This week, the U.S. Supreme Court issued a ruling affecting the award of tens of millions of dollars to whistleblowers who report securities violations.
The nation’s highest court said whistleblowers must have reported the violations to the Securities and Exchange Commission before they can share in compensation as a result of enforcement. In other words, it is not enough to report suspected securities violations to an employer. You must file a complaint with the SEC.
How does this happen? The 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act allows whistleblowers to receive up to a portion of proceeds in successful enforcement actions. Some say, that has dramatically changed the landscape for whistleblowers.
Just this week, the SEC announced a case in which it paid whistleblowers tens of millions for tips about securities violations at JPMorgan Chase & Co. (JPM, Financial). The action accuses JPMorgan of failing to disclose to clients conflicts of interest involving their investments. The bank has not publicly commented on the matter.
GuruFocus spoke this week with two men who have reported banking and securities violations to regulators. These whistleblowers have starkly different views about what can happen when malfeasance is exposed.
One of the whistleblowers, Richard Bowen, began reporting wrongdoing to his employer years before the 2008 subprime mortgage crisis. The second whistleblower, Edward Siedle, made his report in recent years, after Frank-Dodd took effect.
Richard Bowen
Bowen is a former Citigroup Inc. (C, Financial) executive who blew the whistle on questionable practices at the banking operator. Bowen was one of the key banking industry officials who testified to regulators during public meetings in Washington D.C. about the subprime mortgage crisis. Bowen is now a senior lecturer and accounting professor at the Naveen Jindal School of Management at the University of Texas at Dallas.
On Nov. 3, 2007, Bowen sent an email to Citigroup executives. In it, he wrote: "The reason for this urgent email concerns breakdowns of internal controls and resulting significant but possibly unrecognized financial losses existing within our organization."
His concerns fell on deaf ears. Bowen filed a complaint under the Sarbanes-Oxley Act of 2002 with the Occupational Safety and Health Administration. He said he had been retaliated against after reporting the malfeasance. Sarbanes-Oxley has an anti-retaliation provision, however, it contains an administrative-exhaustion requirement and a 180-day administrative complaint-filing deadline.
What are your thoughts on the subprime mortgage crisis?
Arguably, if Citigroup had taken action when I started screaming about it, about two-and-a-half years before the bailouts, it still would have been painful but, from my standpoint, I believe it would not have been that painful.
Do you think changes under new law make it easier to blow the whistle?
My understanding is that for every person that gets money in an a SEC reward, there are hundreds that do not. If you take a look at the number of tips, you’re totally at the mercy of whether or not the SEC wants to investigate. And I am convinced that politics play a role? During my case, there was complicity by the government and the SEC.
What allows you to speak openly?
I was subject to an onerous confidentiality agreement, which I violate on a regular basis. Citigroup made no bones about it. They said they would come after me and ruin me. My only saving grace was that I had testified nationally. I had unique circumstances. I gave nationally televised testimony before the commission. That testimony was not covered by any confidentiality agreement once the information became public. My circumstances are unique, to say the least.
What advice do you give others?
I encourage my students (and others) to test the ethics of the company they are working for. If a company is not going to embrace employees who ask questions, and I don't mean in an antagonistic fashion, then you don't want to be part of that company. Get out of there.
Has the environment for whistleblowers gotten any better?
Has it gotten any better? Supposedly whistleblowers are protected, but the reality is that they are not. They can be retaliated against, basically with impunity on the part of the company. I tell my students if you ever do become a whistleblower, know it will blow up the career you’ve got with whatever industry you’re with. There can be substantial consequences.
Edward Siedle
The Florida-based attorney specializes in asset management law. Much of his work is focused on forensic examination of U.S. pension systems. A former SEC attorney, he is now the owner of Benchmark Financial Services, which investigates money management abuses.
Siedle tells GuruFocus he was the whistleblower in the action by the SEC and the Commodity Futures Trading Commission, against JPMorgan. The action was made public last Friday. Siedle says he acted as the whistleblower in obtaining the preliminary award determination. Siedle says, the CFTC action triggered $30 million; the SEC's $48 million.
Can you provide any more details about the action?
Without telling too much, I received an anonymous phone call. Employees of companies will contact me because I’m knowledgeable about wrongdoing in money management.
You’ve been in the whistle-blowing business for a long time. Compare then and now.
Thirty years ago, whistleblowers were treated very badly. They were retaliated against. Their careers were ruined. They were not rewarded. In the last few years since Dodd-Frank, the whistleblower program was created to reward whistleblowers up to 30% of any fine imposed by the government for blowing the whistle. So today, the legal, political and social environment for whistle-blowing is better than it’s ever been in history. Whistleblowers don’t have to destroy their careers and there is the potential to make tens of millions of dollars.
What advice would you give to people who are thinking about blowing the whistle on an employer?
I would tell you 99% of employees who become aware of wrongdoing do not report it. It’s a rare individual who chooses to pursue this so my advice is that, if you’re in that situation, protect yourself. You may seek out a lawyer who is knowledgeable. The real message today is that there is no reason that the whistleblower has to go public and jeopardize his or her career.
How do I report a violation to the SEC?
An attorney can provide you confidentiality through attorney-client privilege. You can file a whistleblower complaint electronically. It’s on the SEC website. If you hire a lawyer, the SEC doesn’t ever have to know your name.
What about all the evidence that most of these cases never get heard?
If you really know what you’re doing, there’s a good chance that the SEC will pursue your matter and that you may very well get an award.
How does whistle-blowing help investors?
Investors own the stock of these companies. If a company engages in wrongdoing, their stock price often gets whacked. Blowing the whistle on a company ensures the company remains compliant with applicable laws and complying with applicable laws is a key component of protecting the value of the price of a stock.
