Regulation: Nabbing crooks

The OSC first hinted that it might introduce a whistleblower program in 2011, when the regulator also unveiled a handful of tools designed to bolster the OSC’s enforcement performance, including no-contest settlements.

Although those tools aim to help the OSC resolve cases more quickly, the whistleblower program is intended to bring major misconduct to the regulator’s attention.

In early 2015, the OSC issued a consultation paper that sketched out an initial vision for the program. Then, the regulator held a roundtable this past summer to discuss some of the issues that arose in response to that consultation.

Now, the OSC is seeking to create a whistleblower program that is more ambitious than the initial design. For example, under the program proposed in late October, a tipster could be eligible to receive an award of as much as $5 million from the OSC. The original proposal would have capped possible payouts at $1.5 million.

The OSC also is broadening the eligibility requirements so that compliance officers, in-house counsel and even personnel with some responsibility for misconduct could be in a position to receive awards.

The OSC also is extending the program to include violations of derivatives laws as well as securities laws. In addition, the proposal includes provisions to protect whistleblowers, including confidentiality and anti-retaliation protection.

The OSC, by both increasing the possible payouts under the program and broadening the population of eligible tipsters, is trying to set the up program for success, as has been the case for the SEC’s whistleblower program.

Since the SEC introduced its program in 2011, it has paid out more than US$50 million to 18 whistleblowers. However, the bulk of that money comprised two major awards: one was for more than US$30 million; the other more than US$14 million. In that time, the SEC has received more than 10,000 tips, rising from a few hundred in the first year to more than 3,000 a year, with the annual total rising in each successive year.

More important, the program has generated significant recoveries for harmed investors, Stephen Cohen, associate director of enforcement with the SEC, reports: “Some of the cases where we’ve had whistleblowers – we’ve returned money to investors ranging from a million dollars to hundreds of millions of dollars – were situations where we never would have brought the cases without the whistleblowers.”

“There’s no question” that whistleblowers help recover money for investors, adds Jordan Thomas, partner with New York-based law firm Labaton Sucharow LLP, who represents SEC whistleblowers. “In many ways, securities violations are like bank robberies – they are rarely one-man jobs and there are almost always witnesses. People know about wrongdoing and they know where the money is.”

Although enticing people to come forward with information about possible misconduct appears to be helping regulators and investors in the U.S., the prospect of paying bounties for that information has sparked concerns that disgruntled employees could bring forth frivolous tips about their companies to the OSC in the hope of receiving a big payout.

During the OSC’s initial consultations, there were arguments that tipsters should be required to report internally first, otherwise internal compliance systems could be undermined by the new program. However, the OSC isn’t buying that view. Although the regulator’s proposed policy does encourage internal reporting, it doesn’t require it.

The SEC heard similar concerns from the U.S. business community when that regulator introduced its whistleblower program, Cohen says, but “in almost 100% of cases, whistleblowers report internally before they come to us. They are not running to us with all of their concerns, circumventing their internal corporate culture. They are coming to us because they’ve reported internally first and nobody listened to them, or they’ve been fired, or retaliated against.”

As mentioned above, for the size of potential payouts from the OSC’s program, the original concept set the limit on rewards at $1.5 million, which could be paid regardless of whether the regulator actually collects the penalties.

The OSC’s latest policy proposal maintains the $1.5-million cap for most cases; but in cases in which the regulator manages to collect more than $10 million in monetary sanctions, whistleblowers could receive up to $5 million (with the same 5%-15% of sanctions formula applying to these recoveries).

For Dominic Auld, a class-action lawyer and partner with Bleichmar Fonti Tountas & Auld LLP in New York, the amount that regulators pay out to whistleblowers can never be too much.

“It may sound like astronomical figures to lay people, and it is, but that’s because the financial services [sector] pays that way,” he says. “Ultimately, if you’re going to get a managing director to sing about a bank cooking the books or screwing around with its depositors’ money or whatever, [the payout] is never too much from my perspective, because you have to ensure that the people who come to the table with information are high-level.”

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