Detecting Securities Fraud with Whistleblower Programs

After the 2007 to 2008 financial crisis and subsequent Great Recession, several federal regulations and laws have been put in place to minimize the amount and extent of securities fraud. Security fraud, also known as stock fraud and investment fraud, includes any practice that induces investors to make financial or investment decisions on the basis of false information, particularly in the stock or commodities markets. Government agencies have worked to limit the financial damaged created by fraudulent activities by implementing whistleblower programs that empower and reward individuals who come forward with information regarding securities fraud or fraudulent activities.

The United States’ Securities and Exchange Commission (SEC) has an entire office designated to whistleblowers. The Commission believes that whistleblowers can be invaluable tools, helping the Commission to identify fraudulent activities, naming those involved, and detecting these activities much earlier. A major perk of the whistleblower program is that the Commission has been able to minimize the financial damage incurred by investors due to securities fraud.

The Dodd-Frank Act created in 2010 established the Dodd-Frank Whistleblower Law in order to encourage company employees to come forward with information. The Dodd-Frank Whistleblower Law has given more power to the SEC to detect potentially financially disastrous securities fraud. According to the SEC website, the governmental department “oversees the key market participants in the securities world including securities exchanges, securities brokers and dealers, investment advisors, and mutual funds”. Some states have followed the national government’s model by adopting individual whistleblower programs. Indiana and Utah are two examples of states that have followed the federal government’s example. Edward Siedle, a representative of a whistleblower in Indiana stated “leveraging the power of the whistleblower is tremendously helpful, and it’s not costing the state anything.”

While the Dodd-Frank Whistleblower Law establishes that whistleblowers can and should come forward and any interference by the company in question is strictly forbidden, the law does not force companies to establish their own programs aimed at increasing company transparency. Private Investigators can lobby companies to establish whistleblower programs that will help prevent securities fraud and other illicit activities. By creating company-wide whistleblower programs, companies can save significant amounts of money for the company itself and investors.

The Securities and Exchange Commission Chairwoman Mary Jo White stated in a speech to the Ray Garrett Jr. Corporate and Securities Law Institute at Northwestern University School of Law in Chicago that she “would urge that, especially in the post-financial-crisis era, in which regulators and right minded companies are searching for new, more aggressive ways to improve corporate culture and compliance, it is past time to stop wringing our hands about whistleblowers”. According to Investment News it has been over five years since the SEC created the whistleblower program, and as Chairman White explained the SEC has “seen enough to know that whistleblowers increase our (SEC) efficiency and conserve our scarce resources”. The Chairwoman also noted the importance of individual internal compliance programs in companies. Hiring a Private Investigator to advocate for a company-wide whistleblower programs can prevent costly legal fees, poor publicity, and loss of faith in the company. The financial damage to a company because of securities fraud can be astronomical, and hiring a PI to help the company create or expand a whistleblower program can save companies millions, if not hundreds of millions of dollars.

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Tiffany Walker – Blog Writer, Lauth Investigations

Whistleblower Protection

Whistleblower Protection


Photo courtesy of Kate Ter Haar, Flickr

Chelsea Manning, Edward Snowden, Julian Assange, and other whistleblowers have sparked an intense debate on the ethics of leaking secrets.  Some view these people as martyrs, others view them as traitors. Numerous laws and acts have been put in place to protect those who choose to expose an entity’s wrongdoings, but where do we draw the line between honest whistleblowing and smear campaigns?

Corporate Whistleblowers

The subject of a leak and the method in which a whisteblower announces their findings all play a role in the ethics of a case. Is the accuser attempting to enact revenge on a corporation by tarnishing their reputation, or are they genuinely trying to alert the public of fraud, harmful practices, and other misdeeds? Many employees keep quiet when they witness corruption because they fear losing their jobs and risk damaging their chances of future employment. And even if an attempt is made, businesses will go to great lengths to cover their tracks, including forcing employees to sign contracts that prevent workers from speaking up about company policies. Consider the case of Donna Busche, whose story was mentioned in this Washington Post article. According to the Post, Busche was fired after raising safety concerns about the nuclear facility she managed. The nondisclosure agreement prevented Busche and her coworkers from reporting mishaps, and also made it impossible for them to receive financial rewards for whistleblowing. Like many others before her, Busche was accused of being fired for other reasons, despite her claims that she did it for ethical reasons.

Measures such as the Dodd-Frank act of 2010 and the Whistleblower Protection Enhancement act of 2012 are meant to protect people like Busche. However, some believe that the government isn’t doing enough to enforce these rules, while others believe that the law encourages people to lie for financial gain. Dodd-Frank rewards whistleblowers with up to 30 percent of the recovery, which can generate millions for the prosecution in a big case.

Going Against the Government

The legality of whistleblowing becomes even more muddled when it involves the government. Snowden’s most recent revelations about the National Security Agency (NSA) have some lauding him as a hero, while others accuse him of treason.

Most recently, a women by the name of Sabrina De Sousa is being punished for her involvement in the kidnapping of Abu Omar. Aljazeera America ran an article about the former CIA operative, who claims to be used as a “scapegoat” for the CIA. De Sousa was working with the CIA in Italy at the time of the kidnapping, but made several attempts to alert Congress to investigate the CIA’s actions. She believed that their treatment of Omar was a huge mistake, and after failing to receive support, found herself being accused for being the mastermind of the operation.

A Difficult Decision

Although the majority of Americans won’t be involved in cases like Snowden’s and De Sousa’s, some may find themselves in a difficult position. A whistleblower is oftentimes the spark needed to ignite a corporate fraud case. Before deciding to go public with information, it’s important for potential whistleblowers to look over contracts they may have signed and learn more about their state’s laws. Even corporations who find themselves the subject of a leak will need to launch an investigation to prove the accuracy of such claims.