The Strategist

SEC to pay $100 mln to whistleblowers

08/11/2016 - 16:58

State Street and BNY Mellon have already paid more than $ 1.2 billion on settlement agreements with the US government. In July, State Street agreed to pay $ 530 million to settle charges in purchase of currency for customers at inflated rates. Much of this sum will go to the SEC and the US Department of Justice, writes the WSJ. BNY Mellon has agreed to pay $ 714 million back in 2015. Then, the authorities suspected the organization in more than ten years-long cheating with pension funds and foreign currency transactions. In July, the SEC said that informants of BNY Mellon’s case may apply for remuneration within three months
According to the Dodd - Frank law, informants, reported to regulators about fraud in public companies, may pretend on 10-30% of the paid fines. This means that Grant Wilson, Peter Cera and Ryan Gagne, reported to SEC on State Street and BNY Mellon’s violations, may get more than $ 100 million in total. Wilson, a former trader at BNY Mellon’s Pittsburgh division, can claim almost $ 60 million, according to the WSJ’s calculations. Cera and Gagne, who worked in State Street, may expect more than $ 90 million at halves.

Perhaps some of that money will come to Harry Markopolos, a lawyer who advised the three informants. Markopolos became famous in the early 2000s, when suspected that hedge fund Bernard Madoff is a Ponzi scheme. He warned SEC about this well before 10 December 2008, when Madoff announced the fund bankrupt. SEC refused to hear Markopolos, and investors received $ 18 billion in losses, and Madoff - 150 years in prison. 

In 2011, the SEC announced a program of cooperation with insiders, who are willing to tell about irregularities in the companies that employ them. Yet, first to speak were not informants but representatives of large public companies. In December 2011, the SEC management held more than 10 such meetings. Mary Schapiro, who was then chairman of the SEC, met with representatives of Apache, Halliburton, United Health, Best Buy, McDonald's, Johnson & Johnson, Pfizer and Marathon Oil.

At the time, Markopolos realized the new program offered many opportunities for his investigative abilities. Back in 2011, he had suspicions that large custodian banks make customers pay for currency transactions. He confided to a friend, previously worked in State Street, and he confirmed his suspicions: "no one checks currency trade". 

Further, Markopolos began to look for confirmation from the bank employees. He persuaded Sera, Gagne and Wilson to work with him, hired lawyers and established a partnership in Delaware to temporarily hide names of his informants.

In 2015, the SEC adopted 150 decisions on fines for the companies on the basis of data received from the insider informants. However, the fee has been paid in only eight cases as informants are paid if a fine excess $ 1 million. This is not happening quickly: the SEC can keep the informants waiting a few months, and even more than a year.