The SEC came under scrutiny, including from U.S. Senator Charles Grassley, following an April 25, 2012 front page article in the Wall Street Journal which reported that the Agency had inadvertently revealed the identity of a whistleblower during an inquiry into his former employer.
The investigation involved Pipeline Trading Systems LLC, which runs stock trading platforms under its new name, Aritas Securities LLC. According to the article, an SEC Staff Attorney showed a notebook belonging to the whistleblower to a Pipeline executive during an interview. The executive recognized the handwriting regarding trades, meetings, and phone calls. Pipeline settled with the SEC on October 24, 2011.
SEC Officials stated that the Agency has always tried to avoid unnecessarily revealing an informant’s identity. An SEC spokesman stated, “Our review of the facts confirms that we followed this practice in this case.” The informant’s notes were presumably a critical piece of the investigation and therefore, the Staff felt it necessary to use them during its interview with the Company executive. The whistleblower provided his notes to the Commission in early 2010. It was not clear as of the time of the WSJ Article whether the Company also produced them as part of the investigation.
The report underscores the risks faced by informants who report allegations of wrongdoing under the new whistleblower provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The SEC’s Whistleblower Program allows an informant to recover between 10% and 30% of the monetary sanctions (including penalties, disgorgement and interest) for any action resulting in sanctions in excess of $1 million. The exact amount of the whistleblower’s award is decided by the Commission. Under the program, the whistleblower must provide “original information” to the SEC that “is not known to the Commission from any other source.” See generally Securities & Exchange Act, Sec. 21F.
Since August 2011 when the Whistleblower Program began, the Office of the Whistleblower has received over 1,000 tips. According to the WSJ article, the Commission plans to make its first payment under the program within the next few weeks. The whistleblower in the Pipeline matter came forward prior to the Whistleblower Program, and is therefore ineligible for any personal recovery.