The SEC is authorized by Congress to pay monetary awards to individuals who bring forward information which results in enforcement action that results in over $1 million in sanctions. The award can be between 10 and 30% of the amount collected. Assistance from these whistleblowers helps the SEC identify possible fraud and other illegal actions earlier than would have been possible otherwise.
First Award Presented
On August 21, 2012 the SEC announced its first award under the whistleblower program. Neither the recipient of the award nor the case was identified to the public. It was announced, however, that the award amount was $50 thousand.
The Case against WorldCom
In 2000 WorldCom was forced by the US Justice Department to abandon its planned merger with Sprint. The company was not able to continue on its aggressive growth path. WorldCom’s stock price was falling and the banks were demanding that margin calls be covered by CEO Bernard Ebbers. Loans from the company provided a short-term solution, and in 2002 Ebbers resigned as CEO. Following Ebbers’ resignation, a team of internal auditors, led by Cynthia Cooper, then Vice-President of Internal Audit, worked secretly and often at night to uncover $3.8 billion worth of fraud. The fraud had begun in 1999 and continued until mid-2002. Ebbers, along with two other company executives had been understating expenses by reporting them as capital and overstating revenue with false accounting entries. The SEC began its SEC investigation later in 2002. The SEC did not have the awards program in place at the time, but Cynthia Cooper shared the Time Magazine Person of the Year recognition in 2002.
The Case against Enron
Cynthia Cooper shared the Time Magazine cover with Sherron Watkins who, in 2001, was Vice President of Corporate Development at Enron Corporation. Watkins is recognized as the whistleblower who called attention to Enron’s fraudulent misrepresentation of its books by CEO Kenneth Lay and Finance CEO Jeff Skilling. The company had a history of overstating profits and assets and reporting losses and expenses in off-the-books foreign entities. The SEC initiated a formal investigation into Enron in November, 2001.
Whistleblowers, along with SEC whistleblower lawyers and the SEC, play an important role in regulating equity trading activity and company reporting.