This article is the third in the WNN series investigating FOIA documents from the SEC about the agency’s whistleblower program. The first article outlined Big Law’s newfound involvement in the SEC program and the second explained how the SEC data discredits recent critiques about favoritism and secrecy within the program.
Recent articles attacking the U.S. Securities and Exchange Commission (SEC) have alleged that its highly successful whistleblower program enriches fraudsters and a small group of well-connected whistleblower attorneys. In response to a Freedom of Information Act (FOIA) request filed by Whistleblower Network News (WNN) and the National Whistleblower Center (NWC), the SEC has released the 1034 pages of documents that served as the basis for the articles.
Whistleblower attorney Stephen M. Kohn, who represented WNN and NWC in their FOIA request to the SEC states that “the FOIA documents, along with the SEC’s Annual Reports to Congress and press releases concerning the whistleblower program, demonstrate the inaccuracy of these claims. The SEC Whistleblower Program has been an immense success.”
“Most of the over $5 billion in funds recovered from fraudsters based on whistleblower complaints are returned to the U.S. Treasury or used to compensate harmed investors. Notably, due to the structure of the award program, zero dollars of taxpayer money has been spent on awarding whistleblowers and whistleblower attorneys,” Kohn, a founding partner at Kohn, Kohn & Colapinto, explains.
- Of the $5 billion in sanctions collected thanks to the SEC Whistleblower Program, approximately $3.7 billion, or 74%, was returned to harmed investors, the U.S. Treasury, and the SEC Investor Protection Fund
- There is no evidence of any whistleblower attorney charging excessive fees
- Whistleblower awards are taxed; approximately 40% of the $1.3 billion awarded to whistleblowers is returned to the U.S. Treasury through taxes
- Whistleblower awards are financed entirely through sanctions collected thanks to whistleblower disclosures. Zero taxpayer dollars have been used to finance whistleblower awards and pay whistleblower attorneys
The passage of the Dodd-Frank Act in 2010 established the SEC Whistleblower Program. Through the program, qualified whistleblowers, individuals who voluntarily provide original information that leads to a successful enforcement action, are entitled to monetary awards of 10-30% of the funds collected by the government.
Government officials from both Presidents Trump and Biden’s administrations have praised the whistleblower program as an immense success. In August, SEC Chair Gary Gensler noted that the whistleblower program “has greatly aided the Commission’s work to protect investors.” He explained that “[i]n the years since the program was established, the SEC has used whistleblower information to obtain sanctions of over $5 billion from securities law violators, return over $1.3 billion to harmed investors, and award over $1.3 billion to whistleblowers for their service.”
Notably, praise for the program is not divided along partisan lines. In 2020, Gensler’s predecessor, Trump appointee Jay Clayton, stated that “the whistleblower program has been a critical component of the Commission’s efforts to detect wrongdoing and protect investors and the marketplace, particularly where fraud is well-hidden or difficult to detect.”
In contrast to the universal praise of the program consistently put forward by SEC officials and whistleblower advocates, this summer, Bloomberg Law and University of Kansas Professor Alexander Platt began offering several critiques of the program. They claim they used documents obtained through FOIA for their “investigation.” WNN has obtained and reviewed the same FOIA documents.
In his article, Platt claims that the SEC Whistleblower Program has been “captured by a small group of well-connected repeat player attorneys” and that “the true role of these attorneys is not so benign.” He suggests that the high fees charged by attorneys disincentivize whistleblowers and states that “Congress and the public at large are being fed a grossly exaggerated picture of the program’s accomplishments – and a grossly understated picture of its true costs.” According to Kohn, “Part 1 of WNN’s exclusive coverage of this issue disclosed evidence that refuted the allegation that a ‘small group’ had ‘captured’ the program.”
“Notably, while Platt offers guesses as to the amount of money earned by whistleblower attorneys, he fails to fully explain the import of the actual statistics released by the SEC on the amount of sanctions collected in whistleblower cases and the amount of money returned to harmed investors,” Kohn said
According to the Commission’s annual reports and various press releases, of the over $5 billion collected by the SEC in whistleblower cases, at least $3.7 billion, or 74% of the sanctions, was returned to harmed investors, the U.S. Treasury, and the SEC Investor Protection Fund.
“The law requires that 70-90% of all sanctions obtained in a whistleblower case be provided to the government. It also requires that fines and sanctions be used to compensate harmed investors. Therefore, taxpayers and victims are always the biggest winners in an SEC whistleblower case,” Kohn explained.
“Furthermore, whistleblower awards are taxed. Approximately 40% of all the money awarded to whistleblowers, over $500 million, goes to the U.S. Treasury in the form of taxes,” Kohn added.
“A key aspect of the whistleblower program which Platt and Bloomberg failed to explain properly is that whistleblower awards are fully financed by the sanctions collected thanks to whistleblowers. No Congressional appropriations or no taxpayer dollars are used to pay whistleblowers. It is up to the whistleblowers to use their reward money to pay their attorneys and to pay taxes on the compensation received,” Kohn said.
Platt insinuates that whistleblower attorneys operate free of oversight and can charge excessive fees, profiteering off the program. Yet, despite strict Bar rules forbidding excessive fees, neither Platt nor Bloomberg cited a single specific complaint that a whistleblower attorney charged excessive fees. The FOIA documents did not contain any information that whistleblowers complained about their counsel.
“Not one penny of taxpayer money is ever used to pay the attorney fees for the whistleblower lawyers,” said Kohn, who also serves as Chairman of the Board of the National Whistleblower Center. “Not one penny of ‘appropriated’ funds are used to pay the attorneys. Whistleblower attorneys usually work without any up-front fees, and well over 90% of the cases they file never result in a reward, and never result in any compensation,” Kohn added.
“The vast majority of whistleblower attorneys are honest, ethical, and hardworking lawyers trying to ensure that whistleblowers stand a chance when they alone confront the multi-billion-dollar corporations that dominate Wall Street. When Wall Street pays millions to former SEC lawyers to attack whistleblowers, no one takes a second look at their billing statements. Whistleblowers need lawyers. Most cannot find them,” according to Kohn, who has represented whistleblowers since 1984.
In a final statement, the whistleblower attorney said: “Lost in the criticisms lodged against the SEC’s whistleblower program is the stunning success of that program. The numbers are objective and speak for themselves.”