Insider Trading Whistle Blowers – Clearing Their Conscience

Insider Trading Whistle Blowers – Clearing Their Conscience

A whistleblower is a person who exposes any kind of information or activity that’s deemed illegal, unethical, or not correct within an organisation that’s either private or public. The information of alleged wrongdoing can be classified in many ways: violation of company policy/rules, law, regulation, or threat to public interest/national security, as well as fraud, and corruption. Whistleblowers, however, take the risk of facing stiff reprisal and retaliation from those who are accused or alleged of wrongdoing. 

Because of this, a number of laws exist to protect whistleblowers. To help fight corruption and insider trading, there’s the Dodd-Frank Wall Street Reform and Consumer Protection Act, better known and most often referred to as Dodd-Frank Law. The Act contains a whistle-blowing provision where someone with information about security violations can report it to the government for a financial reward.  

Information that a firm’s numbers are fraudulent or that its business is corrupt is valuable. It’s a broad new whistle-blowing provision for 10% to 30% bounties to people who alert the Securities and Exchange Commission (SEC) to securities law violations that result in million-dollar-plus SEC recoveries. 

Accounting frauds often hatch over many years deep inside the company. Low-level employees may know something is afoot and may be tempted to blow the whistle, but they risk losing their jobs and permanently damaging their careers. So they keep quiet while the fraud festers and grows. 

Dodd-Frank addresses this incentive problem by not only rewarding whistleblowers but also protecting them from being fired for reporting fraud. The act calls for the SEC to establish one of Dodd-Frank’s many elaborate regulatory structures. In order to determine whether the whistleblower provided original information, how valuable the information was to the prosecution and whether the whistleblower qualifies for protection from employer retaliation.

Categories: Trading