Refusing SEC Reward Money: Noble Act or Whistleblower Deterrent?

There were two big stories about Security Exchange Comission (SEC) whistleblower rewards in the last couple of weeks. The SEC proudly announced a $22 million award, which pushed the total amount awarded under the SEC whistleblower program to over $100 million. That is a pretty good start for the program.

The other story, which got a lot of notice, was a SEC whistleblower who was entitled to an award for his role in exposing fraud at Deutsche Bank but decided to turn down money from the SEC instead.

He said he was obliged to take the share his attorney and his ex-wife were supposed to receive, but the portion that he otherwise would have kept he turned down in protest of the SEC.

At first, almost everyone sided with Mr. Ben Artzi, the whistleblower, and his stunning decision to turn down the money. He was one of two whistleblowers awarded money from the fund and was entitled to $8.25 million. I’m not sure how much his lawyer and his ex-wife got, but it is clear that the whistleblower walked away from real money.

He did not think Deutsche Bank employees or stockholders should lose money when executives were not punished directly for “inadequate controls in the valuation of complex derivatives.”

The Bank had to pay back $55 million.

Not many people, no matter what the circumstances, would turn down an award like this. Mr. Ben Artzi apparently wanted the money clawed back from the executives.  He also had particular acrimony for the SEC hiring a Deutsch Bank executive. All which is understandable.

However, if you read David Colapinto’s Blog (I work with David on some cases) you may see we would all be better off if Mr. Ben Artzi took the money. David provides many sound reasons and details in the case and I’d like to add a second to his motion.

We know of course that the legal system is flawed, that whistleblower rewards are not perfect, and that one case or even a bunch of cases are not going to solve everything.

However, I don’t buy the idea that Deutsche Bank and its stockholders should not have to pay.  They profited from the bank’s actions. That argument makes no sense to me. Now, you could side with Mr. Ben Artzi and say the SEC should have gone after the executives.  

There is a lot of sympathy for the idea that executives at major financial institutions walk when fraud occurs.  Distinguished whistleblower lawyers continue to call for more criminal enforcement of such people. At best, I’m skeptical about how all that will work. Proving a criminal case is difficult, and I could also see a major bank throwing an executive under a fast moving train and escaping liability for the institution.

The decision to proceed in that manner, for a criminal case, in any event, is not an easy one and not a one size fits all situation. It’s also not an argument for either not holding the Company itself accountable or not rewarding the whistleblower.  

The money the Deutsche Bank had to pay may at least force people in the bank to think twice. Nobody is saying $55 million will destroy Deutsche bank, but I doubt the people in the bank are going to forget how they lost this dough either.

What’s troubling about Mr. Ben Artzi’s noble act is that it tends to provide the inference that somehow there is something wrong with getting a big reward for a big whistleblower action. (Mr. Ben Artzi did not suggest this himself.)

The usual suspects who want to weaken all such laws always defend the right of private corporations to make each and every decision based on greed. Most whistleblowers, by contrast, may well want to make money off their actions, but they do not set out in life to make money by being a whistleblower.

It is a position that luck, fate, and horrible circumstances put somebody in to learn about fraud on the job. Then they may realize that they can get a pay day by being a successful whistleblower, but even that comes as the result of unusual and great effort by somebody with the courage to point out wrongdoing.

The awards go only to those who really do provide valuable evidence of fraud when the government obtains something as a result. They are rare events to be cherished. The incentive does what it should, it makes it possible for whistleblowers to fight big banks with professional legal help and it rewards those who actually earn a reward.

That is something we have to constantly re-enforce. Every time there is a big reward it means more people have the hope to continue to fight fraud. Isn’t that what we want? Capitalists want incentives for investment and everyone accepts that as a public policy good. So is an incentive to fight fraud.

Mr. Ben Artzi should take the money and use it for any of the noble pursuits I’m sure he has.  He should celebrate his success in at least forcing one bank one time to have to pay up when it acted to defraud people.   

The SEC should be applauded here too because a win is a win in this area. No, it will not fix the entire financial market, and yes his former bosses may get away this time, but at least everyone should know when the whistleblower wins.