Phillips & Cohen attorney advocates SEC whistleblower reward program modeled after False Claims Act

JULY 6, 2009, WASHINGTON, DC -- The Financial Times published the following letter to the editor from Erika A. Kelton, a partner with Phillips & Cohen LLP, in response to a news article about the proposal made by the inspector general of the Securities and Exchange Commission to establish an SEC program that would reward whistleblowers for information about investor fraud.

The current SEC whistleblower program rewards whistleblowers only for insider trader information, and the guidelines for deciding rewards are vague, SEC Inspector General H. David Kotz said in a letter to Rep. Paul E. Kanjorski (D-PA), the chairman of the House Financial Services Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises.

Whistleblower bounty must go hand-in-hand with reform
Published: July 6 2009
From Ms Erika A. Kelton.

Sir, While the inspector general of the Securities and Exchange Commission is right to propose a new bounty programme to encourage whistleblowers (July 2), such a programme would be pointless without a requirement that the SEC actually investigate reports of investor fraud and pursue the ones deemed worthwhile.

The SEC already receives plenty of whistleblower and investor complaints - more than 700,000 annually. The problem is that important information about significant cases of investor fraud - such as Bernard Madoff's Ponzi scheme - gets buried in with crackpot complaints.

There's no question the Department of Justice's bounty programme created under the False Claims Act to stop fraud against the government has been successful, with recoveries from whistleblower cases totalling more than $14bn. Based on my experience handling whistleblower cases, it's clear that the success is due not just to the rewards offered to whistleblowers but also because the act requires the Justice Department to decide within a specified time whether to intervene and prosecute a whistleblower complaint.

If Congress is serious about stopping future Madoffs, it should include an action-forcing mechanism in any SEC whistleblower legislation and use the False Claims Act as a model. Without such a mechanism, there will be no assurance that serious whistleblower allegations will get the attention they deserve.

Erika A. Kelton,
Phillips & Cohen LLP,
Washington, DC, US