July 27, 2010
In a move that will likely trigger an increase in whistleblower allegations and investigations, on July 23, 2010, the U.S. Securities and Exchange Commission (“Commission”) announced that it had awarded a $1 million bounty to Karen Kaiser for providing information and documents leading to the collection of civil penalties in the Commission’s insider trading actions in May of this year against Pequot Capital Management, Inc. (“Pequot”), its chairman and CEO, Arthur J. Samberg, and David Zilkha, an employee of Microsoft and later, Pequot. Kaiser is Zilkha’s ex-wife.
The SEC’s insider trading case alleged that in 2001 Pequot traded in Microsoft securities based on advance information that Zilkha, then a Microsoft employee, provided on the company’s quarterly earnings. The Commission staff had previously investigated the trading but closed the investigation without action due to a lack of evidence. Then, in late 2008, Kaiser discovered and produced to the SEC a key email between Zilkha and another Microsoft employee that Zilkha had not produced in the first investigation.
The $1 million bounty is by far the largest ever awarded by the SEC and represents 10% of the $10 million penalty the SEC collected in its settled insider trading action against Pequot and Samberg. (Zilkha is contesting the SEC’s charges.) Previously, the SEC had awarded a total of $160,000 to five claimants in the twenty years since it received the statutory authority to award bounties in insider trading cases. In April of this year, the SEC’s Inspector General issued a report criticizing the under-utilization of the statutory bounty authority.
This bounty was awarded pursuant to the SEC’s previous statutory authority to reward those who provide information — in insider trading cases only — with up to 10% of the penalties collected. The Dodd-Frank Wall Street Reform and Consumer Protection Act now greatly broadens the SEC’s bounty authority to apply to any type of enforcement action and increases the potential award up to 30% of the monetary sanctions collected. The Act also strengthens protections for whistleblowers.
Together with the expanded bounty authority contained in the Dodd-Frank Act, this recent award signals a clear intent by the Commission to use — and publicize — substantial financial rewards to motivate individuals to come forward with evidence of potential violations of the securities laws. However, financial rewards can also motivate complaints that are misplaced, based on misunderstandings or simply unfounded. In many cases, companies often have an opportunity to address whistleblower complaints before the government does. When handled properly, a company’s response to such complaints can go a long way to demonstrating to the government that the company has addressed the issue. If handled improperly, it can heighten the government’s concern about the company’s senior management. In sum, the government’s expanded bounty authority, and demonstrated willingness to use that authority, puts a premium on a company’s compliance infrastructure and response to complaints about potential misconduct.
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