Insider Trading Tipsters: SEC Lets Your Fingers Do the Finking
Psssst! Want to make big bucks ratting on an inside trader?
The number to call is (202) 272-2254.
That’s the Enforcement Division at the Securities and Exchange Commission in Washington. The SEC’s new program for giving “bounty” to tipsters who turn in inside traders is now up and running. SEC commissioners on Wednesday put finishing touches on the program by passing rules on how tipsters must go about applying for their reward once an inside trader has been charged.
The program, designed to make it easier to catch people who illegally trade securities based on non-public information, was mandated late last year by Congress in the Insider Trading and Securities Fraud Enforcement Act. The law allows the tipster to be paid an award of up to 10% of the penalty imposed by the SEC, which can be as much as three times the inside trader’s illegal profits.
The SEC says it has already received about 25 tips under the program, several of which are expected to lead to civil charges soon. Thomas D. Hamill, senior counsel in the enforcement division, said tipsters in these cases would be eligible for the rewards.
SEC Commissioner Charles C. Cox said in an interview that he is optimistic that the program will be effective by providing a new incentive for informants to come forward. “I don’t think it’s sufficient to simply rely on scorned lovers or people who were cut out of getting in on the insider trading deal,” he said.
But so far, not all of the tipsters under the new program have proved reliable.
Gary Lynch, SEC enforcement director, said some calls have been purely spurious, by people without accurate information but bent on seeking revenge against someone. “It’s a good way of trying to make life miserable for your worst enemies,” he said.
Hamill said the first payouts under the program are some time away. He said the SEC hasn’t addressed the issue of how it will determine the size of the award. The law allows the agency wide discretion, with 10% of the penalty only a maximum. Hamill said the SEC probably will decide on a case-by-case basis. SEC officials said they would consider the reasons a person came forward and whether they were themselves guilty of any illegal trading.
Ivan F. Boesky, the former stock speculator who currently holds the record for the largest insider trading violations, agreed to pay $100 million, half of which was repayment of profits and the other $50 million the penalty. So if a tipster today turned in a case that size, he or she theoretically would be entitled to up to $5 million under the SEC formula.
Hamill said he wouldn’t rule out the possibility of such a hefty reward. “On the one hand, there may be some reluctance to pay out that big a sum,” he said. “On the other hand, it may encourage some people to come forward.”
The possibility, at least, of a huge reward makes the SEC program potentially more profitable for the bounty seeker than some other government rewards, such as the Internal Revenue Service’s longstanding program for people who turn in tax evaders. IRS rewards are limited to a maximum of $100,000, an IRS spokesman said.
But the SEC program may not be as generous as the one for people who squeal on thieving defense contractors. Under the federal False Claim Act, individuals who report evidence of fraud in government defense contracts can get 15% to 30% of the damages awarded to the government in a successful case.
The SEC has decided against setting up a toll-free hot line for insider trading tipsters. So Hamill stressed that individuals who want to avoid the cost of a long-distance call to Washington may also call their nearest SEC regional office. In Los Angeles, the main telephone number is (213) 468-3098.
One thing to consider, though: The SEC won’t guarantee confidentiality. Hamill said the SEC will try to keep the tipsters’ identity confidential if they request it. The commission even established procedures Wednesday for tipsters to file anonymous claim forms for their rewards. But Hamill cautioned that in certain circumstances the SEC might be forced to disclose a tipster’s identity, for example, if a defendant in an insider trading case files a subpoena and demands to cross-examine the tipster.
The SEC prefers tips in writing, complete with names, dates and specifics, Hamill said. But the phone lines are open for people who can’t wait to squeal or who are intimidated by having to put their allegations on paper.
