The Whistleblower Industrial Complex

Abstract

Although the whistleblower programs (WBPs) created by Dodd-Frank have received universal acclaim, little is known about how they actually work. Last year, the Securities and Exchange Commission (SEC) received an average of 49 whistleblower tips every workday. Success depends on sifting through this avalanche of tips to determine which ones to investigate. To date, however, the tip-sifting process has been entirely shrouded in secrecy.

This paper breaks new ground. It offers a rare look inside the WBPs administered by both the SEC and the Commodity Futures Trading Commission (CFTC), shining a bright light on the critical role played by private whistleblower attorneys in the tip-sifting process. Using a new dataset comprised of information I obtained under the Freedom of Information Act, I find (among other things) that tipsters represented by lawyers significantly outperform unrepresented ones, repeat-player lawyers outperform first-timers, and lawyers who used to work at the SEC outperform just about everybody.

The upshot is that the SEC and CFTC have effectively privatized the tip-sifting function that is at the core of the WBPs. Private lawyers have likely extracted hundreds of millions of dollars in fees and expenses from these programs, with a disproportionate share going to a concentrated group of well-connected, repeat players. Unlike traditional plaintiffs’ side securities attorneys and attorneys who represent clients seeking government payments in many other contexts, private whistleblower lawyers operate free from virtually all public accountability, transparency, or regulation. I highlight significant efficiency and accountability deficits imposed by this oversight-free private outsourcing program and propose reforms to realign these private actors with the public interest.

Keywords: Whistleblowers, Bounties, Dodd-Frank, SEC, CFTC, Securities Regulation, Public and Private Enforcement, Privatization, Outsourcing, Revolving Door