If you can imagine Wall Street as the American Old West and the Securities and Exchange Commission (“SEC”) as the local sheriff, then the SEC’s new bounty program is the equivalent of nailing up reward signs all over town that read: “Wanted: Dead or Alive.” The agency is looking for information regarding publicly traded companies, financial services institutions, and other covered entities who may have violated U.S. securities laws, and it is willing, more than ever, to pay a premium for the information.
On July 21, 2010, President Obama signed into law the Dodd-Frank Act that, among other things, amends the Securities Exchange Act of 1934 by adding Section 21F “Securities Whistleblower Incentives and Protection.” This obscure and little debated section offers whistleblowers multi-million dollar “bounties” for reporting suspected securities law violations directly to the SEC. Under the program, which went into effect last year, the SEC is required to pay as a bounty to whistleblowers who voluntarily provide the agency with “original information” an amount equal to 10% to 30% of any monetary sanctions exceeding $1 million dollars. When the average SEC settlement is over $18.3 million dollars, whistleblowers can expect the average bounty to be well in the range of $2 million to $5 million dollars.
This new program is fundamentally flawed because it attempts to combat corporate opportunism by encouraging employee opportunism. To solve systemic problems like securities fraud and foreign bribery, the SEC needs to look beyond financial incentives. It needs to take a step back and consider the basic moral principles of mutual self-interest and subsidiarity. These normative arguments were sorely missing in the debates leading up to the final rules implementing the bounty program. These principles make clear that what is missing from Congress’s latest effort is mandatory internal reporting.
This Article endorses the Whistleblower Improvement Act of 2011, H.R. 2483, which was introduced by Congressman Michael Grimm in the first session of the 112th Congress and would require internal reporting as a condition for money benefits under the SEC’s new bounty program. This amendment is needed not just to make corporate compliance programs work in the new era of SEC bounty hunting, but to make whistleblowing morally upright.