Securities and Exchange Commission Approves New Rules Providing Big Rewards to Financial Fraud Whistleblowers

The U.S. Securities and Exchange Commission approved rules on May 25, 2011 that could make it very lucrative for Wall Street and other corporate insiders to alert the agency to securities fraud.  Under the new rules, whistleblowers will be entitled to receive 10 to 30 percent of the money they help the S.E.C. collect through enforcement actions.

Business groups, including the U.S. Chamber of Commerce, had lobbied strenuously for rules that would impose constraints on whistleblowers, but the S.E.C. rejected suggestions that whistleblowers be required to inform the company being accused and allow it to address the allegations internally.

“For an agency with limited resources like the S.E.C., I believe it is critical to be able to leverage the resources of people who may have first-hand information about potential violations,” S.E.C. Chairwoman Mary Schapiro said.  Schapiro, an independent, and the S.E.C.’s two Democratic Commissioners, voted for the new rules over the objections of the S.E.C.’s two Republican Commissioners.

Whistleblower tips have already proven valuable to the S.E.C.  Enforcement official Stephen Cohen noted that one whistleblower recently provided a road map to an alleged fraud that saved the agency six to twelve months of investigative work, and revealed wrongdoing that the agency might not have otherwise detected.

If the new whistleblower rules operate as planned, individual investors should reap the benefit of not only additional detection, but deterrence as well.  “Knowing that whistleblowers are being encouraged to dime them out will make the next Madoff think twice and three times before they go down a bad path,” attorney Dean Zerbe said.

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