American Bar Associaation Journal: Whistle-Blowing to the SEC Is About to Become More Profitable

By Debra Cassens Weiss

A $1 million reward announced Friday for a whistle-blower in an insider trading case was the largest ever paid by the Securities and Exchange Commission. But that amount may pale in comparison to amounts the agency is authorized to dole out under new financial reform legislation.

The new law, the Dodd-Frank Act, authorizes the SEC to pay whistle-blower rewards ranging from 10 percent to 30 percent of sanctions, according to stories in the Washington Post and the New York Times DealBook blog. Before, rewards were capped at 10 percent of the recovered amount, and only five people had received payments in the entire history of the program.

The SEC paid the $1 million to Karen Kaiser, the ex-wife of a former Microsoft employee, and to her new husband. The information she provided helped build an insider trading case against the founder of Pequot Capital Management, Arthur Samberg, who settled the SEC’s civil case against him for $28 million earlier this year without admitting liability.

In the prior five cases, the largest payout had been $55,220, the Washington Post says. DealBook gives an example of the potential payout under the new law. It cites a settlement of securities fraud charges last week against Dell in which the computer maker paid a $100 million penalty and three corporate officers paid $11 million. If a whistle-blower had provided information leading to the enforcement action, he or she could have received $11 million to $33 million under the new law.

DealBook says the old law allowed rewards only for information about insider trading. The new law allows rewards for whistle-blowers who provide information that leads to any judicial or administrative action under the securities laws, if sanctions exceed $1 million. The whistle-blower must provide original information from independent knowledge, and the SEC must have been unaware of the reported wrongdoing.

Those dissatisfied with SEC decisions on rewards can appeal in the appropriate federal appeals court.