets.
Looking back, I pondered in 2010 whether Dodd-Frank might one day spawn "professional whistleblowers," i.e., whistleblowers who were not employees of a company violating the law but rather academics or other third parties who use their talents to identify and alert authorities to such violations. Indeed, Section 922 of Dodd-Frank does not require the whistleblower to be an employee. As stated in this Dow Jones Newswires article from 2010, Section 922 may well be open-ended on this point because it was "inspired by Harry Markopolos, who hounded the SEC for years with his hunch that Madoff was running a giant Ponzi scheme." One attorney quoted in the article predicted that future whistleblowers might include "a lot of extraordinarily, analytically brilliant people spending time thinking about why something doesn't add up," he said.
It took nearly six years, but in January 2016, the SEC announced its first-ever award to a "professional whistleblower" under Dodd-Frank -- a $700,000 payment to an industry expert (who was a company outsider) who conducted a detailed analysis that led to a successful SEC enforcement action. Sean X. McKessy, Chief of the SEC’s Office of the Whistleblower, stated that the whistleblower had provided "independent analysis as well as independent knowledge of securities law violations to the agency. We welcome analytical information from those with in-depth market knowledge and experience that may provide the springboard for an investigation.”
The WSJ reported yesterday that Harry Markopolos -- the man who seemingly inspired the idea of awards to "professional whistleblowers" -- has assembled a team that could be in line to receive whistleblower awards in excess of a staggering $100 million. The potential awards relate to two recent SEC settlements:
1. State Street Bank and Trust Company: On July 26, 2016, the SEC announced that State Street had agreed to "pay $382.4 million in a global settlement for misleading mutual funds and other custody clients by applying hidden markups to foreign currency exchange trades."
2. Bank of New York Mellon: On March 19, 2015, the SEC and federal prosecutors announced that BNY Mellon had agreed to "pay a total of $714 million to settle lawsuits... which concern BNYM’s misconduct in connection with its standing instruction [foreign exchange] product."
According to the WSJ, both settlements followed information provided by three employees of State Street or BNY Mellon who were "recruited or aided by Mr. Markopolos." The BNY Mellon employee could receive an award approaching $60 million and the two State Street employees could receive more than $90 million combined. To date, the highest whistleblower award ever issued by the SEC is $30 million. The WSJ notes that while Markopolos assembled and advised the group of employee whistleblowers, "and could reap a slice of any payouts awarded to the whistleblowers," it is unknown what his stake may be.
If these awards play out as reported above by the WSJ, this would seem to be an interesting new, hybrid situation: a professional whistleblower and corporate outsider (Markopolis) initiating and orchestrating the flow of information to the SEC from whistleblower employees.