The bounties could give tipsters a powerful incentive to expose the kind of abuses that have cost investors dearly, from the Enron and WorldCom accounting frauds of a decade ago to the Fannie Mae and Freddie Mac scandals of later years and alleged misrepresentations involving toxic mortgages.
The government pays bounties to whistleblowers for exposing fraud, from tax evasion to Medicare scams and Pentagon procurement abuses. As part of an overhaul of financial regulation, Congress and President Obama last year demanded a formal reward system at the SEC, which polices Wall Street and punishes fraud against investors.
Businesses say that before whistleblowers share information with the SEC, they should alert the company they are accusing and give the company a chance to address the alleged misconduct.
Some business groups have said they are worried that the SEC could be overwhelmed with tips. They say they want to ease the burden on regulators by screening the complaints.
“Companies are far better equipped to assess complaints in the context of their particular business and to ‘separate the wheat from the chaff,’ ” two major Wall Street groups, the Financial Services Roundtable and the American Bankers Association, said in a December letter to the SEC.
The American Association of Bank Directors says the reward program should be scrapped. Employees have a duty to their companies, the group says, “but now they have been deputized and promised huge riches to bypass their companies and report to the government.”
Lawyers who specialize in representing whistleblowers say companies cannot be trusted to police themselves.
The government should not discourage potential informants from coming forward or put them in danger of retaliation by requiring them to begin by dealing with the companies they think are breaking the law, lawyers said.
“The SEC’s primary purpose is to protect investors — not internal compliance programs,” Sen. Charles E. Grassley (R-Iowa), who has long advocated that the government encourage whistleblowing, said in a letter to the SEC.
The SEC “should not throw whistleblowers to the wolves,” Grassley added.
At issue is a program Congress and the president ordered the SEC to implement in response to the mortgage meltdown and financial crisis.
Under the Wall Street regulatory overhaul known as the Dodd-Frank Act, whistleblowers are entitled to rewards of 10 percent to 30 percent of the money they help the SEC recoup through enforcement actions.
In big cases, the bounties could total tens of millions of dollars. Goldman Sachs last year paid $550 million to settle an SEC complaint that it sold investors a subprime mortgage product that was rigged to fail.