November 18, 2019
Thank you for the opportunity to comment on your proposed changes to the Whistleblower Program Rules.
I took great interest in the data reported in the 2019 Annual Report to Congress on the Dodd-Frank Whistleblower Program, as I am sure you have. As has been reported, the SEC collected a record amount of money, and while many at the SEC have spent the past few years disputing the importance of such figures in assessing the SECs effectiveness, I am pleased that you are again celebrating the fact that the SEC is back to publicizing the Enforcement Divisions efforts by sending a message through such large awards.
What worries me, and should worry the Commission and, quite frankly, every American, is that the data also shows that the number of whistleblower complaints has gone down. In fact, after growing on average 10% each year since 2012, it decreased last year by 1.3%. What is most astounding however is that this is the FIRST TIME since the SEC WB bounty program was introduced that the figure has decreased. Given the relative youth of the program and the fact that higher WB rewards attract greater interest among potential whistleblowers, the SEC should be alarmed that the number of WB tips would be decreasing at this juncture.
I have refrained from commenting on the proposed changes to the program as the vast majority of my concerns have been discussed by several other commenters. The one area of concern that I was interested in raising was the possibility that the mere suggestion of these changes would result in the SEC receiving dramatically fewer high-quality WB complaints. It seems based upon recent figures that my concerns are being realized and I thought now would be a good time to express my thoughts.
My concern was rooted in my own experiences just after the SEC's announcement of the potential rules change. As a forensic accountant who specializes in financial statement fraud, I often use independent analysis to find companies potentially engaging in financial statement irregularities. Once I have found instances of suspicious financial accounting, I have historically alerted the SEC FIRST and then released my reports to the public months after contacting the SEC.
Shortly after the SEC began its comment period, I received messages from two hedge funds and one large university endowment seeking exclusive first-viewing rights to any of my reports. My understanding from conversations with these firms was that the information that I provided was extremely valuable and that if my ideas were proven correct, I could be assured a fixed share of the profits made by the entity, as they would allow me to track returns generated from my ideas. I was even assured that I would collect my fees quarterly for as long as the entity held the profitable position. The firms were not suggesting that I not go to the SEC at all, but were suggesting that coming to them with those ideas as soon as possible would be far more beneficial to me.
Essentially, a few institutions were offering me exactly what the SEC was considering taking away from its potential whistleblowers: transparency about the process, assurance of a fixed percentage agreed upfront, a long-term agreement not subject to change at whim, and payment for actionable ideas within months. I do not know how many other similarly situated independent analysis-type whistleblowers have decided to submit their ideas to institutional investors first or exclusively, but I suspect that a number of analysts are seeking other ways of monetizing the value of their information given the potential changes to the WB program rules. I found it interesting that Harry Markopolos' most recent report on GE received considerable attention for the fact that he had engaged with a hedge fund to complete his research. Markopolos stated to Barrons in August 19, 2019, that he was teaming up with the hedge fund because he had not gotten paid by the SEC. While he admitted that he had also submitted his reports on GE to the SEC, I believe many independent analysis whistleblowers are avoiding reporting to the SEC altogether as they do not believe they will ever get paid. I suspect that this is part of the reason why the number of WB tips, and quite possibly, the number of high-quality tips is on the decline. As for me, I have not submitted a tip to the SEC since the announcement of this potential rule change, despite having made multiple submissions (some of which have resulted in SEC investigations) in years past. The WB program as currently conceived by the SEC seems hostile to WBs in general, and to independent analysis WBs in particular.
As the SEC considers these proposed changes, it should consider whether it prefers that high-quality independent analysis is compiled in conjunction with and vetted by institutional investors first or even solely. If so, what impact does ceding such information and responsibility to institutional clients have on US markets, US issuers and investors. And most importantly, what does it suggest for the role of the SECs Division of Enforcement. The Commissions decision on the WB bounty rules is an existential one: not for independent analysis WBs, as clearly there is a market for high quality research. This is an existential issue facing the SEC.
Regarding the proposed rules, I offer my opinions as follows:
FOR: Including DPAs and NPAs as part of awards should also include bankruptcy proceeds
FOR: Allowing additional forms of reporting besides TCRs
AGAINST: Discretion to increase awards under $2M-not in the statute
AGAINST: Discretion to decrease large awards greater than $100M-not in the statute as Senator Grassley exhaustively explained and just plain unfair as so many others have opined
AGAINST: Changes to definition of independent analysis-language even more confusing and changes are not necessary
FOR: Elimination of double or triple recovery, AS LONG AS, SEC ensures that WB gets paid by other agency should not be WBs responsibility to go out and find and negotiate with another agency when WB submitted info to SEC
FOR: Summary disposition process for nuisance award filers
Also, the Commission should seek to improve the timing and transparency around payment to whistleblowers. The backlog is not in keeping with Congress intent nor does it help in promoting the Commissions objectives.
Finally, this proposal itself has broken an assumed level of trust between WBs and the SEC. The SEC and particularly the Office of the Whistleblower, post the Commission's decision on the proposed rules, needs to figure out how to repair and strengthen that relationship. This, of course, assumes that the SEC wishes to maintain support from the WB community.
Thank you again for the opportunity to express my thoughts despite my submission being well-past the comment period deadline.