Whistleblower Bidding War

Crime can pay, but not always. It now seems that Americans in the financial industry, and who happen to be free of ethics, now have a new income opportunity: turning into whistle-blowers. On the surface it looks very simple in that all they need to do, if they participate in or become aware of illegal shenanigans in their firms, is tell the SEC and be richly rewarded.

The Securities and Exchange Commission is expecting a sharp increase in tip-offs from senior employees and third parties prompted by potential seven-figure bounties.

In practice I'm sure it won't actually be that simple, so we should wait until it actually occurs. Regardless, that isn't the part of this story that most interest me. What I see happening will be, in essence, a bidding war. On the one hand you have the SEC, the government's securities regulator, promising cash for information that will lead to arrests and fines against the whistle-blower's employer (at least that's the theory). On the other hand you have the immensely rich investment banking firm, the prospective whistle-blower's employer, waving a blank bonus cheque as an enticement to remain loyal to the company and do as they're told. What is a person in the know to do?

The bidding war for the employee's silence or squawking isn't actually quite fair since the SEC's rewards are going to be fairly predictable, and in particular there are going to be limits to the possible payouts. The bank knows that limit and they are well able to outbid the government. They will have to choose between avarice and "doing the right thing". Worse, word will get around so if they want to stay in the industry the whistle-blower had better be confident that the government award will support them for the rest of their working lives. They'll want to get the amount down in writing before agreeing to anything since governments everywhere can be quite negligent with actually paying their bills to those with even the slightest taint of guilt once they've gotten what they want. Investment banks pay their bonuses on time and to excess. Theirs are promises, if you will, that you can take to the bank.

Ethical or not, on balance I would advise potential whistle-blowers to wait for the proverbial s*** to get very close to the fan before running to the SEC and opening up. They had better run fast or hope that none of their co-workers got the same idea before them since there is unlikely to be any leftovers for those second or third in line, yet they will still be compelled to testify once they've stepped forward.

Of course for the truly unethical you can just make stuff up and hope for the best, especially those that are not in line for fat bonuses and see little future for themselves in the industry.

“Our only concern is if this were to encourage malicious whistleblowing – people making stuff up to cause trouble,” said the Association for Financial Markets in Europe.

It may very well turn out in this case that getting paid for unethical acts, real or imagined, is the better way to go. By upping the ante, all the SEC will have accomplished is to increase the bonuses paid to middle and lower-tier bank employees.