Accounting Fraud at Autonomy Perplexing to H-P and Me
Groupon Reports Troubling Financial Results

SEC Receives 3,000 tips from Whistle-blower Program

Is the Dodd-Frank Whistle-blower Program Successful?

As someone who follows whistle-blowing in business and accounting carefully, because of the obvious implications for ethical behavior, I was drawn to the Securities and Exchange Commission’s Annual Report on the Dodd-Frank Whistleblower Program for Fiscal Year 2012.

The “Report” was released on November 15 and reveals a number of interesting data.  The SEC has received a lot of tips, complaints, and referrals:  A total of 3,001 in fiscal year 2012 with the lowest number (166) in November 2011 and the highest number (313) in May 2012.  Those tips, complaints, and referrals came from all 50 states, the District of Columbia, Puerto Rico and 49 countries, primarily from tipsters located in states with proximity to major markets.

Just over 10% of the tips were received from individuals outside of the U.S.  And, the 3,001 tips primarily were concentrated in three areas:  Corporate Disclosure and Financials (18.20%); Offering (IPO) Fraud (15.50%); and Manipulation (15.20%). 

What the Report does not tell us, except in the most general terms, is what the SEC is doing with the tips. I mean, isn’t that the more important piece of information? I can just imagine how many employees send in tips to get back at the company for some perceived bad treatment or “discriminatory” behavior.  For example, how many of the 3,001 tips actually identified fraud or wrongdoing?  How many were duplicative?  How many were referred to the Division of Enforcement?  How many resulted in the initiation of investigations by the Division of Enforcement?  How many related to investigations that already were ongoing? 

The Report does describe the first, and only, award under the program made in August 2012 to a whistleblower that reportedly helped the SEC stop an ongoing multi-million dollar fraud.  The whistleblower will receive nearly $50,000 for evidence of securities fraud. I have previously blogged about this incident.

According to the SEC, judgments and orders issued during fiscal year 2012 have exceeded the statutory threshold of $1 million in 143 cases, for which Notices of Covered Action have been posted so that individuals may apply for whistleblower awards.  The Report notes, however, that the posting of such notices does not indicate that a whistleblower tip, complaint, or referral led to the SEC initiating an investigation or filing an action or that an award to a whistleblower will be paid in connection with the case.  Thus, the Report does not reveal whether the SEC utilized a whistleblower’s assistance in any of the 143 cases; nor, does it disclose whether whistleblowers have brought compelling cases to the SEC that have resulted in judgments and orders below the statutory threshold.

One startling bit of information revealed in the Annual Report is that there are only 14 total employees working for the Office of the Whistleblower.  Although the Report suggests that these employees are receiving assistance from the Division of Enforcement’s Office of Market Intelligence, it is unclear how the Whistleblower Office or the SEC as a whole can effectively administer a program that generated 3,001 tips and, according to the Report, required the staff to return over 3,050 phone calls from members of the public in its first full year.  The Annual Report does not answer this question, nor reveal the average length of time between the filing of a tip and review of the information of purported wrongdoing.  Congress included an enhanced whistleblower program in Dodd-Frank not only to help the government root out fraud but also to encourage corporations to better police themselves and address illegal conduct head on.

The most controversial provision of Dodd-Frank is the whistle-blowing award that some believe is akin to a “bounty hunter” fee. I believe the potential is there for unsubstantiated claims as a result of the award. My fear is that a disgruntled employee will report alleged fraud and hope the SEC will uncover enough details in its investigation to justify receiving the award. On the other hand, if it helps to stem the tide of financial fraud, then the program will serve as a valuable deterrent to crime in business and financial operations. Somehow I doubt that will be the case given the long history of financial fraud in the U.S.

My favorite fraud, and on that set the tone for many years to come, occurred in 1963. Anthony “Tino” De Angelis was a commodities broker who had run into trouble with the law for supplying improperly prepared meat to the federal school-lunch program. In the early sixties, he finagled an initial ­contract with the U.S. government’s Food for Peace program, which sold excess foodstuffs to poor countries. And on the basis of his stunningly large, almost totally fake inventory—De Angelis claimed 1.8 ­billion pounds of soybean oil, but had only 110 ­million—the swindle raised at least $180 million from investors.

De Angelis filled some of his tanks with water, leaving only a thin film of oil on top in case of inspection—­perhaps the most literal Wall Street slickster of them all, at least in the day. The problem was the soybean prices tumbled when the Soviet market didn’t open up as De Angelis had expected, and when panicked investors came knocking to collect on their investments.

Sometimes I’m amazed the lengths to which some people will go to pull the wool over the eyes of others and commit financial fraud. Bernie Madoff comes to mind as the biggest fraudster so far in  the 21st century.

Blog posted by Steven Mintz, aka Ethics Sage, on November 30, 2012