Last month, the Wall Street Journal reported that an Ericsson whistleblower received a $279 million whistleblower award from the Securities and Exchange Commission (SEC).

It was the largest such award in the SEC whistleblower program’s short history. The program has received universal acclaim. But little is known as to how the program actually works.

For the past couple of years, Alexander Platt has been using the Freedom of Information Act (FOIA) to get detailed information out of the SEC about the inner workings of the program.

And he has recently published a paper – The Whistleblower Industrial Complex – detailing his findings from the SEC and Commodity Futures Trading Commission (CFTC) programs. 

Platt finds that tipsters represented by lawyers significantly outperform unrepresented ones, that repeat-player lawyers outperform first-timers, and lawyers who used to work at the SEC outperform just about everybody.  

“The upshot is that the SEC and CFTC have effectively privatized the tip-sifting function that is at the core of the whistleblower programs,” Platt writes. “Private lawyers have likely extracted hundreds of millions of dollars in fees and expenses from these programs, with a disproportionate share going to a concentrated group of well-connected, repeat players.” 

The paper finds that both programs are dominated by a small set of well-connected firms. At the CFTC, a single firm accounts for two-thirds of all dollars paid out. 

At the SEC, a single firm accounts for one-fifth of all dollars paid out. 

Repeat player lawyers dominate both programs. The median and average awards for clients of lawyers who have previously won at least one award are dramatically higher than first-timers.

Platt finds that about a quarter of all dollars awarded by the SEC have gone to clients of lawyers who formerly worked for that agency. 

“Assuming a standard contingency fee, the SEC has effectively caused as much as $70 million to be paid to its own alumni,” Platt reports. “The trend has accelerated in the most recent period; based on still-incomplete data from the SEC and the public record, at least 42% of all dollars awarded in the 18 months between January 1, 2021 and June 30, 2022 went to clients of former SEC officials.”

You find that at least 40 percent of all dollars awarded in the eighteen months between January 1, 2021 and June 30, 2022 went to clients of former SEC officials. 

“It raises the concern that not all whistleblowers are being treated equally by the SEC staff,” Platt told Corporate Crime Reporter in an interview last month. “Some are being given preferential treatment because of who their lawyer is. Not because of their skills, but because of their personal connections and access that lawyer is granted.” 

“Why is that a concern? It may be that those connected lawyers are effectively creating a barrier to entry in the market for whistleblower legal services. There is an antitrust competition dimension.” 

“If you are a fantastic whistleblower lawyer, you may go to a great client and say – I’ll take your case and charge you 15 percent. Normally, in a well functioning market, a client would say – I’ll take a great lawyer for 15 percent rather than a great lawyer for 30 percent. That is how competition should work.”

“But a client might not choose that lawyer because they know that that lawyer is not going to get the same attention and advantageous access as the lawyer with SEC connections. So they will pay 30 percent or a higher fee to that well connected lawyer even though this other lawyer is just as talented, just as hard working and just as skillful. They worry it’s not a fair playing field.” 

“In the worst case, it means that we have some high quality tipsters who are just going to stay home, knowing that they will only be able to keep 70 percent of their bounty.” 

“This is just the analysis that the SEC does when it wants to think about how to calculate bounties. The idea of the program is that you have to offer high monetary payouts because we want the senior well placed executives to come forward and know that if they do the right thing, they will get paid at a level that compensates them for not only the loss of their current job but also the loss of their future employment prospects.”

“The dollars here really count. Lawyers take a cut. The lawyer market is going to affect how much money tipsters get to keep. If it’s a competitive market, there will be downward pressure on the prices for high quality legal services. People will enter the market and offer great services for lower prices. Tipsters will be able to shop around.”

“If instead, a small number of lawyers have unique and preferential treatment, that competition is not going to happen as readily.”

How many tips is the SEC looking at right now? And what percentage are filed pro se?

“I asked for information of represented versus unrepresented, but the SEC declined to provide it. I do not know how many tips come in represented as opposed to unrepresented. As for the gross volume, it’s massive. There are something like 12,000 tips a year that they receive under this program.”

“There were 130 awards in my sample which goes from the inception of the program through the end of 2020. And of those 130 awards, 87 went to tipsters with a lawyer, 43 went to tipsters without a lawyer. Of the 87 awards that went to folks with a lawyer, 30 awards went to folks with a lawyer that I classify as a revolving door lawyer.”

More awards were given to tipsters without a lawyer than with tipsters with a revolving door lawyer. If I’m a whistleblower and I’m looking at that statistics, and I’m looking at a $100 million award, why wouldn’t I just bring the case pro se?

“Many people do that. I don’t know how many tips are filed pro se. But my speculation is that the vast majority of tips are filed pro se. Why? Because it’s easier to do that. You hop on your computer, you go on the website, you dash off the tip in a couple of hours. That’s a lot easier to do than to go out and hire a lawyer, convince a lawyer to work for you and so on. Quite a lot of people do attempt to file this pro se.”

You say there is this whistleblower industrial complex that has garnered 42 percent of the recoveries in that two year period that you looked at. Couldn’t you say the same thing about the defense side? That the vast number of former SEC lawyers when they go into private practice, practice on the defense side. The traditional revolving door. If you crunched the numbers, don’t you think you would find a similar or greater outcome? You would find that the vast number of major settled SEC cases are with revolving door lawyers?

“Yes, totally. Absolutely. My previous paper was motivated by the universally understood reality that the SEC has a very active revolving door to the defense bar. It’s beyond question that the revolving door is a fact of life for the SEC. The revolving door to regulated industry and the defense bar is omnipresent. The fact that it is there is beyond question.”

“One other thing about my current paper. Some of these revolving door lawyers are making statements on the record about their access to the SEC. They have gone on the record in media interviews and say – I get to call my friends at the SEC to find out if they would be interested in my client’s information before we even file a tip.” 

“I don’t think most whistleblower lawyers have that advantage. There are former SEC officials who are now whistleblower lawyers who have said – I get access to the entire investigative file and get invited so that my clients can provide context. Again, I don’t think most tipsters are getting those advantages.”

“You look at those statements and match those up with some of the findings in this paper, then you have to start to want to ask the question – is this program being operated on a level playing field or not?”

Is there Congressional oversight to the SEC whistleblower program?

“It’s a huge problem. Every year, the SEC files a whistleblower report to the Congress. That’s required by Dodd-Frank. That’s a major way Congress can keep up with what the program has been doing.” 

“This year, that annual report was the least transparent report in the program’s history. I found that this report, released in November 2022, omits six types of statistical information that the program had been disclosing every single year since the beginning of the program. Those include the proportion of tipsters who were insiders of the firm versus outsiders. They had been disclosing the proportion who reported internally to their compliance programs before coming to the SEC and the proportion who didn’t.” 

“And this year, no mention of those data points and no explanation for why they were omitted. I find that troubling because it inhibits Congressional oversight of this program.” 

Have you filed another FOIA about lawyers?

“No. But I have filed a FOIA for other information, including what proportion of the dollars paid out have gone to insider tipsters and outsider tipsters. People inside the company aren’t the only folks providing tips to the agency.”

When the SEC was reporting insider versus outsider, how did it break down?

“A substantial chunk of awards have gone to outsiders according to previous disclosures. My more recent FOIA focuses on that question. And my upcoming paper will report on the dollars paid out to insiders versus outsiders. Outsiders are playing a bigger role in this program than is often assumed.”

How are they getting the information if they are outside the company?

“There are different ways that outsiders get information about corporate misconduct. But one group of very active outsiders in this space are known as activist short-sellers.” 

How are they getting the information?

“They are often affiliated with a hedge fund placing bets that the company’s stock will go down. They gather and compile information and issue a public report on the company and hope to profit as the truth is revealed and the company’s stock price tanks. That’s how activist short sellers make their money. I’m looking into the extent to which those market players are also filing whistleblower tips with the SEC and receiving bounties from the SEC on top of any trading profits they earn from disclosing the fraud.”

[For the complete q/a format Interview with Alexander Platt, 37 Corporate Crime Reporter 24, June 12, 2023, print edition only.]