Kansas professor urges greater federal transparency, oversight of corporate whistleblower programs

SEC, CFTC payouts to tipsters linked to concentrated groups of private lawyers

By: - August 12, 2022 11:42 am
Alexander Platt, an associate professor of law at the University of Kansas, said documents obtained under the U.S. Freedom of Information Act show whistleblower programs at the Securities and Exchange Commission and the Commodity Futures Trading Commission could be enhanced through stronger transparency and oversight. (SEC)

Alexander Platt, an associate professor of law at the University of Kansas, said documents obtained under the U.S. Freedom of Information Act show whistleblower programs at the Securities and Exchange Commission and the Commodity Futures Trading Commission could be enhanced through stronger transparency and oversight. (SEC)

TOPEKA — A two-year inquiry into federal whistleblower programs created to thwart corporate fraud led a University of Kansas law professor to conclude two prominent initiatives aimed at identifying misconduct were undermined by cronyism and secrecy.

Alexander Platt, an associate professor specializing in securities regulation and corporate governance, said lack of transparency existed in programs at the Securities and Exchange Commission and the Commodity Futures Trading Commission compensating business insiders offering evidence of malfeasance.

A concentrated group of private attorneys representing a big chunk of SEC and CFTC whistleblowers earned hundreds of millions of dollars while avoiding accountability beneficial to the public and policymakers, he said.

Platt said the SEC and CFTC were obligated to preserve anonymity of whistleblowers, many of whom disclosed secrets while remaining employed at companies accused of misdeeds.

“The problem is the agencies have invoked this justification as an excuse to also hide embarrassing or controversial information about the programs’ operations,” said Platt, who published findings through the Columbia Law School.

The SEC has been entrusted with protecting investors by enforcing U.S. securities law and taking action against wrongdoers. CFTC’s mission is to protect the public from fraud, manipulation and abusive practices in the sale of commodity and financial futures and options.

An SEC spokesperson said the whistleblower program had “deterred wrongdoing, incentivized companies to enhance their compliance programs, and returned more than $1 billion to harmed investors.” The SEC has a obligation to protect the identity of people reporting violations and showed no special preference or treatment for claimaints represented by counsel who were former SEC attorneys, the spokesman said.

The SEC has awarded $1.3 billion to 281 whistleblowers since issuing its first award in 2012 to people who voluntarily provided original, timely and credible information leading to an enforcement action. Whistleblower awards range from 10% to 30% of money collected when sanctions exceeded $1 million.

A Bloomberg report in July delved into secrecy of the SEC’s whistleblower program and pointed to problems raised by Platt.

Meanwhile, CFTC chairman Rostin Behnam this spring told the U.S. House agriculture committee the commission’s enforcement division prioritized cutting-edge investigative and analytical techniques to preserve market integrity.

“A part of the enforcement program’s success is rooted in its whistleblower program,” Behnam said.

Platt said the SEC received an average of 50 tips each workday in 2021, which explained the commission’s outsourcing of the process of sifting through information.

Disclosures emerging from U.S. Freedom of Information Act requests submitted by Platt led him to conclude the SEC disproportionately favored tipsters represented by former SEC officials. About 25% of the SEC’s total whistleblower awards went to clients of attorneys who previously worked for the SEC, he said.

In terms of the SEC, Platt said, a single law firm accounted for one-fifth of all money paid out under the Dodd-Frank Wall Street Reform and Consumer Protection Act’s whistleblower bounty program created in 2010 following disclosures of pyramid scheme fraudster Bernie Madoff’s deceptive and predatory financial practices.

Platt said CFTC awarded nearly two-thirds of cash distributed to corporate tipsters were represented by a single law firm.

“Private lawyers have likely extracted hundreds of millions of dollars in fees and expenses from these programs,” he said. “Unlike traditional plaintiffs’ side securities attorneys and attorneys who represent clients seeking government payments in many other contexts, private whistleblower lawyers operate free from virtually all public accountability, transparency or regulation.”

Platt said more congressional oversight and public transparency of the whistleblower programs, including work of private attorneys, would improve the government’s ability to operate programs in the public’s interest.

“Ten years in, I think it’s time to tighten the reins a bit. These are good programs that could be, and should be, better,” Platt said.

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Tim Carpenter
Tim Carpenter

Tim Carpenter has reported on Kansas for 35 years. He covered the Capitol for 16 years at the Topeka Capital-Journal and previously worked for the Lawrence Journal-World and United Press International. He has been recognized for investigative reporting on Kansas government and politics. He won the Kansas Press Association's Victor Murdock Award six times. The William Allen White Foundation honored him four times with its Burton Marvin News Enterprise Award. The Kansas City Press Club twice presented him its Journalist of the Year Award and more recently its Lifetime Achievement Award. He earned an agriculture degree at Kansas State University and grew up on a small dairy and beef cattle farm in Missouri. He is an amateur woodworker and drives Studebaker cars.

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