Wall Street was stunned when, on October 21, 2021 the Commodity Futures Trading Commission (CFTC), a relatively obscure federal agency, announced a $200 million award payable to a whistleblower. This was the largest award ever granted to a whistleblower since bounty payments became available to corporate whistleblowers under the False Claims Act (FCA) in 1986 and the Dodd-Frank Act (DFA) in 2010. Given the amount of the award it is not surprising that those stung by whistleblower disclosures were appalled by the amount of the award. These arguments have been picked up by the mainstream press.
For example, in response to the CTFC award Paul J. Davies, in an opinion column published in the Washington Post, argued that Congress should “draw a line” on the amount a whistleblower can collect and supported capping the amount of awards. Davies’ arguments mirror those of the Chamber of Commerce. The Chamber has opposed every whistleblower law, and regularly files briefs in various courts seeking to narrow or undermine the scope of whistleblower protections. Arguing for limits on whistleblower rewards has been a top Chamber agenda item for years.
Although caps may seem like a good idea, upon review they are not. A mandatory limit on rewards would apply to cases regardless of sacrifice or hardships a whistleblower suffered, the value of their information, the years of long delays experienced in most cases, and the adverse tax consequences of obtaining a large lump (highest tax bracket, loss of deductions). Additionally, those who are arguing for caps ignore the deterrent effect whistleblower rewards have on potential wrongdoing, how such awards incentivize high quality informants to step forward, and the well-documented benefits obtained from whistleblower disclosures.
Advocates for caps also ignore the fact that all of the rewards come directly from the money obtained from fraudsters. No taxpayer money is used. In short, the whistleblower earns his or her reward because the amount of the award is directly tied to the quality of his or evidence, the level of cooperation and assistance provided by the whistleblower, and the size of the underlying frauds. The larger the fraud, the greater the need for a well-placed whistleblower. The larger the fraud, the larger the sanction, and therefore the larger the reward. Rewards are based on a small percentage of the amount of sanctions received by the government. Under the Dodd-Frank Act (the law that resulted in the large reward payment by the CFTC), the government always obtains the vast majority of money obtained from the fraudster: Between 70% to 90%. In the current case the government collected $2.5 billion in sanctions, of which the whistleblower obtained a $200 million award. This was a massive fraud, committed by a large German bank. Without whistleblowers it is nearly impossible to detect well-hidden fraud schemes that rip off taxpayers, investors, and the public every day.
Oddly, to justify placing a cap on the amount of awards the Post columnist pointed to a proposal floated by the U.S. Securities and Exchange Commission (SEC) to limit the amount of awards in large cases. He wrote: “The SEC has considered making the awards more discretionary or limiting the largest to $30 million to preserve funds.” However, Davies’ reliance on the SEC proposal actually demonstrates why large awards benefit law enforcement, accountability and the public.
Davis is correct that in 2018 the Trump-appointed SEC voted by a 3-2 margin to propose such a rule. The three Republican members of the Commission proposed a formal rule that would have reduced, in almost any case, awards of over $30 million. The two Democratic Commissioners opposed the rule. But the Republicans had the votes, and it initially appeared that the Chamber-supported rule would be rubber stamped.
But what followed was truly extraordinary. The Commission internally debated the issue for over two years. Numerous experts, whistleblowers, and investor advocacy groups weighed in on the issue, including Americans for Financial Reform, the directors from the Stanford University Graduate School of Business, Senators from both political parties and ENRON whistleblower Sherron Watkins. They all vehemently opposed any caps. Instead of ignoring the numerous public comments opposed to reducing the awards, the Commissioners opened their doors and met with these experts. For the first time a regulatory agency with direct responsibility for paying whistleblower rewards underwent an extensive internal review on the impact of large rewards on their enforcement program. The debate was serious, prolonged and in good faith.
The result was breathtaking. In September 2020 the SEC proposal to limit rewards in large cases was unanimously rejected by all five SEC Commissioners. All three Republican Commissioners changed their position. In a truly bi-partisan vote, the Trump appointed Chairman, along with four Commissioners all voted down the proposed rule that would have given the SEC the authority to reduce rewards to the lowest possible amount in large cases. The objective and empirical record before the SEC which demonstrated the importance of paying very large rewards in order to incentivize reporting, facilitate close cooperation between the whistleblowers and the government investigators, and deter future misconduct, all of which were the precise goals Congress had in mind when it passed the Dodd-Frank Act and similar whistleblower laws.
The then-SEC Chairman Jay Clayton was explicit in his rejection of caps: “Whistleblowers often take professional and reputational risks in reporting their information to the SEC and we are committed to rewarding them for taking those risks and contributing to our enforcement efforts. Today’s rule amendments will help us get more money into the hands of whistleblowers, and at a faster pace.”
Behind this shift in position was a simple recognition that whistleblowing works, that it serves the public interest, and that large rewards motivate highly credible and high-placed reporting. In announcing the rejection of caps Chairman Clayton explained: “The Commission’s enforcement efforts, and most importantly, American investors and markets, have greatly benefited from the credible information and assistance that whistleblowers have provided . . . The amendments also affirm that award amounts . . . are to be determined exclusively based on the application of the award factors set forth in the Commission’s whistleblower rules.”
The mandatory award factors are predicated precisely on achieving Congress’ goal to use the Dodd-Frank Act program as a tool for effective enforcement of securities laws and the protection of investors. The goals are simple: Encourage high-quality reporting, enhance enforcement, facilitate effective cooperation between law enforcement and the whistleblower, and deter future misconduct by making potential wrongdoers aware that there are strong monetary incentives for their own employees to disclose major frauds.
