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Wall Street Layoffs Could Spur Increase in Whistleblower Tips and Help the SEC Combat Market Manipulation Schemes
Wednesday, January 18, 2023

Due to declines in public offerings, mergers, and trading activity, Wall Street banks are restructuring and reducing headcount.  Last week, Goldman Sachs laid off approximately 3,200 employees, and Morgan Stanley, Barclays, and other financial institutions have announced job cuts in recent months.  Layoffs could shrink the financial services workforce by 10%.

The widespread layoffs could spur individuals with firsthand knowledge of fraud schemes in the financial services industry to disclose these schemes to the SEC whistleblower program or the CFTC whistleblower program.  Whistleblowers have helped detect and halt some of the largest Wall Street frauds, including a whistleblower who received a $200 million whistleblower award from the CFTC for helping to expose the rigging of the Libor benchmark interest rate.  Wall Street whistleblowers are eligible for awards for reporting a wide range of frauds, including market manipulation (e.g., spoofing and front-running), accounting fraud (e.g., improper revenue recognition), insider trading, investment and securities fraud, FCPA violations, fraudulent securities offerings and Ponzi schemes, investment adviser fraud, and violations of the anti-money laundering laws.

Due to well-justified fear of workplace retaliation and backlisting, many Wall Street insiders are reluctant to report fraud.  But once a prospective Wall Street whistleblower is laid off, they could be more willing and even emboldened to disclose fraud.  Indeed, a study published in the Journal of Experimental Social Psychology titled The whistleblower’s dilemma and the fairness–loyalty tradeoff found that “fairness and loyalty norms clash during whistleblowing decisions” and the vast majority of corporate whistleblowers face negative outcomes due to their whistleblowing, including revenge, reassignment, firing, and personal distress.

Whistleblower reward laws offer a powerful incentive to take the substantial risks entailed in coming forward.  Where a whistleblower has original information about securities fraud, commodities fraud, tax fraud, money laundering, or fraud on the government, the whistleblower could be eligible for a whistleblower reward.

An increase in whistleblower disclosures from Wall Street insiders could strengthen the government’s ability to combat complex financial frauds at a time when fraud is endemic and occurring on an unprecedented scale.   Recent examples include the implosion of Archegos Capital, the demise of supply-chain finance company Greensill Capital, and the collapse of FTX. The 2008 financial crisis caused by widespread fraud in the financial services industry cost the U.S. economy approximately $20 trillion dollars.  Wall Street fraud harms not only sophisticated investors and market participants, but also Main Street.  For example, the financial crisis caused high unemployment, underemployment, foreclosures, homelessness, and lost retirement savings.

Even in an era of big data and increasingly sophisticated electronic tools to detect fraud, including artificial intelligence and advanced data analytics that enable the SEC to uncover and detect patterns of suspicious activity, whistleblowers play a critical role in detecting and halting fraud.  SEC Chair Gensler observed in a July 2021 speech that the “tips, complaints, and referrals that whistleblowers provide are crucial to the Securities and Exchange Commission as we enforce the rules of the road for our capital markets . . . the whistleblower program helps us to be better cops on the beat, execute our mission, and protect investors from misconduct.”

Wall Street whistleblowers can significantly strengthen the government’s ability to combat fraud by providing early detection of a fraud scheme, critical investigative leads such as the names of employees carrying out the scheme and the location of electronic documents evidencing the scheme, and other information that enables the SEC or CFTC to save time and resources in investigations and enforcement actions.

Wall Street Whistleblowers Can Qualify for Substantial Awards

Since the inception of the SEC whistleblower program, the SEC has paid more than $1.3 billion in awards to whistleblowers for providing information that led to successful enforcement actions.  According to the SEC whistleblower program’s most recent report, “[e]nforcement actions brought using information from meritorious whistleblowers have resulted in orders for more than $6.3 billion in total monetary sanctions, including more than $4.0 billion in disgorgement of ill-gotten gains and interest, of which more than $1.5 billion has been, or is scheduled to be, returned to harmed investors.”

The report also reveals that the most common complaint categories reported by whistleblowers were manipulation (21%), offering fraud (17%), initial coin offerings and cryptocurrencies (14%), and corporate disclosures and financials (13%). Some fraud schemes can result in substantial penalties and disgorgement, which can in turn yield large whistleblower awards.  The largest SEC whistleblower awards to date are $114 million, $110 million, and $50 million.

Wall Street Whistleblowers Can Report Anonymously

The SEC, CFTC and FinCEN AMLA whistleblower reward programs permit a whistleblower to report violations anonymously if represented by counsel.  The Form TCR (Tip, Complaint, or Referral) is the form SEC whistleblowers and their attorneys use to submit tips to the SEC Office of the Whistleblower.  When a whistleblower submits a tip anonymously through an attorney, the whistleblower is not required to put his or her name on the form.  Rather, the whistleblower’s attorney will provide their contact information and will be the SEC’s point of contact for the submission.

Assisting in an Existing Investigation Can Qualify for a Whistleblower Award

Even if the SEC already has information about a particular securities law violation, a whistleblower can qualify for an award if their disclosure “significantly contributes” to the success of a resulting SEC enforcement action.  Of the whistleblowers who received awards in FY 2021, approximately 56% provided original information that caused staff to open an investigation or examination, and approximately 44% received awards because their original information significantly contributed to an already existing investigation or examination.  In assessing whether information assisted with an ongoing matter, the SEC considers factors such as whether the information allowed the SEC to bring an action in significantly less time or with significantly fewer resources, and whether it supported additional successful charges, or successful claims against additional individuals or entities.

Prompt Reporting is Critical to Qualify for and Maximize a Whistleblower Award

The Dodd-Frank Act requires the SEC to issue awards to whistleblowers who provide original information that leads to enforcement actions with total monetary sanctions (penalties, disgorgement, and interest) in excess of $1 million.  “Original information” is information that is not already known to the SEC.  Thus, if another whistleblower files information about a violation with the SEC before you submit that information, you will not be eligible for an award based on the same information (unless you were the original source of the information that the other person submitted).

Information about a violation of the federal securities laws can be derived from your independent knowledge (facts known to you that are not derived from publicly available sources) or independent analysis (evaluation of information that may be publicly available but which reveals information that is not generally known).

Moreover, even if a whistleblower is the first to report the information, the SEC considers the timeliness of information to be a significant factor when determining the size of an award. Reporting promptly increases the chance of obtaining the maximum award percentage (30%).  And as a practical matter, the SEC is more likely to act on timely information.  The SEC receives a significant number of tips and has limited resources.  The best claims reveal fraud that the SEC can halt and whose impact the SEC can potentially minimize.

Wall Street Whistleblowers Are Protected Against Workplace Retaliation

Various federal and state whistleblower protection laws provide a remedy for a whistleblower suffering retaliation for disclosing fraud or violations of securities, commodities, tax, or anti-money laundering laws, including these federal whistleblower protection laws:

  • Sarbanes-Oxley Act (protecting whistleblower disclosures about violations of SEC rules and regulations; violations of federal laws related to fraud against shareholders; or mail, wire, bank or securities fraud);

  • Dodd-Frank Act (protecting whistleblowing to the SEC and CFTC);

  • Taxpayer First Act (protecting whistleblowing about tax fraud or tax underpayment);

  • Consumer Financial Protection Act (protecting disclosures concerning consumer financial protection); and

  • Anti-Money Laundering Whistleblower Protection Law (protecting disclosures about violations of the Bank Secrecy Act or sanctions evasion).

While most of these anti-retaliation laws protect internal disclosures (e.g., reporting to a supervisor), whistleblower protection under the Dodd-Frank Act is predicated on a showing that the whistleblower disclosed a potential violation of federal securities law to the SEC prior to suffering an adverse action.  Remedies for whistleblower retaliation include back pay (lost wages and benefits), emotional distress damages, damages for reputational harm, reinstatement or front pay in lieu thereof; and lost future earnings.

State law may also provide a remedy, such as New York’s amended Section 740 of the New York Labor Law, which protects a disclosure about any conduct that the employee reasonably believes violates any law, rule, or regulation or poses a substantial and specific danger to the public health or safety.  In addition, approximately 42 states recognize a common law wrongful discharge tort action (a public policy exception to at-will employment), which generally protects a refusal to engage in illegal activity or the exercise of a statutory right.

Non-Disclosure and Severance Agreements Generally Do Not Bar Whistleblowing to the Government

A prospective whistleblower might be dissuaded from reporting fraud to the government because they signed a broad non-disclosure or severance agreement that bars a current or former employee from disclosing any confidential information or disparaging the company.  But a prohibition against reporting fraud to the government would likely be deemed void as contrary to public policy.  Moreover, an NDA or separation agreement that impedes a whistleblower from reporting a violation to the SEC would violate SEC Rule 21F-17 and could subject a company imposing such a restriction on its employees to enforcement action.

To date, the SEC has brought 17 actions against companies and individuals for violating Rule 21F-17, including an action against the perpetrators of a fraudulent securities offering for their attempt to resolve investor allegations of wrongdoing by conditioning the return of investor funds on the investors signing agreements that prohibited them from reporting potential securities laws violations to law enforcement.  Most of the enforcement actions arose from overly broad non-disclosure agreements or policies that lack an exception for voluntary communications with the SEC concerning possible securities laws violations.

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