16 Sep 2016

SEC Whistleblower Suits: Lawyers are Cashing In

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Lawyers are collecting millions in contingency fees from whistleblower lawsuits. The SEC Whistleblower Program has awarded over $107 million to 33 individuals in the last five years.  As the penalties grow and the SEC collects more funds, whistleblower staff and resources also grow.

On August 30, 2016, a tipster received an award totally over $22 million as part of a $80 million settlement with Monsanto. That tipster and former Monsanto employee was represented by Phillips & Cohen LLP, a Washington based law firm. The SEC accused Monsanto of lying about the earnings of its Roundup herbicide and materially distorting consolidated earnings over a three-year period. Monsanto paid $80 million in penalties and fees; and neither admitted to or denied wrongdoing.

Whistleblowers involved in the SEC Program are individuals, either employees or interested 3rd parties, who identify fraudulent activities at a company, report them to the SEC through an attorney and then offer at least some of the evidence needed to prove fraud is occurring.

As the SEC collects larger fines and penalties, more law firms are developing whistleblower divisions and representing them on a contingency basis, meaning that the attorneys only get paid if an award is given. Typically, law firms working on contingency can collect 30% to 40% of any award. Their clients, the tipsters, can receive between 10% and 30% of penalties in excess of $1 million.

Encryption Empowers Whistleblowers to Act on Their Own Terms

Even beyond SEC whistleblowing, commercially available encryption technology is enabling individuals to come forward anonymously or not, when they believe a company or organization’s wrongdoing must be made public. Edward Snowden believes that he revealed unjust surveillance by the US government when he leaked classified documents to the world. Snowden’s pervasive use of data encryption and email encryption have allowed him to secure and control the gradual release of the classified documents he is in possession of. Some believe that Snowden uses these carefully guarded digital assets as leverage in securing his own personal safety and asylum, and to remain relevant years after his initial leak. With the “Panama Papers”, an anonymous “whistleblower” was able to send journalists thousands of confidential files, using encryption technology. In either case, encryption technology is giving whistleblowers the ability to control their method of disclosure, making it easier for them to decide to come forward with incriminating evidence.

How Does This Impact Investors?

For investors, the lessons are less clear. There is no solid evidence that a SEC settlement produces a material, long-term drop in value for the penalized company. Monsanto’s stock barely moved when the settlement was announced; it was acquired two weeks later by Bayer. Settlement fees themselves are usually a tiny percentage of a company’s quarterly revenue. Cases of fraud might suggest a corporate culture of fraud; that is a critical area to research before investing.