Wall Street Moles Turn To Schneiderman For Faster Cash Than SEC

SEC spokesman John Nester declined to discuss any specific tips the regulator receives or investigations it has pursued.

While Schneiderman’s ability to pay informants is limited to instances in which wrongdoers bilk New York or local governments out of public funds, he wields a powerful weapon in fighting securities fraud through the Martin Act.

SEC’s Turf

The 1921 law doesn’t require the attorney general to prove that a defendant intended to defraud anyone or that fraud occurred at all, making it broader than most federal prosecution tools. Former New York Attorney General Eliot Spitzer famously began using the law about a decade ago to go after Wall Street’s biggest firms, stepping on the SEC’s turf in the process. Schneiderman sued Barclays under the Martin Act.

“The Martin Act is so broad and gives the New York attorney general much more leeway to bring a case compared to the SEC, which has to go through a number of hoops to get a case approved,” said James D. Cox, a law professor at Duke University.

The hoops for the SEC’s enforcement division often include interviewing dozens of witnesses, conferring with other agency divisions that regulate markets and giving targets a chance to respond to allegations before filing a lawsuit. SEC lawyers also have to convince a majority of the regulator’s five commissioners to approve any enforcement action, which is a check on bringing weak cases.

Negative Press

Some attorneys general seeking to make names for themselves are more inclined to sue following a brief investigation, with defendants frequently settling amid a barrage of negative press, said Paul Atkins, a former SEC commissioner.

Still, Massoud Maqbool, a managing director at financial- consulting firm Latency Innovation Corp., said the SEC was mostly uncommunicative after he filed a whistle-blower claim more than a year ago, causing him to question how much the regulator looked into his tip about NYSE Group Inc. sending out incorrect time stamps for equity trades.

After hearing nothing for months, Maqbool started including Schneiderman on e-mails he sent to the SEC. He said he also alerted Intercontinental Exchange Inc.’s NYSE, which ended up acknowledging the issue and fixing it. NYSE spokesman Eric Ryan declined to comment.

‘One-Way Street’

“The communication is often a one-way street at the SEC,” said Thomas Sporkin, a former SEC enforcement lawyer who helped set up the whistle-blower office before joining BuckleySandler LLP in 2012. “The exception is when a whistle-blower becomes a material part of an investigation. Then the individual will have a sense of how valuable their contribution is.”

Even the negotiations between the SEC and the informant that triggered the record payment announced last month went less than smoothly.

The whistle-blower, who lives outside the U.S., complained that the award was low compared with earlier payouts, according to an SEC legal filing. The SEC attributed that to the tipster sitting on the information, causing investors to “suffer significant monetary injury that otherwise might have been avoided.” The whistle-blower countered that the delay occurred because of uncertainty over whether the SEC would actually take action, the filing shows.

Quick Successes

The SEC has had successes and quick ones. The second- largest award of $14 million, announced a year ago, involved a tip that led to an agency enforcement action less than six months after the informant came forward. The SEC doesn’t disclose details about any of the cases, as it’s legally barred from naming whistle-blowers or providing information that might reveal their identities. In total, the SEC has paid more than $45 million to 14 individuals.

Thomas, the former SEC enforcement attorney who now represents whistle-blowers at Labaton Sucharow LLP, cautions that cash alone isn’t what motivates many informants.

“Some just want to right what they see as a wrong,” he said. “Others feel unfairly retaliated against, which drives them to report wrongdoing to the various regulators and law- enforcement groups.”