The Securities and Exchange Commission made an unusual announcement this week, announcing a whistleblower award to a company outsider. Could this been a new way to profit from companies engaged in fraud? Is this a new alternative to short selling?
Earlier this week, the SEC announced a $700,000 award to a company outsider who conducted a detailed analysis that led to a successful SEC enforcement action.
“The voluntary submission of high-quality analysis by industry experts can be every bit as valuable as first-hand knowledge of wrongdoing by company insiders,” said Andrew Ceresney, Director of the SEC’s Enforcement Division.
Whistleblowers inside a company are at risk. They risk losing promotions, bonuses, or even their jobs. Of course, they can file whistleblower retaliation claims, but even that recovery can be risky.
The traditional route for an outsider to gain from a company’s malfeasance is to short sell the stock. Of course that is risky as well. When you buy a stock, all that is at risk is the money you paid for the stock. A short position has a much bigger loss potential. If you are wrong and the stock rises, you are at loss for all of that gain. You can look at the problems Bill Ackman is having with his Herbalife short.
Now the SEC has opened the window to earning a whistleblower award for providing “high-quality analysis by industry experts” that leads to a successful SEC enforcement action. The earning potential is lower, but you don’t have capital at risk. You also don’t risk losing your job.
By law, the SEC protects the confidentiality of whistleblowers and does not disclose information that might directly or indirectly reveal a whistleblower’s identity. We don’t know anymore behind the award.
I had expected that the recipient would have stepped forward to trumpet his or her success as a professional whistleblower. So far, that has not happened. I suspect there is more to the story.
The SEC order for the whistleblower award lists four people claiming an award. The preliminary determination denied three of the four. One of those contested, but still lost. That claimant had supplied tips to the SEC, but whatever was supplied was not sufficient. Those tips were designated for “no further action.” Upon review of the information it was not sufficient to and lacked factual connections between the tips and the enforcement action.
It sounds the ranks of professional whistleblowers are growing.
Sources:
- SEC Awards Whistleblower More Than $700,000 for Detailed Analysis
- ‘Short selling is an incredibly lonely proposition,’ billionaire hedge fund manager Bill Ackman says
- SEC Awards Company Outsider $700,000 by Mary Jane Wilmoth in the Whistleblower Protection Blog