Get ready for more whistleblowers in the financial advice sector

The SEC and states like Indiana believe company insiders can provide better insights on fraud and wrongdoing than aggrieved investors can.

As federal and state securities regulators rely more on firm insiders to uncover wrongdoing, the investment advice sector may find itself more vulnerable to whistleblowing.
Earlier this month, Indiana announced its first whistleblower award, giving $95,000 to a former JP Morgan official who helped the state’s regulators make an advice-related case against the firm that resulted in a $950,000 settlement.
The popularity of whistleblowing was evident again Tuesday, when the Securities and Exchange Commission announced it had given a $22 million award to a whistleblower for help in stopping a “well-hidden fraud” at a company the agency did not name.
The award was the agency’s second largest. It awarded $30 million to a whistleblower in 2014. Since the program was established in 2011, the SEC has paid $107 million to 33 whistleblowers.
In the Indiana case, the informant showed how the firm failed to make proper disclosures to clients about proprietary funds in discretionary accounts. In a statement, the state said the “whistleblower exposed JP Morgan for putting its interests before its clients.”
An inside source can provide regulators with a portrait of malfeasance that snapshots from aggrieved investors can’t.
“That’s who these whistleblower awards are likely to go to — the executives within a firm that have an overview of everything going on in a firm,” Alex Glass, Indiana securities commissioner, said in an interview. “We probably wouldn’t have seen [an individual] complaint about it.”
Most whistleblower cases involve insider trading and off-market scams, such as Ponzi schemes. If whistleblowing grows in the advice sector, wirehouses are where most of the activity is likely to take place, because they have wide-ranging operations that can show systemic problems.
“It’s in the large broker-dealer environment where we’re going to see whistleblowers,” said Keith Woodwell, Utah securities director. “Having an insider with knowledge of where to look is invaluable.”
Jordan Thomas, a partner at Labaton Sucharow, said larger advisory firms and brokerages could become whistleblower targets.
That’s where “it’s more probable you’re going to see an SEC whistleblower mindset,” said Mr. Thomas, who helped establish the SEC program when he worked there as an assistant enforcement director. He also represented the whistleblower in a 2015 SEC case against JP Morgan that was similar to Indiana’s enforcement action.
He’s glad to see whistleblowing advance at the state level.
“It’s encouraging that Indiana is taking leadership in this area,” Mr. Thomas said.
Indiana and Utah are the only two states that have whistleblower laws. Indiana’s was enacted in 2012 and Utah’s in 2011. Utah has successfully prosecuted 15 cases based on leads from whistleblowers.
Other states are starting to notice what’s going on in Utah and Indiana, according to Laura Posner, chief of the New Jersey Bureau of Securities. She also is enforcement chair for the North American Securities Administrators Association Inc., an association of state regulators.
“It’s certainly been a topic of conversation at NASAA,” Ms. Posner said of whistleblower laws.
She said interest varies from state to state. The most recent activity was a bill introduced in the New York Assembly in early 2015 that would establish a whistleblower program for any type of financial fraud.
The details are different among whistleblower programs. The SEC awards can range from 10% to 30% of monetary sanctions of $1 million or more. Indiana pays up to 10% and Utah pays up to 30%, with lower award thresholds.