Over a period of several years, the Brazilian unit of medical-devices maker Zimmer Biomet Holdings ran a massive kickback scheme, according to the Securities and Exchange Commission, which in 2017 levied a $30 million penalty against the Indiana-based company. The wrongdoing reportedly came to light when a Brazilian former orthopedic surgeon provided an anonymous tip to the company and then to the SEC. That won the whistleblower a $4.5 million reward from the US regulatory agency.
The bounty was authorized by the 2010 Dodd-Frank Act, which offers such whistleblowers 10–30 percent of cash funds collected from enforcement actions that top $1 million. Some critics question whether this provision is a good idea. A Bloomberg investigation recently found that the Dodd-Frank whistleblower program “often ignores its own rules, shields much of its work from the public, and has been a financial boon for law firms that hired former agency officials.”
But the program does effectively deter financial fraud, according to Chicago Booth’s Philip G. Berger and City University of New York’s Heemin Lee (a graduate of Booth’s PhD Program). Their research finds that the Dodd-Frank whistleblower provision has reduced the likelihood of corporate financial fraud by 12–22 percent, depending on how the calculations are done, without significantly affecting audit fees.
Whistleblower laws have a long history. In 1863, when Civil War profiteers were effectively robbing the public purse, the US...
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