Does SEC Whistleblower Reward of $1 Million Signal A New Attitude Toward Wall Street Whistleblowing?

Only days after the new financial reform law created the first potentially meaningful awards for whistleblowers reporting securities and commodities violations and abuses, the SEC may have signaled a new attitude toward encouraging whistleblowers.

The SEC recently announced its first million dollar award for a whistleblower’s report of information about insider trading involving hedge fund adviser Pequot Capital Management, Inc., its chief executive, Arthur J. Samberg, and David E. Zilkha, a Microsoft employee.

Although $1 million may not sound like much when compared to the losses caused by the Madoffs of the world, it is a dramatic improvement over what the SEC had done before.

In following the development of the new SEC Whistleblower Program, we previously discussed the Inspector General’s summary of how, over the past eleven years, the SEC had paid a total of less than $160,000 to reward whistleblowers under the “old” SEC bounty program for whistleblowers. The IG reported:

The SEC bounty program has made very few payments to whistleblowers since its inception and received a relatively small number of bounty applications. As a result, the program’s success has been minimal and its existence is practically unknown.
Since the inception of the SEC bounty program in 1989, the SEC has paid a total of $159,537 to five claimants as detailed in Table 1 below.

Table 1: Bounty Payments to Whistleblowers Bounty Claimant Year Bounty Amount 1) Claimant 1 1989 $3,500 2) Claimant 2 2001 $18,152 3) Claimant 3 2002 $29,079 4) Claimant 4 2005 $17,500 4) Claimant 4 2006 $29,920 4) Claimant 4 2009 $55,220 5) Claimant 5 2007 $6,166
Total $159,537
Source: OIG Generated

Just as another Inspector General’s report in 2006 set the stage for the successful new IRS Whistleblower Program that is attracting many reports of even billions in tax liability, let’s hope this Inspector General’s report has motivated the SEC to make full use of the opportunity to build a meaningful whistleblower program. We are already getting calls from potential Wall Street whistleblowers wishing to take advantage of it, and it could be a rewarding process–depending on how well the SEC seizes the opportunity.

The SEC’s recent announcement of the $1 million reward is reprinted below:

U.S. SECURITIES AND EXCHANGE COMMISSION Lit. Release No. 21601 / July 23, 2010 SEC Awards $1 Million for Information Provided in Insider Trading Case Securities and Exchange Commission v. Pequot Capital Management, Inc., et al., Civil Action No. 3:10-CV-00831-CVD (United States District Court for the District of Connecticut, Complaint filed May 27, 2010).

The Securities and Exchange Commission today announced the award of $1 million to Glen Kaiser and Karen Kaiser of Southbury, Connecticut, who provided information and documents leading to the imposition and collection of civil penalties in the above litigation. This is the largest award paid by the SEC for information provided in connection with an insider trading case.

The SEC staff previously investigated alleged insider trading in Microsoft Corp. securities by hedge fund adviser Pequot Capital Management, Inc., its chief executive, Arthur J. Samberg, and David E. Zilkha, a Microsoft employee who accepted an employment offer at Pequot, but closed its investigation without action. In late 2008, Karen Kaiser, the ex-wife of Zilkha, and her husband, Glen Kaiser, discovered key evidence that ultimately led to the filing of a settled enforcement action against Defendants Pequot and Samberg alleging they engaged in insider trading. Among other documents and information the Kaisers provided the SEC was a key email communication between Zilkha and another Microsoft employee that was not turned over to the SEC in the first investigation. Without admitting or denying the allegations in the SEC’s complaint, Pequot and Samberg consented to the entry of injunctions and orders requiring the payment of civil penalties totaling $10 million (as well as the payment of disgorgement and prejudgment interest totaling over $17 million and an investment advisory bar as to Samberg and censure as to Pequot).

The SEC approved the award earlier this week pursuant to Section 21A(e) of the Securities Exchange Act of 1934, which authorized the Commission, in its discretion, to grant an award of up to 10% of the penalties paid in a case to a person who provided information leading to the imposition of those penalties, but only in insider trading cases. That provision has since been repealed by the Dodd-Frank Wall Street Reform and Consumer Protection Act, which added new Section 21F to the Securities Exchange Act, authorizing the Commission to award bounties to parties who provide information leading to recovery of monetary sanctions in a broader range of cases, not limited as before to civil penalties recovered in insider trading cases.

On the same day the Commission filed the settled complaint against Pequot and Samberg in the above matter, it also issued an order instituting administrative and cease-and-desist proceedings against Zilkha in connection with the conduct described above. That matter is pending before an SEC administrative law judge.

For further information, please see Litigation Release Number 21450 (May 28, 2010) [Commission filing of settled civil injunctive action against Pequot and Samberg]; Advisers Act Release Number IA-3032 (May 27, 2010) [order instituting proceedings against Zilkha]; and Advisers Act Release Number IA-3035 (June 8, 2010) [settled proceeding barring Samberg from associating with an investment adviser and censuring Pequot].

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