By MICHAEL SMALLBERG
UPDATE: The SEC has responded to this post below.
In an apparent case of history repeating itself, the Securities and Exchange Commission (SEC) has failed once again to protect the identity of a key whistleblower, even as the agency tries to encourage more whistleblowers to come forward with tips about financial industry misconduct.
The Wall Street Journal reported yesterday morning that an SEC attorney “inadvertently revealed the identity” of a whistleblower to his former employer during an investigation of Pipeline Trading Systems LLC.
The whistleblower, Peter Earle, worked at Milstream Strategy Group LLC, a Pipeline-affiliated trading entity. Pipeline recently paid $1 million to settle SEC charges alleging that the company failed to disclose to customers of its “dark pool” trading platform that Milstream was filling most of the orders.
Earle provided the SEC with a notebook in early 2010 after he had left the company that helped guide the agency's investigation. Later that year, Daniel Walfish—an attorney at the SEC’s New York Regional Office—provided Earle’s notebook to Gordon Henderson, who headed up Milstream. Henderson—who already had suspicions about Earle—was easily able to recognize Earle’s handwriting, according to the Journal.
This isn’t the first time an attorney from the SEC’s New York office has blown the cover of a whistleblower during an enforcement investigation. In 2010, we wrote in Politics Daily about a whistleblower named Peter Sivere, a former compliance officer at JPMorgan Chase who tipped off the SEC about his employer’s failure to provide the agency with materials sought during an investigation.
George Demos, an enforcement attorney in the SEC’s New York office, assured Sivere that the SEC’s investigation would be kept confidential. But he turned around and disclosed non-public information about Sivere to JPMorgan’s counsel, who then used the information to attack Sivere’s whistleblower credentials, according to a 2009 investigative report by the SEC Office of Inspector General (OIG). The SEC took no action to discipline Demos, who soon left the agency and made a failed run for Congress. Sivere has since appealed to the New York judicial system to hold Demos accountable for professional misconduct.
POGO has repeatedly raised concerns about a culture of impunity at the SEC. By failing to follow the OIG's recommendation to hold Demos accountable, the SEC missed an opportunity to send a strong message about the importance of protecting the identity of whistleblowers.
The SEC acknowledged the notebook incident in the Pipeline case, but insisted that the enforcement attorney followed agency protocol. “Our review of the facts confirms that we followed this practice in this case,” an SEC spokesperson told the Journal. “While we utilize evidence from all witnesses, we do not reveal which witnesses may be cooperating with the government except as required by law or the governing rules of civil procedure.”
Like many other whistleblowers, Earle initially tried to raise his concerns within the company. He was fired in April 2009 after making several internal complaints. Shortly thereafter, he approached the SEC indicating he had “extensive information” about Pipeline’s trading misconduct. Earle said he has since been the “target of ire” from current and former Pipeline employees.
Congress recently expanded the SEC’s authority to provide whistleblowers with financial awards for tips leading to successful enforcement actions. The program also offers enhanced protections to whistleblowers who experience retaliation.
At the same time, the SEC often contacts firms under investigation and gives them an opportunity to probe the matter internally. In POGO’s public comment letter to the SEC regarding its new whistleblower program, we specifically raised concerns that this policy could put whistleblowers in harm’s way:
POGO is also deeply concerned by a statement in the commentary attached to the proposed rules suggesting that the SEC will occasionally send disclosures directly to the firms cited for misconduct and let them investigate the problems internally:
We expect that in appropriate cases, consistent with the public interest and our obligation to preserve the confidentiality of a whistleblower, our staff will, upon receiving a whistleblower complaint, contact a company, describe the nature of the allegations, and give the company an opportunity to investigate the matter and report back.
Furthermore, according to sources, SEC Enforcement Director Robert Khuzami recently stated at a securities industry conference:
I am sure that it will be not uncommon, in the appropriate case, to contact the company and indicate that we have received this and have them undertake at least the same kind of initial review that they would currently do or hopefully that they would have done even if it had never come to our attention and it had stayed within the company.
POGO has serious concerns about the SEC sending whistleblower disclosures back to the firms accused of wrongdoing and letting them conduct their own investigations. In many cases, sending a tip back to the same firm cited for misconduct jeopardizes the confidentiality of the whistleblower who disclosed the wrongdoing. As such, this proposal contradicts Congress’s clear intent to provide for safe and anonymous whistleblowing.
Earle’s experience highlights the dangers of sharing information provided by whistleblowers to companies under investigation. Although Earle would not qualify for an award or enhanced protections under the SEC’s new whistleblower program since he approached the agency before the new program was in place, we strongly the urge the SEC to review its enforcement policies to ensure that investigators take every possible step to protect the identity of informants.
Michael Smallberg is a POGO investigator.
Image via Sixth Lie.