In recent years, few tools have proven as effective against fraud as whistleblower statutes and initiatives. The idea is simple: many frauds are difficult to identify, and insiders -- who know of or may suspect wrongdoing -- can act as eyes and ears, sounding an alarm that might otherwise not ring. In many cases, whistleblowers receive a percentage of any financial recovery ultimately obtained. And those recoveries have been substantial. Indeed, the gold standard of whistleblower statutes -- the federal False Claims Act -- has spurred the return of more than $34 billion to government coffers since the mid-1980s.
Not surprisingly, the success of the False Claims Act has spurred many states and agencies to enact their own whistleblower initiatives. One such program can be found at the Securities and Exchange Commission, where whistleblowers are seen as a weapon in the war against securities fraud. An August 6 post in the Wall Street Journal’s MoneyBeat blog demonstrates the power of programs like these -- and the ability of a single individual to make a difference.
The article recounts the story of Haim Bodek, a high-speed trader who filed a whistleblower complaint to the SEC in 2011, alerting the agency of a little-known but potentially illegal trading practice -- one that might have forever slipped under the SEC’s radar had Bodek not spoken up.
At issue is the use of certain ‘order types’ -- instructions traders use to tell an exchange how to handle a buy or sell order. At one time, order types were fairly simple, telling an exchange to execute an order immediately or to wait until a stock hit a certain price. But in recent years, the varieties of order types have grown dramatically.
One of these new order types is known as “Hide Not Slide.” Bodek’s whistleblower complaint alleges that when high-speed traders used this order type, they were given an unfair advantage over ‘everyday investors.’ Specifically, he claims, high-speed traders would be able to trade out of turn, jumping ahead in line -- potentially harming other investors and violating SEC regulations.
Bodek’s whistleblower complaint has led the SEC to investigate “Hide Not Slide” and other order types like it. The agency’s chairman, Mary Jo White, noted in a recent speech that the large number of order types and how they operate in practice is a source of concern for the agency. Exchanges have been asked to conduct a comprehensive review into order types. Experts say this may only be the beginning.
“With one whistleblower’s complaint, a veil on a potentially problematic practice has been lifted,” says Jeffrey F. Keller, a partner at the labor and employment law firm Keller Grover, and a veteran whistleblower lawyer. “This is the real power of the whistleblower -- the ability to let us see fraud that we might otherwise never see.”
The goal of whistleblower statutes and programs like the SEC’s is to encourage insiders to come forward with their knowledge, and to support them once they do. “These are courageous individuals who want to do the right thing,” says Keller. “And we should be doing everything we can to help them do it. The success of whistleblower initiatives shows that we’re on the right track -- and we need to keep the momentum going.”
