Berman Tabacco recently worked with Harry Markopolos in preparing a response to the proposed changes to the Securities and Exchange Commission’s (“SEC’s”) whistleblower program. Mr. Markopolos is widely recognized and respected throughout the financial community and is especially revered within the whistleblower community for his work on exposing the Bernie Madoff Ponzi scheme.
In 2010, the SEC enacted a whistleblower program to incentivize people to report securities fraud. The program was created in the wake of the 2008 financial crisis and Mr. Markopolos’s well-documented efforts to force the government to investigate Madoff. Under the program, the SEC is authorized to make monetary awards to whistleblowers who voluntarily provide original information that leads to successful enforcement actions resulting in monetary sanctions over $1,000,000. Currently, a successful whistleblower stands to receive an award of between 10 and 30 percent of the monetary sanctions collected.
On June 28, 2018, the SEC proposed amendments to its whistleblower rules (“Proposed Rules”) and requested comments from the public. Some of the proposed changes would have a significant impact on the SEC’s whistleblower program. In one of the most controversial proposed changes, the SEC would have discretion to cap whistleblower awards on recoveries exceeding $100 million. Another controversial change is the limitation of the definition of “independent analysis” to insight that would not have been reasonably apparent to the SEC based on publicly available information.
Mr. Markopolos’s response points out some of the flaws of the Proposed Rules. First, Mr. Markopolos vehemently disagrees with the SEC’s proposal to grant itself the discretion to limit whistleblower awards, stating that “I strongly disagree with the proposed discretionary cap on awards exceeding $100 million. Although well-intentioned, this provision would be a gift to the major investment banks and other large public companies, as it would deter high-ranking officers at those entities from turning whistleblower.”
In his response, Mr. Markopolos also notes how it would be nearly impossible to apply the SEC’s proposed interpretation of “independent analysis.” Specifically, Mr. Markopolos states that “[u]nder the Proposed Interpretive Guidance, however, my team [on the Madoff case] could not have been certain of recovering a whistleblower award because of the ‘20/20 Hindsight’ nature of the guidance.” Mr. Markopolos reasons that:
Under the proposed rule, it would be far too easy for the commission, in hindsight, to claim that it could have or would have learned of a fraud on its own. Instituting a sensible objective standard would both protect the SEC Whistleblower Program from paying out unearned awards, while also protecting the whistleblower from having a misguided SEC employee say, ‘we would have caught that on our next exam anyway, so why pay the whistleblower?’
Mr. Markopolos’s response has received a positive reception in the press, including in The Wall Street Journal and the National Law Journal.
Berman Tabacco was happy to support Mr. Mr. Markopolos in preparing his comment letter. “We are proud to have assisted Mr. Markopolos with his comment letter and presume his words will have a significant impact on the SEC’s final rule-making decisions,” commented partner Bryan Wood. We look forward to the SEC’s final decision, which we expect to be announced in 2019.