Public Contract Law Journal

Replacing the SEC's Whistleblower Program: The Efficacy of a Qui Tam Framework in Securities Enforcement

by Victor A. Razon

Victor A. Razon ( is a J.D. candidate at The George Washington University Law School and is a member of the Public Contract Law Journal. He would like to thank Professor Pierson of The University of Alabama School of Law and Professor Yukins of The George Washington University Law School for their guidance and support.

I.   Introduction

On July 1, 2009, Bernard Madoff received a 150-year prison sentence for orchestrating the largest fraudulent scheme in U.S. history.1 Madoff, once a highly respected investment manager, used a Ponzi scheme2 to defraud thousands of investors of $65 billion over several decades.3 Authorities discovered the scheme during the financial crisis of 2007 – 2008, causing public confidence in the integrity and effectiveness of financial markets — already at an all-time low since the Great Depression — to plummet.4 The Securities and Exchange Commission (“SEC”) faced severe criticism following the scandal, and Congress demanded an explanation from the SEC as to how it failed to detect such unprecedented and blatant fraud.5 In fact, the SEC originally investigated Madoff in 1992, received multiple warnings over the decades from whistleblowers,  and  closed  an  investigation  of  Madoff’s  business  in  early 2008 without ever bringing an enforcement action.6 Faced with a financial system in ruins as a result of widespread white collar crime and consumer abuses, Congress decided to reform the SEC’s whistleblower program following the financial crisis.7

Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank”) in response to consumer abuses, including  Madoff’s Ponzi scheme,  that contributed to the financial  crisis  of 2007 – 2008.8 As part of its sweeping financial regulatory reforms, Dodd- Frank established a new SEC whistleblower program to help the agency detect and punish securities law violations.9 After reviewing the SEC whistleblower program, the SEC Inspector General filed a 2013 report advising against the adoption of a qui tam10 framework.11 The SEC Inspector General further recommended a re-evaluation of the issue in several years.12 Nearly four years have passed since that report. Thus, it is time to reconsider the merits of a qui tam provision in securities enforcement. This topic is especially relevant given the Trump administration’s goal to decrease federal spending, shrink the size of the federal government, and promote financial deregulation.13

This Note argues that Congress should replace the SEC whistleblower program with one modeled after the False Claims Act (FCA), where a qui tam provision has led to substantial victories for the government in battling government contractor fraud. This reform would bolster the SEC whistleblower program through improving the quality of information received and addressing any concerns of regulatory capture undermining the effectiveness and integrity of securities enforcement. Parts II and III provide background on the SEC whistleblower program and the FCA qui tam framework, respectively. In Part IV, this Note suggests that a qui tam provision would improve the quality of whistleblower information because it effectively screens whistle- blower tips and imposes sufficient costs to discourage whistleblowers from bringing frivolous complaints. Improving the quality of whistleblower information is important because it ultimately conserves precious agency resources. Next, this Note suggests that a qui tam provision would address regulatory capture arising from the revolving door phenomenon and current political climate because it allows private parties to proceed on meritorious claims insulated from the influence of a potentially captured agency.

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