Study: Whistleblowers Are Even More Costly Than You Thought

When whistleblowers feed the government information about corporate malfeasance, the damage can be even more costly than expected. Even before the Securities and Exchange Commission started offering sizeable bounties for actionable information, the assistance of one or more tipsters in an enforcement action increased penalties by 30 percent and nearly doubled prison sentences.

That’s the conclusion of a new research paper, “The Impact of Whistleblowers on Financial Misrepresentation Enforcement Actions,” authored by Andrew Call of Arizona State University, Gerald Martin of American University, Nathan Sharp of Texas A&M University, and Jaron Wilde of the University of Iowa. The researchers compiled datasets of employee whistleblowing allegations obtained from the U.S. government and all enforcement actions for financial misrepresentation to investigate the effect of employee whistleblowers on the consequences of financial misrepresentation enforcement actions by the Securities and Exchange Commission and Department of Justice, and the effects whistleblowers have on penalties, prison sentences, and duration of regulatory enforcement actions for financial misrepresentation.

Using all SEC and DOJ enforcement actions associated with financial misrepresentation between 1978 and 2012, the researchers investigated whether whistleblower involvement is associated with larger penalties against targeted firms. They drew heavily upon data provided by the Occupational Safety and Health Administration which, prior to the Sarbanes-Oxley Act, was tasked with fielding employee complaints of discrimination for blowing the whistle on alleged financial impropriety and communicating those allegations to the SEC.

Additional data was compiled by examining enforcement documents from all administrative and legal proceedings associated with financial misrepresentation. Of the 1,133 firms subject to financial misrepresentation enforcement actions between 1978 and 2012, 145 were associated with at least one whistleblower complaint being made after the beginning of the violation and before the end of regulatory proceedings period.

After controlling for various factors that affect the amount of penalties assessed in an enforcement action, the researchers found that, on average, whistleblower involvement is associated with $90.16 to $92.88 million greater firm penalties than if no whistleblower was involved. Penalties assessed against executives and other employees averages $50.22 to $56.50 million more than if no whistleblower was involved. And, when whistleblowers are associated with an enforcement action, executives and employees at targeted firms are sentenced to prison on average 21.86 to 27.02 months longer than if no whistleblower was involved.

In total, the study estimates that whistleblowers enabled regulators to successfully obtain additional judgments of $20.75 to $21.27 billion more than would have been obtained without their assistance. This increase in penalties accounts for 30 percent of the total $70.13 billion penalties assessed over the 35 year sample period from 1978 to 2012.

The researchers also examined whether whistleblower involvement affects the duration of enforcement actions, either expediting the resolution of enforcement actions or prolonging investigations. The latter scenario proved to be the case. The total duration of enforcement actions was nearly 10 months longer for actions associated with a whistleblower than for those without.

“The effect whistleblowers can have on an enforcement action is increasingly pronounced as policymakers continue to enact legislation attempting to encourage whistleblower involvement, and regulators continue to dedicate significant resources to promoting and rewarding whistleblowing activity,” the researchers wrote.

The news may be even worse for companies in the throes of an investigation. The research sample predates the creation of whistleblower offices, a formal venue for sharing complaints and evidence, at the SEC ad CFTC, as well as a bounty program that rewards whistleblowers who provide original information about corporate misconduct with 10 percent to 30 percent of monetary sanctions over $1 million.