In the fifteen years since the passage of the Dodd-Frank Act in 2010, multiple government agencies have established whistleblower programs that enable whistleblowers to receive mandatory monetary awards for voluntarily providing original information that leads to a successful enforcement action. Chief among these is the SEC Whistleblower Program, which has collected over $8 billion in sanctions and awarded $2.2 billion to whistleblowers since its inception in 2011.
U.S. federal whistleblower award laws, such as the provisions in Dodd-Frank, dictate that the whistleblower is to receive an award equal to 10-30% of the sanctions collected. These laws have proven highly effective at unearthing corruption by incentivizing disclosures from insiders. However, this structure creates a potential perverse incentive. The more money that is successfully defrauded, the higher the sanction, and therefore, the higher the whistleblower award; thus, if a whistleblower stops a fraud early or before it even begins, they are entitled to less (and perhaps no) money, they could receive much more money by letting the fraud run its course before reporting the information to the SEC. Of course, this runs contrary to Congress’s intention in passing the Dodd-Frank Act: preventing a fraudulent individual or company from defrauding more money and harming additional investors should be among the SEC’s main goals.
For years, this problem remained theoretical. However, a recent denial by the SEC and...
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