Benefits of whistleblower programs outweigh costs

November 18, 2014, American University

Promoting and maintaining financial fraud whistleblower programs, such as those of the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC), is costly.

Cases involving whistleblowers require significant resources as they take nearly 10 months longer to complete. Rewards for whistleblowers who come forward with original information leading to an enforcement action can be large, ranging from 10% to 30% of monetary sanctions over $1 million. This past September, the SEC awarded $30 million to a whistleblower—it's largest award yet.

But according to a new study coauthored by Gerald S. Martin, professor of finance at American University's Kogod School of Business, the benefits of whistleblower programs outweigh the costs as whistleblower involvement helps the SEC and Department of Justice (DOJ) build stronger cases against firms and executives accused of financial misrepresentation.

Increased Penalties, Greater Enforcement

The study, titled "The Impact of Whistleblowers on Financial Misrepresentation Enforcement Actions," found that on average, firm penalties associated with whistleblower involvement are $92.88 million more than when no whistleblower is involved. Executives and employees at firms with whistleblower involvement are fined on average $56.50 million more and are sentenced to prison for approximately 27 months longer.

To conduct the study, Martin and his fellow researchers from the University of Iowa, University of Arizona, and Texas A&M University obtained a dataset of employee whistleblowing allegations through a Freedom of Information Act filing. The researchers merged this dataset with a comprehensive database of financial misrepresentation enforcement actions under Section 13(b) of the Securities Exchange Act created by the 1977 Foreign Corrupt Practices Act.

The researchers estimate whistleblowers enabled regulators to successfully obtain additional judgments of $21.27 billion more than would have been obtained without their assistance. This increase in penalties accounts for 30% of the total $70.13 billion penalties assessed over the 35 year sample period from 1978 to 2012.

Support for Increasing Whistleblower Incentives

Until now, research about the impact whistleblowers have on enforcement outcomes has been limited, yet policymakers continue to push for increased rewards for whistleblowers without regard to the economic benefits of doing so.

"Last month U.S. Attorney General Eric Holder called on Congress to increase rewards for whistleblowers to improve the DOJ's ability to conduct investigations and stop Wall Street misconduct," Martin said, citing a recent example. "This study provides the necessary evidence to inform policymakers on the ongoing debate about the efficacy of whistleblower programs and supports the increase of whistleblower incentive programs."

Explore further: Kim Dotcom offers $5m 'bounty' in online piracy case

Related Stories

Insider trading study shows stronger enforcement

October 23, 2014

The first major study of the enforcement of Australia's insider trading laws has shown the number of insider trading cases brought by the Australian Securities and Investment Commission (ASIC) is increasing, and the regulator ...

Republicans blast FDA monitoring of whistleblowers

February 26, 2014

(AP)—Republicans are blasting the Food and Drug Administration for secretly monitoring the emails of agency scientists who went public with allegations that they were pressured to approve certain medical devices.

Pfizer to pay $491M to resolve drug marketing case (Update)

July 30, 2013

The U.S. Justice Department said Tuesday that drugmaker Pfizer Inc. will pay almost $491 million to resolve an investigation into illegal marketing of the organ transplant drug Rapamune by a company Pfizer later acquired.

Recommended for you

Coffee-based colloids for direct solar absorption

March 22, 2019

Solar energy is one of the most promising resources to help reduce fossil fuel consumption and mitigate greenhouse gas emissions to power a sustainable future. Devices presently in use to convert solar energy into thermal ...

EPA adviser is promoting harmful ideas, scientists say

March 22, 2019

The Trump administration's reliance on industry-funded environmental specialists is again coming under fire, this time by researchers who say that Louis Anthony "Tony" Cox Jr., who leads a key Environmental Protection Agency ...

0 comments

Please sign in to add a comment. Registration is free, and takes less than a minute. Read more

Click here to reset your password.
Sign in to get notified via email when new comments are made.