Financial Reform Law Could Reward Private Sector Whistleblowers in a Big Way

A small provision in the massive new financial reform law promises a big payout to insiders who give the government original information that reveals illegal schemes in the private sector, including insider trading, false earnings reports and classic Ponzi schemes, the Los Angeles Times reports.

Under the law, whistleblowers will receive 10 percent to 30 percent of the funds the government collects in fines and settlements related to financial fraud cases. The provision extends to the private sector the kinds of rewards that have been available for years to whistleblowers who report on wrongdoing in government contracts.

“This is very significant and will have an immediate impact,” Erika Kelton, a Washington lawyer who has represented whistleblowers, told the Times. “It will motivate knowledgeable insiders to step forward and tell the enforcement agencies what they know. It is the secret weapon in this massive bill.”

But others are worried the new rule will take away the incentive to report problems internally, or fuel a new wave of legal claims from whistleblowers.

“I’m skeptical. This is the trend toward the informant-method of law enforcement,” said Walter Olson, a scholar at the libertarian Cato Institute.  “Congress sees this as free money, but do we want to live in a society with paid informants everywhere?”

The U.S. government first started rewarding whistle-blowers during the Civil War, when it began to pay people who exposed illegal activity in military contracts. In 1986, the government expanded the False Claims Act to provide payouts to people who revealed fraud in other government contracts. Recently, the biggest awards have gone to whistleblowers who revealed fraud in government-funded health care programs.

In 2009, a former Pfizer pharmaceutical salesman was awarded $51.5-million after revealing problems with the drug Bextra, which was prescribed for pain associated with arthritis and menstrual discomfort. The drug was pulled from the market in 2005, and the drug company paid the government a record fine of $2.3 billion.

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