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Crime & Courts

New rules offer big cash awards to whistleblowers

Mary Schapiro

March 1: U.S. Securities and Exchange Commission Chairman Mary Schapiro answers a question at the Reuters Future Face of Finance Summit in Washington. (Reuters)

Whistleblowers who report corporate fraud or other misconduct to the government could receive sizable cash awards under new rules adopted Wednesday by federal regulators.

Tipsters would be eligible if they give the Securities and Exchange Commission information that leads to an enforcement action resulting in more than $1 million in penalties. The SEC would pay up to 30 percent of the money it recovers from a company or person.

A divided SEC voted 3-2 to adopt the whistleblower program. The two Republican commissioners objected.

The new rules will take effect in about 60 days. Whistleblowers who provided information starting in July 2010, when the overhaul law was enacted, also would be eligible to receive awards.

The whistleblower program was mandated by the financial overhaul law enacted last year. It was contested by big U.S. companies, like AT&T Inc., Best Buy Co., FedEx Corp., Google Inc., Target Corp. and Verizon Communications Inc., in addition to the U.S. Chamber of Commerce.

They argued that whistleblowers should first have to tell their companies of misconduct and give them a chance to correct problems before informing the SEC. Otherwise, the corporations contend, it will take longer to address wrongdoing.

On the other side, advocates and lawyers for whistleblowers say they would be discouraged from reporting wrongdoing if required to inform company officials first.

The new rules would seek to discourage employees from bypassing their companies' compliance programs. Once employees report potential wrongdoing to their company, the SEC would officially designate them as whistleblowers, potentially eligible for awards — provided they give the SEC the same information within 120 days.

In addition, the SEC will credit whistleblowers whose companies pass their information to the agency, even if the whistleblowers themselves do not. That way, whistleblowers could receive awards by reporting wrongdoing internally to their companies.

The new rules represent the first time that whistleblowers will be given a financial incentive to report misconduct to company authorities, SEC Chairman Mary Schapiro said before the vote.

Companies' internal compliance programs play "an extremely valuable role" in preventing fraud, Schapiro said. She said the new rules strike a balance between encouraging whistleblowers to pursue internal compliance when appropriate and giving them the option to go directly to the SEC.

"It is the whistleblower who is in the best position to know which route is best to pursue," she said.

Advocates of the new program say whistleblowers can be an effective line of defense against corporate wrongdoing. The SEC was embarrassed by its failure to halt Bernard Madoff's multibillion-dollar fraud over nearly two decades, despite red flags raised by whistleblowers.

The SEC has made few awards to whistleblowers under its bounty program. Until now, it's been limited to insider trading cases. And its system for processing tips from whistleblowers was criticized as chaotic.

Under the new program, if an insider at Goldman Sachs had given the SEC information leading to its $550 million civil fraud settlement with Goldman over its marketing of mortgage securities, that person could have collected up to $165 million.

"The SEC has chosen to put trial-lawyer profits ahead of effective compliance and corporate governance," the Chamber of Commerce said after the vote. "This rule will make it harder and slower to detect and stop corporate fraud, by undermining (internal) compliance systems."

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