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Are we about to see a wave of informants expose wrongdoing at hedge funds?

Just yesterday, the Securities and Exchange Commission (SEC) announced two major changes to its whistleblower program. They should significantly increase the rewards that whistleblowers receive, which already totaled a staggering $564 million last year.

Here’s what the SEC announced:

On February 10, the U.S. Securities and Exchange Commission (SEC) proposed two amendments to the rules governing its highly successful whistleblower program. Both amendments seek to ensure that whistleblowers are properly rewarded for exposing securities law violations. One proposed amendment allows the SEC to pay related action awards for enforcement actions taken by other entities even when those agencies have their own whistleblower reward programs. The second proposed amendment clarifies that the SEC can only consider the dollar amount of an award as a factor when choosing to increase an award, not lower it.

The changes, like many government actions, are rather arcane. But their effect should be a substantial increase in the cash available to hedge fund insiders who rat out their bosses.

Attorneys who represent whistleblowers lauded the changes:

“The proposed amendments are an excellent step in the right direction,” said leading whistleblower attorney Stephen M. Kohn of Kohn, Kohn & Colapinto. Kohn, who has previously worked closely with SEC Commissioners on whistleblower program rules added that “this initiates a process that should ensure that the SEC complies with the law, and pays rewards when a whistleblower’s information triggers multiple fines under various laws, including those administered by the SEC.”

Is it a coincidence that the SEC made this announcement shortly after beginning a probe of short sellers including GameStop short Melvin Capital LP?

Maybe. Maybe not.

In addition to offering millions in compensation, the SEC whistleblower program keeps the informant’s identity hidden.

The Witness Protection Program was instrumental in taking down the American mafia. But it didn’t offer millions in rewards!

This SEC program could provide an even more powerful inducement.

People who work at hedge funds are motivated by money, by and large. If the SEC dangles ever larger checks in front of them, while at the same time tightening the investigative noose, I think they’ll gladly expose any wrongdoing.

I’m excited to see what this investigation, along with bigger financial incentives, uncovers.

What do you think hedge fund informants might expose? Let me know in the comments at the bottom.

There will be no blog on Monday. I have jury duty.

See you on Tuesday. Have a great weekend everybody! 🙂

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More on markets:

Melvin Capital Under Federal Investigation

$1 Billion Still Missing from Bitfinex Hack

Hedge Funds Pull Back from Tech Amid Big Losses

“CMI 101: Demystifying Derivatives with CFTC Chairman Gary Gensler” by Third Way is licensed under CC BY-NC-ND 2.0

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