SEC whistleblowers – insider trading, other federal securities law violations

Private individuals who know of specific instances of insider trading may be eligible for a reward from the Securities and Exchange Commission. However, the SEC has awarded relatively few rewards to whistleblowers for insider trading information because the criteria for determining rewards are broad, vague and not subject to challenge in court.

The Securities Exchange Act of 1934 authorizes the Securities and Exchange Commission to award a bounty to a whistleblower for information that leads to the recovery of a penalty for insider trading. That reward may not exceed 10 percent of the actual recovery. There is no requirement that whistleblowers receive any reward.

Both the decision to give a reward to a whistleblower for insider trading information and the amount, if any, is entirely up to the SEC.

As a result of the Bernard Madoff Ponzi scheme that cost investors billions and public outrage that the SEC ignored whistleblower information, Congress and the SEC are considering whether to amend the Securities Exchange Act to create a new SEC whistleblower reward program for information leading to the recovery of a civil penalty from any violator of the federal securities laws, not just insider trading violations. SEC Inspector General H. David Kotz has recommended that an amended Securities Exchange Act provide specific criteria for awarding bounties.

Erika A. Kelton, a partner with Phillips & Cohen LLP, advocated in a letter published in the Financial Times that Congress include in an amended law a mechanism that would force the SEC to investigate and pursue all substantive complaints from whistleblowers. Without such a requirement, Ms. Kelton said, a new SEC reward program would be pointless. The action-forcing mechanism in the False Claims Act is one reason “qui tam” (whistleblower) lawsuits have been so effective in uncovering and stopping fraud against the government.

If you are aware of a major violation of federal securities laws and would like to discuss your options with an attorney, please contact us.