November 16, 2011
After Tip, the Claim For Reward
Whistleblowers alleging that two banks overcharged clients for currency trades could provide an early test of a new U.S. program to encourage tips of possible financial wrongdoing.
The whistleblowers, who are helping the Securities and Exchange Commission in civil investigations into whether Bank of New York Mellon Corp. and State Street Corp. improperly charged customers for currency trades, have filed claims seeking possible bounties from the SEC, according to people familiar with the matter.
The Securities and Exchange Commission seal outside headquarters in Washington, D.C.
The agency's whistleblower program, launched under the Dodd-Frank financial-overhaul act, stemmed from calls for tougher policing of Wall Street following the financial crisis. The plan for the first time offers government bounties to financial insiders and others who tip off the SEC about alleged securities fraud, offering payments of at least $100,000 to those whose information leads to big enforcement penalties.
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The agency finalized its whistleblower rule in May and aims to make its first payment under the program next year, according to people familiar with the matter. Under the program, people whose information leads to an SEC enforcement action with penalties of more than $1 million are guaranteed a 10% to 30% cut of the penalties. To receive the money, the SEC must determine the tips provided original information that led to the enforcement action.
In a report Tuesday, the SEC said it received 334 whistleblower tips in the seven weeks when the final rules became effective on Aug. 12 and the Sept. 30 financial year's end.
Among those who have filed SEC whistleblower claims are Grant Wilson, a former BNY Mellon currency trader; and Peter Cera and Ryan Gagne, former State Street currency employees; each has provided the government information about currency activities at their former employer, the people familiar with the matter said. The Wall Street Journal first reported the identities of the whistleblowers last month.
BNY Mellon and State Street have denied any wrongdoing and are fighting civil lawsuits filed by state attorneys general and others in the matter. They said they are cooperating with inquiries by government authorities. Michael Lesser and Philip Michael, the lawyers for the whistleblowers, declined to comment, as did an SEC spokesman. The whistleblowers' cooperation with SEC investigators is likely to increase the legal pressure on BNY Mellon and State Street.Both banks are battling a widening civil law-enforcement probe into allegations that for years they systematically overcharged pension funds and other clients for currency trades. The BNY Mellon and State Street tips are among the first publicly reported possible bounty claims to the SEC.
Jordan Thomas, who helped to craft the whistleblower program before leaving the SEC in July, said the quality of the submissions has been high.
"Some relate to senior people at large financial firms and other corporations, typically hard targets for the SEC to successfully bring enforcement actions against," said Mr. Thomas, now acting on behalf of whistleblowers as a partner at law firm Labaton Sucharow LLP. He has no involvement in the BNY Mellon and State Street cases.
Messrs. Wilson, Cera and Gagne have submitted a mass of information to the SEC about the companies' currency-trading operations, including emails and other internal bank documents, the people familiar with matter said.
The SEC's civil investigations into activities at State Street and BNY Mellon involve similar allegations to those already made in civil lawsuits against each bank filed by state prosecutors and public pension funds, the people said. But they said the agency is looking at a broader range of possible wrongdoing than most of those suits.
The SEC is looking at currency trades the two banks made for private clients, as well as for public pension funds, and investigating the companies' activities across the nation, not just in certain states, the people said.
The allegations against the banks center on claims they overpriced certain currency trades for large institutional clients by using less-advantageous exchange rates to maximize their own profits.
The SEC program isn't the only source of potential payment for the whistleblower group behind the currency-trading allegations, which includes Harry Markopolos, best known for trying to alert the SEC to Bernard Madoff's multibillion dollar Ponzi scheme.
Mr. Wilson and others in the group have a financial stake in civil lawsuits filed by four states against BNY Mellon, seeking total damages of more than $2 billion. These people could collect a share of any damages from these suits of up to $100 million under provisions of the states' false claims acts, people familiar with the matter said.
Messrs. Cera and Gagne and others in the whistleblower group also have a stake in a civil suit filed against State Street in 2009 by California state prosecutors. These people could collect up to 33% of the estimated $200 million in damages sought in that case, according to people familiar with matter.
Mr. Thomas, the former SEC official, said the agency wants to encourage high-level whistleblowers. "If it is a close call whether the information provided by the whistleblowers was significant or not, I think the SEC's going to err on the side of the whistleblowers," he said.
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