Newspaper article International New York Times

In Fighting Fraud, States Reward Their Informants ; Securities Regulators Offer Money to Those Who Blow the Whistle

Newspaper article International New York Times

In Fighting Fraud, States Reward Their Informants ; Securities Regulators Offer Money to Those Who Blow the Whistle

Article excerpt

In return for helping states to enforce securities fraud laws and protect residents from financial harm, confidential informants earn a piece of the penalty.

In the aftermath of the financial crisis, a growing army of confidential informants -- better known as whistle-blowers -- has helped federal securities regulators identify and prosecute wrongdoers.

Now the same thing is happening at the state level: Securities regulators in two states (so far) are enlisting the aid of these informants to enforce their own fraud statutes and protect residents from financial harm. And the whistle-blowers are reaping rewards.

On Aug. 19, for example, an informant was awarded $95,000 for helping Indiana securities regulators bring an enforcement action against JPMorgan Chase for failing to disclose certain conflicts of interest to clients about the way the bank invested their money. The monetary award was the first given under that state's whistle- blower program aimed at securities law violators.

The informant supplied information about improprieties in JPMorgan Chase's asset management unit, including its practice of steering clients to in-house funds that carried higher costs or generated greater fees to the bank. In a July settlement, the bank paid $950,000 to Indiana, whose officials characterized JPMorgan's practices as "outside the standards of honesty and ethics generally accepted in the securities trade and industry."

Connie Lawson, the Indiana secretary of state, said in an interview, "We would not have been able to develop this case had it not been for the information that was provided to us."

Indiana's program was created in 2012 by the state legislature and is overseen by Ms. Lawson. State officials can award up to 10 percent of monetary sanctions received in an enforcement action to a person who provided original and significant information that led to the case.

Utah is the other state with a whistle-blower program aimed at identifying securities law violations. Lawyers who represent whistle- blowers say such programs allow states to leverage their limited resources to crack down on fraud.

"There's no way these state regulators can ferret out Wall Street's latest crime," said Edward Siedle, a forensic fraud investigator at Benchmark Financial Services who represented the Indiana informant. …

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