Subject: File No. DF Title IX - Whistleblower
From: Anant Sahai
Affiliation: Associate Professor of Electrical Engineering and Computer Sciences, UC Berkeley

December 15, 2010

There are two factors required to have impact: incentives and resources. The idea of the whistleblower award program is a good one because it provides incentives for people who have knowledge of bad behavior to come forward. However, it is also important to make sure that the SEC has access to the resources necessary to go after this fraud. Without the resources to actually go after fraud, there will be no impact --- and moreover the incentive to report will also go down. Especially in these challenging budgetary times, resources within government are limited --- especially resources that will deployed for the general public's interest against the concentrated interests of the corrupt.

Public/Private partnerships in going after fraud can help bring those resources to the table in the form of outside attorneys that can participate in the process, help formulate strategies, do the legwork, etc. It is vitally important to make sure to encourage the participation of such outside resources, using the appropriate confidentiality agreements to make sure such outsiders can be brought fully into the strategy/decision-making process on a particular case. But remember, companies do not have an innate sense of modesty that can be offended by disclosure. So there is no point in going too far in trying to protect the "privacy" of nonhuman entities.

Whistleblowing and prosecution of fraud is also a game played against sentient players, not nature. So it is also important to consider the incentives and resources on that side too. For this reason, it is vitally important that whistleblowing not be hamstrung with requirements to first disclose wrongdoing to internal channels. That will allow the perpetrators of fraud to concentrate their own resources against whistleblowers.

If you want to encourage reporting to internal channels first, do so by incentives instead. For example, say that "a company that does not voluntarily come forward with a full confession and recompense to the citizenry within 1 year of reporting to an internal channel is liable for triple damages with a corresponding triple payoff for the whistleblower." This gives the whistleblower and his/her attorneys some incentive to report internally that compensates for the increased risk. Furthermore, retaliation in any form against such whistleblowers should also increase the damages considerably.