U.S. News

Prosecutor warns of whistleblowers "run amok"

NEW YORK (Reuters) - Whistleblowers who turn in false information in pursuit of rewards under a new federal program could face criminal prosecution, the U.S. attorney for Manhattan said on Friday.

“There’s a lot of concern and discussion about whistleblowers run amok,” said Preet Bharara, whose district is one of the busiest in the country handling white collar crime.

Officials will be on guard for informants who lie to enforcement authorities, either as tipsters or in other cases, he said.

“There’s no greater way to send a message” than to bring perjury cases for false statements to the Securities and Exchange Commission, said Bharara, speaking at a regulation conference in New York sponsored by the Practicing Law Institute.

As required by the Dodd-Frank financial regulatory reform bill, the SEC earlier this month proposed rules for a whistleblower program encouraging people to identify violations of securities law.

Companies and even some SEC commissioners have voiced concern, however, that the program could burden the agency with an avalanche of frivolous tips.

Whistleblowers whose tips lead to sanctions of $1 million or more would collect 10 percent to 30 percent of total penalties.

The minimum bounty -- 10 percent of $1 million -- would be about twice the median household income in the United States, “so it’s a significant incentive,” said Linda Thomsen, a partner at law firm Davis Polk & Wardwell LLP and a former SEC enforcement director.

Those kinds of rewards are already creating a “growth industry,” with plaintiffs’ attorneys advertising and ramping up to help file whistleblower complaints, she said at the conference.

The program allows whistleblowers to report tips anonymously through attorneys. Other provisions prohibit employers from firing or retaliating against whistleblowers.

The SEC has set up a separate office of the whistleblower, but otherwise will likely handle tips the same way it does now, said Robert Khuzami, head of the SEC’s enforcement division.

Companies may be asked to do the initial assessment and the SEC may not conduct an independent review if the company’s check appeared candid and thorough, he said.

The proposed rules also provide incentives for a whistleblower to report first to a company compliance program, an attempt to avoid undermining internal company programs.

The whistleblower program is modeled on the U.S. False Claims Act, a U.S. Civil War era law meant to encourage reports of fraud against the government.

The new whistleblower program will replace the SEC’s insider trading bounty program, which compensates tipsters who give the agency information to file charges against those that use or pass on material nonpublic information to trade securities. The new program will apply to a much broader range of securities violations.

The SEC’s proposed whistleblower rules are open until mid-December for public comment.

Reporting by Dena Aubin; Editing by Gary Hill