When the Securities and Exchange Commission rewards a whistleblower for providing information that leads to an enforcement action, it keeps the identity of the person secret — making it difficult to know how many financial advisers have won whistleblower awards.
Late last year, however, the lawyer of a former Morgan Stanley broker revealed that his client received a $1.8 million payout for giving the SEC a lead on sales of complex Citigroup foreign exchange products whose risks and costs were allegedly not properly disclosed and ended up causing significant investor losses.
Morgan Stanley Smith Barney and Citigroup Global Markets agreed to pay $5.92 million to settle the charges in September 2017.
James Sallah, a partner at Sallah Astarita & Cox, represented the whistleblower broker, who he said “was upset they weren’t doing right by the clients.” His client, whom he did not identify, acted on principle but also was pleased with the SEC award.
“I hope this would encourage more brokers to step forward if they believe there is an issue that puts clients in harm’s way that is not being addressed or rectified by the firm,” Sallah said.
But stepping forward incurs big risks for advisers. Even if they’re kept anonymous by the SEC, their firms may ferret them out, which could lead to losing their jobs. Legal fees also can add up, if the whistleblower needs to retain counsel.
Johnny Burris, owner of Burris Wealth Management, knows the sacrifices related to whistleblowing.
When he was a JP Morgan Chase broker, he refused to recommend the proprietary products the firm preferred to sell to clients. In 2015, the firm agreed to pay $307 million to settle charges from the SEC and the Commodity Futures Trading Commission that it did not properly disclose conflicts of interest. The firm said the disclosure problems cited in the settlement were not intentional.
Burris was not part of the SEC whistleblower program. He said JP Morgan wrongfully terminated and defamed him. He filed a whistleblower retaliation claim with the Occupation Health and Safety Administration, which awarded him $474,000. His case is now in federal court.
“It puts a target on your back,” Burris said of whistleblowing. “For me, it is the right thing to do, and I would do it again.”
But he said whistleblowing may not be good for all advisers.
“When deciding to be a whistleblower, ask yourself how much justice you can afford,” Burris said. “It can be very expensive, even if you’re right.”
The SEC has awarded more than $738 million to 134 individuals since issuing its first award in 2012, the agency said in a news release last month. That includes 28 awards for more than $176 million since the beginning of October. Whistleblowers can be awarded 10% to 30% of sanctions greater than $1 million if the SEC determines their information was crucial in making the case.
The SEC tries to prevent bad faith on the part of whistleblowers by incentivizing them to report problems internally first. If they do so, and their firm doesn’t act, they could get a higher payout. About 81% of award recipients initially raised their concerns to their firms.
The 2015 SEC case against JP Morgan Chase did involve whistleblower tips, according to a statement from the law firm Labaton Sucharow, which represented one of them.
Matthew Stock, who is of counsel at Zuckerman Law, said financial advisers are well-positioned to be whistleblowers because the SEC targets harm to retail investors.
“If you could highlight an area that is a priority, you’re more likely to get the SEC to act,” Stock said.
Advisers also are valuable tipsters because of their knowledge of securities laws. They know when something is wrong.
“They’re not guessing,” said Stock, who is director of the whistleblower rewards practice at his firm. “Their evaluation of violations is usually spot on.”
The bigger the penalties in an SEC case, the more likely it is that a whistleblower will be rewarded. That can work against advisers, said John Berry, a partner at Munger Tolles & Olson.
For instance, advisers might inform the SEC about violations involving disclosures of fees their firms receive for recommending certain investment products. But fines in that area don’t add up as fast as they do for a large-scale investor ripoff.
“If you report a Ponzi scheme, you get a pretty big award,” Berry said.
Whistleblowers can never be sure what the SEC does with the information they provide. The agency might decline to pay a whistleblower award if it is already investigating potential wrongdoing cited by the tipster. It also might not be able to prove malfeasance.
On the other hand, the whistleblower’s information might be central to a successful enforcement action, and a nice award may be the result. But the hero is never revealed by the agency, which means it’s difficult to know how often it’s an adviser.
“We don’t know, and the program is set up that way,” Stock said.
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