An SEC whistleblower program designed to prevent another Bernie Madoff-type scandal often ignores its own rules, shields much of its work from the public, and has been a financial boon for law firms that hired former agency officials, a Bloomberg Law investigation has found.

Written into the Dodd-Frank financial reform law of 2010 and championed by Sens. Elizabeth Warren (D-Mass) and Chuck Grassley (R-Iowa), it was created to make sure tips about financial wrongdoing aren’t ignored as they were before Madoff’s $64.8 billion Ponzi scheme.

By that measure, it’s been successful: the Securities and Exchange Commission has gotten roughly 60,000 tips since 2012, and paid out more than $1.3 billion in awards.

But the review of all 561 SEC final orders revealed a program operating in secrecy far beyond its legislative mandate to protect whistleblowers’ identities. The agency won’t disclose names of companies involved in fraud, hasn’t identified all of the law firms that received money for their clients, and won’t even report the office’s annual budget.

That makes it nearly impossible for Congress and the public to gauge what crimes are uncovered, the criteria used to determine which cases it takes and whether individual payments that can top $100 million are justified.

“There is no public interest check on this program, and the secrecy makes it impossible to measure its success or to provide a check on what it’s doing,” said Reuben Guttman, a Washington attorney who has represented whistleblowers in medical, pension and pharmaceutical fraud cases. “The program calls out for massive congressional oversight.”

Bloomberg Law examined court records, documents obtained through the Freedom of Information Act and interviewed more than a dozen attorneys. Among the findings:

• The whistleblower office awarded $36 million in September to a person who was “culpable in the underlying scheme,” according to the final order and delayed reporting the crime until after the criminal statute of limitations had expired. The five-year delay allowed the fraud to continue, costing victims millions of dollars.
• The SEC awarded $1.2 million in 2020 to an informant who the staff alleged “planned” and “initiated” the multimillion-dollar fraud at the heart of the case.
• A D.C. Court of Appeals judge called some of the agency’s rules among “the sloppiest regulations I have ever seen,” and warned the commission to “get its act together.”
• Law firms led by or employing two former high-ranking SEC officials—one who helped write the rules, another who led the program for five years—received at least $205 million in awards for whistleblower clients.

“Whether a waiver is appropriate in a particular case depends on the facts and the circumstances,” SEC officials wrote in response to written questions. “There is no special preference for claimants who are represented by counsel, including counsel who were former SEC attorneys.”

More than half of all payments to whistleblowers have been made in just the past 18 months. Since becoming SEC chairman in 2021, Gary Gensler has rolled back rules that allowed the commission to set caps on awards it deemed too large and shortened the time whistleblowers wait to be paid. The SEC also changed some rules in 2020 to make it easier to waive some filing requirements.

The agency stretches its rules at times and decisions can seem inconsistent or contradictory, said Sean McKessy, who ran the program from its inception in 2011 until 2016. He now handles SEC whistleblower cases at the law firm Phillips & Cohen.

“Rules on their own can be waived because the commission created them and they can enforce them the way they see fit,” McKessy said. “The statute is what it is, but it’s so broad it gives the commission a lot of discretion.”

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