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 subsequent denial on appeal demonstrate that this problem has since become a practical issue. Doe v. United States SEC, No. 23-271, 2025 U.S. App. LEXIS 13274 (9th Cir. May 30, 2025). In a Ninth Circuit appellate case decided this May, petitioner Paul Zindell provided information to the SEC demonstrating that McGinn Smith & Co. intended to perpetrate another investor fraud scheme related to a fraud case the SEC had already brought against McGinn Smith & Co. and its owners. Zindell is a retired daily newspaper owner/operator and was an investor in McGinn Smith & Co. The SEC was suing McGinn for investor fraud and had obtained a court-ordered freeze of McGinn’s assets to protect the investors who were defrauded. Zindell’s new information led directly to the SEC obtaining a contempt order and an injunction to prevent the additional fraud Zindell discovered from taking place.
In his SEC whistleblower award case, Zindell alleged that by obtaining the court order to stop the fraud, he reported to the SEC, which obtained relief in its action against McGinn to protect the defrauded investors. Had McGinn succeeded in carrying out a new fraud scheme in violation of the injunction to freeze assets, there was a real risk that the harmed investors in the SEC action would not have obtained any money at all. As a result of obtaining the contempt order and injunction based on Zindell’s information, the SEC included Zindell’s allegations and the contempt order in its amended complaint. It cited it in the SEC’s motion for summary judgment in the action against McGinn. The SEC went on to obtain a judgment and collected funds from McGinn and Smith to pay the investors who were defrauded.
The principal issue in Zindell’s whistleblower award case was whether Zindell qualified for an award for providing valuable information to the SEC regarding the fraud that was stopped early. Zindell argued that his information was integral to the success of the action that the SEC had filed against McGinn and Smith, as it led to the SEC’s contempt order and injunctive relief, preventing McGinn from carrying out the fraud in violation of the court’s prior order. It preserved the assets for damages and relief to the harmed investors in the SEC’s action. The Ninth Circuit decided in the negative because no sanctions were collected directly from Zindell’s report because no fraud actually occurred. The facts of Zindell’s case, especially pertaining to the denial of an award for information regarding a fraud that was successfully stopped before it could be carried out, demonstrate that the theoretical perverse incentive described above has become a real, practical, and legitimate concern with the SEC’s rulemaking.
The SEC is “not rewarding people for stopping [fraud] early or before there’s any fraud,” Zindell stated in an interview. The SEC’s “rules actually incentivize people who know that there’s a fraud going on to let it run for another 10 years—let it be another Madoff!”
There are clear benefits to the Dodd-Frank Act’s reward structure. Whistleblower awards under the statute are proportional to the scope of the (ongoing) fraud they uncover, which presumably aligns the size of awards with the financial risk to the whistleblower from disclosing. Critically, this structure also means that Congress does not have to allocate funds to paying whistleblower awards; all awards come out of collected sanctions, meaning that no taxpayer dollars are being spent on awards.
However, when fraud is preemptively thwarted by the SEC under the whistleblower program, this incentive system begins to fall apart. Under the SEC’s current rules, a whistleblower is more likely to receive an award if they allow a fraud to cause damage before reporting it to the Commission.
To avert this issue, the SEC could have granted Zindell an award and paid him a lower percentage, but it chose to deny an award entirely.
This issue was raised during oral arguments before the Ninth Circuit in Zindell’s case. Judge de Alba asked SEC counsel Stephen Yoder whether Zindell had been incentivized to allow the fraud to continue in the following exchange:
Judge de Alba: “Would John Doe have a better argument if money had actually been collected?”
Mr. Yoder: “Yes, Your Honor, he would.”
Judge de Alba: “So, if he would’ve waited until the fraudsters got away with it a little bit more, he would’ve been in a better position than letting you know ahead of time.”
Mr. Yoder: “That’s a fair question, Your Honor, and it’s absolutely the case. The Commission is not accusing Doe of doing anything wrong here. He absolutely did the right thing in bringing information about misconduct to the Commission’s attention. But the way Congress wrote this statute, it does not reward everyone who brings information to the Commission. It doesn’t even reward everyone if the Commission uses that information. Congress wrote the statute to require that the information must lead to the successful enforcement of the Commission’s action. And the Commission exercised its rulemaking authority under Section 21F(j) to implement that provision. And that resulted in Rule 21F-4(c), which we’ve been talking about, and which, as I understand it, Mr. Doe does not challenge as being consistent with the statute. This is simply a balance that Congress struck, and the Commission is trying to act consistently with that balance by applying its rules as written.”
Rule 21F-4(c) defines information that leads to successful enforcement and specifically establishes that a whistleblower will only be considered to have provided such information in cases where “the Commission brought a successful judicial or administrative action.”
Despite Mr. Yoder’s assertion that “this is simply a balance that Congress struck,” Zindell stated in his interview that he did not believe this interpretation of the Act aligned with Congress’s goals in passing the statute, nor that the error in disincentivizing him was on Congress’s part.
Instead, Zindell believes the intention of the Dodd-Frank Act is, in part, to protect and incentivize whistleblowers like him and that the SEC’s rules should be revised accordingly. The problem, according to Zindell, “is the obvious one of not paying someone for stopping a fraud…It’s such an obvious fix.”
Whistleblower Network News contacted the SEC for comment on this case; at the time of writing, the SEC has not provided any comment.
