August 8, 2010 10:30 pm

US to pay big sums for Wall St tip-offs

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New US whistleblowing incentives within the Dodd-Frank financial reform act – that could net informants multimillion dollar pay-outs – are likely to generate a surge in allegations against US-listed companies and Wall Street banks, lawyers say.

The Securities and Exchange Commission is expecting a sharp increase in tip-offs from senior employees and third parties prompted by potential seven-figure bounties.

“The scale of the awards reflects the high quality of whistleblower we hope to get – people within a company, broker or other regulated firm that we might not have heard from before,” Stephen Cohen, an SEC official, told the Financial Times. “We’re expecting a tremendous response.”

The substantive new financial incentives for securities fraud whistleblowers are part of the sweeping Wall Street reforms that became law last month.

People who provide original information that leads to a successful SEC enforcement action will now be entitled to 10 per cent to 30 per cent of any sanction collected over $1m – including a share of the proceeds from any related regulatory action.

“We’ve seen recent settlements of SEC actions of up to $800m . . . this is a tremendous incentive for people to blow the whistle and for entrepreneurial law firms to represent them,” said John Coffee, a law professor at Columbia University.

Similar whistleblowing payments for actions for fraud against the government, under the false claims act, have spawned a multibillion dollar industry of law firms specialising in healthcare claims.

“We’re predicting that there are going to be more cases, based on the experience under the false claims act,” said Tim Coleman, a partner at Freshfields Bruckhaus Deringer, the law firm.

However, financial industry bodies and lawyers representing companies warned that the scale of the potential pay-outs could generate rogue tip-offs by disaffected employees, wasting resources for both the employer and regulator.

“Our only concern is if this were to encourage malicious whistleblowing – people making stuff up to cause trouble,” said the Association for Financial Markets in Europe.

“The company will end up being cleared, but investigations still take up a great deal of time and resources. This [provision] will need careful monitoring.”

The SEC insisted it could cope with the expected influx of new allegations.

“We already have systems in place, which we’re improving, for dealing with thousands of tips every year,” Mr Cohen said. “If this canhelp us to bring cases more efficiently and quickly, it will make us a more effective regulator.”

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