Will record $200m payout tempt a new army of Wall St whistleblowers?

US banks should be braced for a wave of whistleblower complaints after a record $200m award offered a reminder that regulators can pay to expose corporate wrongdoing.

The payout to a former Deutsche Bank employee from the Commodity Futures Trading Commission will garner more attention and tips for the whistleblower programme that was established by the Dodd-Frank Act a decade ago, experts say.

It would not be the first time a high-profile award sparked a round of complaints. In 2018, when three Bank of America bankers were given $83m in awards in a case of misconduct at the broker-dealer arm of Merrill Lynch, the Securities and Exchange Commission received 5,282 tips, up almost 20 per cent from the previous year.

“There’s no question that every time either commission — the CFTC or the SEC — issues large awards, it increases awareness and more whistleblowers come forward,” said Jordan Thomas, chair of the whistleblower representation practice at law firm Labaton Sucharow LLP and a former SEC assistant director who led the development of the agency’s whistleblower programme.

“This award puts the CFTC . . . in the major leagues,” said Thomas. “You’re going to see a dramatic increase in the number of tips and the quality of tips that they’re going to get from this point forward.”

Labaton Sucharow, he added, had applications from whistleblowers with US authorities for almost $1bn in monetary sanctions.

The record reward comes as US whistleblower programmes gain pace, with regulators issuing increasingly conspicuous payouts as longstanding, often cross-border, probes come to a head.

The SEC — which has paid whistleblowers more than $1bn since the start of its programme a decade ago — issued rewards worth more than $500m in fiscal year 2021 alone.

Under the SEC and CFTC schemes, whistleblowers are eligible to receive 10-30 per cent of monetary penalties collected that exceed $1m.

However, tipsters may have to cool any newly created expectations for mega-awards, with payouts typically sitting in the single or double digit million range.

The CFTC’s $200m award was almost seven times larger than its second-biggest payout of $30m in 2018. It marked the first time the CFTC attributed part of the reward to penalties levied by a foreign regulator, a debut criticised by one CFTC commissioner, Dawn Stump.

A spokesperson for John Boozman, the most senior Republican in the Senate committee for agriculture, nutrition and forestry, which has jurisdiction over the CFTC, said the senator was in favour of the agency’s whistleblower programme and deemed awards contingent on the size of penalties “fair”. He did, however, agree with Stump in that basing part of a reward on penalties collected by foreign regulators “might not be appropriate”. 

Nevertheless, employees are still likely to play the odds if they think they have seen major wrongdoing.

“I think there’ll be a lot of people coming out of the woodwork trying to think, ‘Hey, I’ve got that next big case’,” said Bradley Birkenfeld, a former UBS banker who was awarded $104m in 2012 through the IRS’s whistleblower programme and fields calls from potential whistleblowers looking for advice.

The tip from the Deutsche Bank whistleblower led to a record $2.5bn in fines in the US and the UK to settle allegations that it manipulated the Libor benchmark rate, an interbank borrowing rate.

For advocates, the scale of the penalty underscores the benefits of rewarding whistleblowers with a cut of the fines.

“In this case, it is quite possible, even likely, that the CFTC never would have recovered what it did in that underlying action,” said Erika Kelton, a whistleblower lawyer at Phillips & Cohen, on the $200m award, which accounts for approximately two-thirds of all whistleblower rewards disbursed by the derivatives regulator.

Chaired by Democrat senator Debbie Stabenow, the Senate committee for agriculture, nutrition and forestry said the CFTC had collected more than $3bn in monetary sanctions as a result of its “critical” whistleblower programme.

Support, including from Stabenow and Boozman, is also bipartisan to address the programme’s funding model with a long-term fix after the US passed an emergency bill earlier this year temporarily ensuring the CFTC whistleblower fund would not be emptied by the payout to the former Deutsche Bank employee.

The $200m award grabbed attention on Wall Street, according to one senior compliance executive at a New York bank: “There was a reaction of, ‘that’s a lot of money’.”

However, the executive questioned whether it would lead to more cases that would not otherwise have been reported. “I don’t think that’s going to change anything. When you step back, either you have a problem or you don’t,” the person said.

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