Recent Criticisms of Whistleblower Reward Programs Miss the Mark

An opinion editorial by former corporate attorney Steven Solomon, published in the New York Times in late December, criticized what he called the “perverse incentives” that the U.S. government’s whistleblower reward programs create for “bad people” who decide to become whistleblowers.  Solomon argues that the whistleblower-reward programs run by the U.S. Securities and Exchange Commission, Department of Justice and Internal Revenue Service should not reward whistleblowers who have previously engaged in wrongdoing.  He says this is “akin to robbing a bank and then turning in your colleagues to get a cut of the money you stole.” Solomon, now a law professor, misses the point of the programs he criticizes, which is to draw on the unique knowledge of insiders in ferreting out large-scale securities violations, fraud on the government and cheating on taxes.

Solomon’s arguments are not new.  Corporate interests barraged the SEC with concerns about rewarding “culpable whistleblowers” when the commission asked for comments on its draft rules for the whistleblower-reward program it established under the Dodd-Frank Act of 2010.  Weighing the irony of rewarding wrongdoers against the societal value gained by incentivizing those persons to come forward with their information, the SEC rejected a blanket ban on rewarding these insiders, who are often best-positioned to blow the whistle on wrongdoing.

In the comments accompanying its final rule implementing the SEC whistleblower reward program, the SEC noted that the predecessor to the SEC’s program, the DOJ-administered reward program for qui tam claims filed under the False Claims Act, had long recognized that “it takes a rogue to catch a rogue.”  The SEC noted that this was “especially true for sophisticated securities fraud schemes which can be difficult for law enforcement authorities to detect and prosecute without insider information and assistance from participants in the scheme or their coconspirators.”  Accordingly, the SEC determined that culpable whistleblowers could enhance the agency’s ability to “detect violations of the federal securities laws, increase the effectiveness and efficiency of the Commission’s investigations, and provide important evidence for the Commission’s enforcement actions.”

Despite its decision not to exclude this category of insiders altogether, the SEC placed significant constraints on the ability of culpable whistleblowers to obtain awards through the program.  Under commission rules, any sanctions the SEC imposes on an entity for conduct that the whistleblower directed, planned or initiated do not count toward the $1,000,000 sanction threshold that triggers the tipster’s eligibility to earn a reward.  In addition, the SEC considers the whistleblower’s level of culpability (and any unreasonable delay in reporting the violation) in determining the amount of the award the whistleblower receives from the commission.

The SEC, DOJ and IRS whistleblower reward programs have undeniably played a huge role in protecting investors and recovering billions that taxpayers have lost to fraud and tax evasion.  These results far outweigh any harm done by rewarding whistleblowers who may have been involved in wrongdoing and then decided for any number of reasons to do the right thing.  Even then, these insiders have no guarantee that they will receive an award, or that by reporting the wrongdoing they avoid all risk of negative consequences for their own involvement.

Solomon also takes issue with the size of the rewards the government pays to whistleblowers, likening them to lottery “jackpots.”  But such rewards come in all sizes, the great majority smaller than the jaw-dropping “millions of dollars” Solomon suggests is the norm.  Solomon also fails to see that the sums whistleblowers may receive are not disproportionate to the risks they take.  The requirements for earning a successful whistleblower award are not easily met, and the overwhelming majority of whistleblowers receive nothing for the information they report within their companies or to the government, more often than not at great risk to themselves.  Whistleblowers face serious risk that employer retaliation will derail their careers and slash their career earnings to a fraction of the level they could have attained if only they had kept their mouths shut.

The rarity and modest median size of whistleblower rewards, combined with the risks whistleblowers take when coming forward, belie Professor Solomon’s cynical description of whistleblower reward programs as a “get rich quick” scheme for bad actors.  These programs have a real-world impact.  They serve as important bulwarks for investors and taxpayers by providing financial incentives to individuals who risk devastating consequences when they decide to come forward.  The fact that someone has done the wrong thing in the past should not preclude that person from earning a reward, even a sizeable one, for a change of heart that advances the common good.  Legislators and government agencies should reject myopic calls for limiting these important programs.