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Whistleblowing: SEC and CFTC

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Few attorneys are better equipped than Gary Aguirre to represent whistleblowers who seek an award from the Securities and Exchange Commission. As a former Senior Counsel in the SEC’s Division of Enforcement, Mr. Aguirre understands how the SEC weighs multiple factors in deciding whether to prosecute or pass when evidence demonstrates a violation of the securities acts.

While at the SEC, Mr. Aguirre led the insider trading investigation of Pequot Capital Management, the world’s largest hedge fund when the trading occurred. He uncovered direct evidence that Pequot's CEO and Chairman, Arthur Samberg,a member of Barron’s Roundtable, used insider information to make an $18 million profit trading Microsoft options. Pequot later paid the SEC $28 million to settle these charges. Mr. Aguirre also led the SEC’s investigation of a major US multinational for possible violations of the Foreign Corrupt Practices Act (FCPA). He as well participated on the team which conducted the accounting fraud investigation of Fannie Mae ($400 million recovery).

When the SEC gave preferential treatment to an elite Wall Street banker in violation of its own regulations, Mr. Aguirre held the agency and its senior executives accountable for their misconduct in five different forums—the U.S. Senate, the U.S. District Court, and three U.S. agencies—making him one of the nation’s most successful SEC whistleblowers.  

Mr. Aguirre holds an advanced law degree (an LL.M.) focused on securities regulation and international law. His articles on securities regulation have been published in prestigious professional and academic journals. His achievements  as a skilled trial attorney speak for themselves.

Mr. Aguirre frequently speaks on securities regulation, including the new SEC whistleblower incentive program, at national and international conferences, on radio and television, and through the print media. When National Public Radio reported  on the SEC’s new whistleblower incentives last December, it featured Mr. Aguirre, speaking on behalf of whistleblowers, and former SEC Chairman Harvey Pitt, speaking on behalf of the financial industry.

The first step toward obtaining an award is to convince the SEC to open an investigation on the whistleblower’s claim. Last year, Forbes described Mr. Aguirre’s role in prompting the SEC to open an insider trading investigation in which the SEC collected $28 million: “[A]fter Aguirre dredged up the smoking gun e-mails and passed them along to the Senate, the FBI and the SEC in late 2008, the SEC reopened the case in January 2009.” The individual who provided Mr. Aguirre with the “smoking gun emails” collected a $1 million award from the SEC under its prior whistleblower statute, the largest known award paid by the SEC to date. The same whistleblower would have been entitled to an award between $2.8 million and $8.4 million under the current law.

Under Section 922 of the Dodd Frank Act, an individual who voluntarily provides the SEC with original information leading to a successful enforcement case may qualify for an award between 10% and 30% of the monies collected. Section 748 of the Act creates the same incentives for a whistleblower to provide the Commodity Futures Trading Commission with original information of a violation of the Commodity Exchange Act. Although the Dodd Frank Act did not become law until July 2010, its whistleblower provisions apply to violations which occurred years earlier.

To illustrate the scope of these new whistleblower incentives, six hypothetical claims to the SEC or CFTC under the Dodd Frank Act are described below. None are based on historical events. In each case, the facts assume the whistleblower complied with relevant provisions of the Act and the applicable agency rules.

Example 1.
An IT specialist working for a hedge fund provides the SEC with emails proving the fund made a $50 million profit by trading credit default swaps in 2008 using illegal insider information. This information leads to a successful enforcement case in which the SEC obtains a court judgment for three times the illegal profit—$150 million—under Section 21A of the Securities Exchange Act and collects it. Under these hypothetical facts, the whistleblower-tech specialist would be entitled to an award ranging between $15 million to $45 million.  

Example 2.
An accountant employed by a Fortune 500 company provides the SEC with computer generated journal entries showing how the company used “cookie jar” accounting from 2007 to 2010 to record perpetual earnings increases.  This information leads to a successful enforcement case in which the SEC collects $100 million through a settlement with the Fortune 500 company. Under these hypothetical facts, assuming the accountant did not participate in the fraud, he/she would be entitled to an award ranging between $10 million and $30 million under the Act

Example 3.
A trader at the New York Mercantile Exchange provides the CFTC with trading records proving a Wall Street Bank manipulated the price of oil for six months in 2008 by “banging the close.” This information leads to a successful enforcement case in which the CFTC collects $15 million from the bank. Under these hypothetical facts, the whistleblower-trader would be entitled to an award ranging between $1.2 million and $3.6 million.  

Example 4.
A large Wall Street bank designs a collateralized debt obligation, knowing the collateral is grossly overvalued and sells it to an institutional investor in 2007, which consequently takes a $300 million loss in 2008. Information provided by a janitor employed by the hedge fund leads to a successful enforcement case in which the SEC settles with the Bank for $125 million. Under these hypothetical facts, the whistleblower-janitor would be entitled to an award ranging between $12.5 million and $37.5 million.  

Example 5.
The “Chinese wall” at a Wall Street bank fails and its traders tip their best hedge fund clients of a tender offer for XYZ Company’s stock at a 50% premium to its market price. Instead of using the tip for personal gain, a hedge fund portfolio manager provides the SEC with information which leads to a successful enforcement case in which the SEC recovers $100 million from the six hedge funds that traded on the illegal tip. Under these hypothetical facts, the whistleblower-portfolio manager would be entitled to an award ranging between $10 million to $30 million.

Example 6.
An employee of a multinational provides the SEC with financial records which prove a US multinational has paid tens of millions of dollars in bribes to officials of his government to obtain contracts for the installation of oil drilling equipment. The information leads to successful enforcement cases in which the SEC and the DOJ jointly collect $75 million in penalties from the multinational. Under these hypothetical facts, the whistleblower-foreign official is entitled to an award ranging between $7.5 million to $22.5 million.

The six examples above are not guarantees either agency would make an award under the hypothetical facts. Rather, each example illustrates Mr. Aguirre’s opinion how the SEC and CFTC’s whistleblower incentive programs are supposed to operate under the stated assumptions. Either the SEC or CFTC could deny an award for various reasons.

To optimize the probabilities of a large award, the whistleblower’s attorney must craft the claim so it prompts the agency to open an investigation, submit the claim in a manner that complies with the agency’s rules, continue to assist the agency with the prosecution of the claim, and, when necessary, press the agency to diligently prosecute the claim. Mr. Aguirre will take these steps on behalf of each of the firm's whistleblower clients who seeks an award from the SEC or CFTC.  

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