SEC's bull market for whistle-blowers

NEW YORK - They've called from pay phones. They've had furtive meetings at hotels and even a church. On internal government documents, they go by such code names as Mr. X.

For the last year, whistle-blowers deep inside corporate America have been dishing dirt on their employers under a Securities and Exchange Commission program that could give them a cut of multimillion-dollar penalties won by financial regulators.

A new bounty program has been an intel boon to the securities industry regulator, which has struggled to redeem itself after failing to stop Bernard Madoff's epic Ponzi scheme and rein in Wall Street before the 2008 financial crisis.

Motivated by cash and the chance to rat out wrongdoers, tipsters are dropping more than names. Whistle-blowers and their lawyers are turning over boxes of documents, copies of e-mails and even audio recordings of alleged fraud or illegal overseas bribery.

"We are getting very, very high-quality information from whistle-blowers," said Sean McKessy, director of the SEC's whistle-blower office.

In the program's first year, 2,870 tips - about eight a day - rolled in as of Aug. 12. And on Aug. 21, one of them finally led to the agency's first payout: $50,000 to an informant who alerted regulators to an investment fraud.

They declined to specify the case, careful to avoid identifying the whistle-blower. Some say shielding identities could pose a challenge for publicizing the program, but the anonymity probably will yield more information.

The flood of new information does not necessarily mean that the SEC will be more effective. In the case of Madoff, one whistle-blower repeatedly sounded the alarm years before the scheme blew up - to no avail.

Some observers wondered whether the agency has enough resources or appetite to pursue complicated cases.

"I'm not sure the SEC is capable of processing the information it could now be receiving," said John Coffee, a Columbia Law School professor specializing in securities matters. "There's not enough staff and the staff is greatly overworked."

Under the program, tipsters whose information proves crucial to a case could get 10 percent to 30 percent of penalties over $1 million. To provide the payouts, the SEC has set aside $452 million from past penalties and fines in an investor protection fund.