Seen enough? Here’s how to get the SEC’s attention

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Sean McKessy spent most of the last five years as first chief of the SEC’s Office of the Whistleblower, building the division into an 18-person unit that has chased down hundreds of the roughly 14,000 tips it has received to date and paying out $132 million to tipsters in connection with successful commission enforcement actions.

McKessy left the agency in late July to join the Washington office of the whistleblower law firm Phillips & Cohen. He was in San Francisco this week, however, and we sat down with him to discuss a range of things, including how often the agency hears from the startup world, whether the SEC is likely to pursue fewer cases in Silicon Valley under a Trump administration and, either way, how tipsters can get the agency’s attention most effectively.

More from that conversation follows, edited for length.

TC: You were an SEC enforcement attorney who left to work in the private sector, then came back to the SEC to spearhead this program. What was that like?

SM: It was a fascinating challenge. There was an awards program under the SEC that was specific to insider trading cases, but it had been around for [22] years and the entirety of the payouts was around $3 million. Dodd-Frank established the one that I ran, which was broader and basically said that if you come forward with any kind of securities law violation and help the SEC bring the case, you can get a reward.

TC: How big an award?

SM: The awards can range from 10 percent to 30 percent of the money collected when the monetary sanctions exceed $1 million.

TC: And the money comes from where?

SM: Wisely, Congress set up separate funds for whistleblowers to be paid out of. [So if you get an award], we’ll multiply the 10 to 30 percent against whatever was collected in the case you helped us bring, but the money is going to be paid out of a different pot. What Congress didn’t want was for victims’ rewards to be reduced because we’re [paying a] whistleblower.

TC: What’s the criteria, beyond that a case has to have sanctions of more than a million dollars?

SM: Well, for example, you need to have voluntarily provided information to us. If the SEC sends you a subpoena and that’s why you’re sharing information with us, you aren’t a whistleblower.

You also have to provide original information, though there are exceptions; you can take publicly available information and synthesize it into analyses. The paradigm for that would be Harry Markopolos [the former securities industry exec who famously tried in vain to warn the SEC about Bernie Madoff]. He never worked at Madoff; everything he knew was from public documents. But his analysis showed the only way Madoff could be producing the returns he claimed was through fraud. The program was set up [in the wake of that case] so people like Markopolos could be eligible.

TC: The office made a $20 million payout on Monday, but the release about it is very opaque.

SM: The SEC is extraordinarily transparent about the cases it brings, so as soon as it brings an enforcement action, there’s a press release. But the whistleblower office has a statutory mandate not to identify whistleblowers. There are many pieces of information that the public would like to know that we thought could be reverse-engineered [to reveal a source].

TC: The office says 14,000 tips have come through the program since it went into effect in August 2011, and that it has paid out $132 million dollars to 34 people connected with 26 cases to date. Those don’t seem like great odds for potential whistleblowers.

SM: The number of people paid doesn’t necessarily represent everyone who brought good information; some have brought in good information where the sanctions have been less than $1 million. As I was leaving this summer, we had 800 ongoing investigations that were generated by whistleblowers. That’s actually a pretty high conversion rate. At any kind of intelligence or regulatory agency, you’re going to get 100 tips for every one or two that are good; that’s just the nature of the business.

TC: Do you think people are reaching out because of the money or they’re more interested in seeking justice?

SM: In the early days of the program, you weren’t even required to fill out a form, so anyone who supplied anything in writing had technically done what they needed to do, and in one case, we reached out to a whistleblower and said, “You helped us bring a really good case; you provided information in writing. You could get paid.” The whistleblower said, “I didn’t do this to get paid; I’m not all that interested in it.” I [strongly encouraged him to accept the award] and he did.

TC: Donald Trump has pledged to dismantle the Dodd-Frank law. Are you worried about preserving what you built at the SEC?

SM: The speculation right now is the SEC’s whistleblower program will be spared because it’s working and it’s a fraud measure, and part of Trump’s philosophy is that we’ve got to “drain the swamp” and root out fraud wherever it may be. And for anyone looking to trim the government, I can’t think [doing away with the unit] is a compelling narrative. I think a lot of what drove people to vote in certain ways was this feeling that the game is rigged. So I don’t know how you tap into that [as a candidate], then turn around and say, “We’re going to take all the resources away from the agencies that we’re counting on to fix the system.”

TC: Do you think startup employees and investors are aware of the whistleblower program and trying to take advantage of it?

SM: I think so. California is the highest submitter state. I don’t think you can draw a straight line between [that fact] and Silicon Valley, but I know there is more attention being paid around issues that [outgoing SEC Chair] Mary Jo White talk about in a speech [at Stanford] earlier this year, including crowdfunding and other alternative mechanisms for startups to raise money without all the traditional regulatory requirements.

I know there’s consternation between wanting to allow for new ways for startups to attract capital and to protect investors from outright fraud. Startups also tend to work their employees to death, which can create an atmosphere for people to say, “Hey, I don’t think this company is doing the right thing.” And there’s a temptation here to make yourself look more valuable than you are to attract investors. So I think all that makes Silicon Valley fertile ground for people to come forward.

TC: Say I’m a disgruntled employee or investor. What should I know about how the SEC prioritizes these tips?

SM: When it comes to purely private enterprise, the question is, is there a hook? You always have rule 10b-5, which is broad anti-fraud, so if you’re going to be soliciting funds from investors, you have an obligation not to be fraudulent. But, for example, I think the SEC will be less interested in diving into [a situation where] the company tried to create a fraud, but few people invested in it.

An unspoken factor, too, is that staff members like to work on cases that get a lot of attention. And bringing a case that involves a high-profile company in Silicon Valley is a way to get your name in the paper. That’s just human nature.

TC: How much work does the whistleblower need to do?

SM: For the whistleblower, your job is to create a compelling storyline that hopefully gets the attention of the people who [pore over all the incoming tips]. Maybe it’s related to something they’re already looking into; that makes it easy. But if it’s a brand new thing, you’ve got to beat out all these other people, and the SEC has limited resources, so your job is to convince the SEC to take it.

So there’s that work on the front end. Then, assuming they take that case, [the size of your reward] depends on a number of factors that they consider, including whether you make yourself available for interviews when they want to talk with you, whether you bring in other people, whether you help them go through documents…

TC: But it’s all subjective, what percentage gets paid out.

SM: It’s very subjective. But my point is, no further work is required. If you cause the SEC to open an investigation, you can walk away and do nothing else and the SEC has to do the work and bring the case. And in that scenario, you’re still eligible.

TC: Are staff attorneys pressured to resolve cases within a certain amount of time? I’m wondering about ongoing investigations out here and what it means that no enforcement action has been taken.

SM: In my earlier stint with the SEC [in the late [90s], it was sort of like, take as much time as you need. When I rejoined in 2011, a lot of the metrics had changed. Staff attorneys were recognized by how efficiently they brought cases. I think over the last three or four years, they’ve set records for the number of cases they’ve brought into the enforcement division, and that’s because there are now metrics around decision-making. If a case is a turkey, you cut bait; you don’t spend any more time than you need to if there isn’t a case to be brought, and if there is a case to be brought, you bring it as quickly as you can. But you can go back and say, “We need more time because of these complexities.”

TC: If a whistleblower does reach out, will that person know whether the SEC is looking into the information they’ve submitted?

SM: Typically, the SEC investigates these things on a confidential basis, so the likelihood is you won’t hear anything unless they want to talk with you. But the whistleblower program creates a different dynamic. We want you to come forward and we’ll pay you and we do have permission to tell people that, “Yes, we loved your tip but we’re not going to bring a case for these reasons,” or maybe that “Your tip has been assigned to a certain person but that’s all we can tell you.” There’s a resource issue [and people are time-constrained], but it’s likely that if you ask for an update and we know that we’ve closed the case, we’ll try and give you a call or let you know [if you call the SEC].

TC: Is there a way to increase your odds of success? Beyond good storytelling, does it help if numerous people approach the SEC about the same issue at once?

SM: In connection with any case, the SEC can only pay 10 to 30 percent of the reward, so if you want the reward all to yourself, you might be the only one who submits anything. On the other hand, if you come forward and you work in a company’s press department and you tell us that your company is cooking its books, the SEC might wonder how you know, whereas if you approach us with someone who works in accounting, your tip might seem more credible.

TC: Have you seen people fight over these rewards?

SM: There are cases now where whistleblowers are being sued by people who gave them information.

It’s funny. There are some whistleblowers who, despite our [policies meant to shield their identities], will issue their own statements. I always tell them it’s not in their interests to do that. It’s the old “mo money mo problems” issue.

Also, just look up the word “whistleblower” in the dictionary; the synonyms you see include [snitch, stoolie, rat fink]. People don’t like whistleblowers until it turns out they were spectacularly right. Then we make movies about them.

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