Insiders blowing the whistle on financial fraud have never made so much money. For the CFTC Whistleblower Office (WBO), business has never been so good. In October of 2022, a single anonymous whistleblower from Deutsche Bank was awarded $200 million, the largest amount issued in U.S. history.
In May 2023, the Securities & Exchange Commission (SEC) doled out $279 million, beating the CFTC’s record-setting Deutsche Bank whistleblower bounty. It also was more than double the highest previous amount the SEC had paid in October 2020, $114 million.
The SEC and the CFTC have been jostling each other for jurisdiction over the ecosystem for digital assets, which #DisruptionBanking previously reported on here. Now, the two regulators are competing for tips on fraud, zeroing in on cryptocurrency companies and exchanges.
For the would-be whistleblower who has figured out the identity of a scammer or hacker who lives in a jurisdiction with which the U.S. has an extradition treaty, there are attorneys like Daren Firestone to help you navigate the regulatory world. Our interview with Firestone is below.
Whistle-blowing back in fashion
When the office was established in 2010, whistle-blowing in the commodities markets was unheard of, but regulators had been humiliated by their own refusal to listen to six whistleblowers, starting back in 2000, who warned about Bernie Madoff‘s Ponzi scheme.
Together with the subprime mortgage fraud, regulators recognized that something needed to be done. Chris Ehrman, the former director of the program, took the reins of the program in 2013.
The first whistleblower award was announced in 2014. Since then, the amount of whistleblower tips has escalated every year, as have the rewards. Ehrman resigned in July 2023, after a decade in his position. Christina McGlasson, who served as Associate Director from 2017 to 2021, has since been made the acting director, after two years in the private sector.
The number of tips doubled from 58 in 2012 to 139 in 2013. In 2022, the office received 1,506 tips, representing a 50% increase from the previous year.
Escalating Bounties
Since 2010, when the office opened, whistleblowers have helped both the CFTC and the SEC recover over $3 billion from financial fraudsters while levying $3.5 billion in sanctions against them, just from the period between 2017 and 2020. Meanwhile, a full $330 million has been paid out to whistleblowers since the first award in 2014.
The CFTC is the sister organization of the SEC, regulating the derivatives markets, like swaps and futures. The futures market was created primarily to reduce risk for commodities producers, but in the 1970s, the futures market began a pivot to more exotic financial instruments that later blew up in the subprime crisis.
The whistleblower program office contains only eleven attorneys, it punches well above its weight, with about 30% of the -+700 CFTC enforcement cases every year involving whistleblowers. It takes a lot of legwork to wade through tips that don’t pan out into an enforcement case, which makes up 80% of reports.
The Funding Crisis
However, the success of the program in bringing in big-ticket whistleblowers led to a funding crisis that threatened the integrity of the program. Financial awards were being delayed so as not to deplete the fund, which had the potential effect of discouraging people with relevant knowledge of criminal conduct from coming forward.
Senator Chuck Grassley (R-IA), who had a hand in establishing the program and who is renowned for his support of whistleblowers, described the funding situation as follows, “The CFTC whistleblower program should not be a victim of its own success. Without congressional action, the whistleblower reward fund could drain faster than it replenishes.”
Fortunately, Grassley co-sponsored a bill to solve the funding crisis. Whereas there was previously a cap on the whistle-blower fund set at $100 million, the new bill raises the cap to $300 million and permanently separates the operations budget of the office from the bounty fund.
The New Frontier of Cryptocurrency and Digital Assets
Ehrman said the CFTC seeks to increase its enforcement footprint in the cryptocurrency ecosystem, where about 40% of the submitted tips originate. Unlike the dynamic of whistleblowers within the traditional financial (TradFi) space, which was mostly the work of an insider within an organization who reports alleged wrongdoing, whistleblowers in the crypto space do not have to be insiders.
Instead, the CFTC is essentially crowdsourcing tips. Essentially anyone who has the skill to audit blockchain interactions could potentially identify fraud and subsequently report it to the CFTC whistleblower office for a financial reward.
The prospective crypto detective’s information must be unique and generate above the $1 million threshold for fraud, the minimum for whistleblowers to be compensated by the program. Now, regulators have their eyes on Decentralized Finance (DeFi).
CFTC targets DeFi Ecosystem
As centralized cryptocurrency exchanges (CEX) such as Binance and Coinbase confront a tidal wave of regulatory enforcement, DeFi projects have experienced a 444% surge in trading volumes. DeFi projects, like Decentralized Autonomous Organizations (DAOs) or Decentralized Exchanges (DEXs), obscure those who effectively run the platform or protocol, and that is no accident.
One founder of OokiDAO spelled out the motive of decentralization, “So many people across the industry right now are getting legal notices, and lawmakers are trying to decide whether they want DeFi companies to register as virtual asset service providers or not—and really what we’re going to do is take all the steps possible to make sure that when regulators ask us to comply, that we have nothing we can really do because we’ve given it all to the community.”
OokiDAO doesn’t have a brick-and-mortar address, so nobody could serve a lawsuit in the conventional manner, but the CFTC convinced a judge to allow the lawsuit to be served through the DAO’s online chatbox, a novel innovation that was much remarked upon in the DeFi industry.
This brings us back to whistleblowers because the CFTC has issued an open call to DeFi insiders to help them identify the founders of DeFi projects that violate the law with impunity and obscure their controlling stakes in DAOs and DEXs.
For those clever blockchain investigators and crypto company insiders who are privy to specific information proving federal financial crimes, there are attorneys like Daren Firestone to guide you through the process of blowing the whistle.
Interview with a Whistleblower Attorney
#DisruptionBanking contacted Daren Firestone, an attorney who specializes in helping crypto whistleblowers earn rewards by exposing fraud, to learn more about who is coming forward and why. Firestone is a former federal prosecutor who began repping whistleblowers because he wanted to continue to fight fraud in the private sector. Below are some excerpts from our conversation.
The Main Thing Whistleblowers Should Know
A: When a whistleblower comes to me, I’ll first have a privileged conversation about their information to answer the question of whether it is worth it for me. It’s a winnowing process on my end. They need to know what they’re getting into.
They want to know about confidentiality. I tell them that confidentiality is never guaranteed, even when you cooperate with the government anonymously. Agencies have policies to protect anonymity, and [compliance] has improved recently. The government has recognized how important anonymity can be. There can be serious consequences both personally and professionally, and the government now makes more of an effort to protect whistleblower identities.
[Whistleblowers] need to be aware that it’s a long process — usually years before it’s resolved. And it’s a one-way street in terms of information flow. The government doesn’t offer information. That can be frustrating, even for people who make tons of money in the end. During the process, whistleblowers can feel adrift. They want to know whether the government is pursuing a case based on their information, but the government usually won’t tell you.
That said, there are often signs that the government is taking action. Prosecutors asking questions, asking for clarification, asking for more information—these are signs that the case is moving.
You’re not always completely in the dark, but there’s an information flow asymmetry.
Whistleblowers’ Motivations
A: Whistleblowers usually have one of a number of motivations. What I call the gold standard is somebody who in the normal course of business comes across a fraud and is morally compelled to do something about it, often at great risk to themselves. My partner Bob Muse represented Cynthia Cooper who exposed the WorldCom fraud — before there were rewards — and she felt that it was her duty to come forward and expose the machinations inside WorldCom. That said, whistleblowers who expose corporate fraud are rarely motivated by political ideology.
Then, there are those who are purely financially motivated. They don’t want to provide information unless they can recoup money. There is also another group that may have less than noble motives, for example, they are angry at a former business partner, and they blow the whistle not because they are offended by the fraud, but because they’re angry at the partner.
Another subgroup is the outsider or whistleblower — somebody who has figured out a fraud by applying a rare skill to analyze public data. Harry Markopolos, the whistleblower who discovered the Bernie Madoff fraud, used publicly available information, but not a lot of people have his skills.
In contrast to the outsiders are the insiders who have a window into the company. Usually, insiders have the best evidence — text messages, emails, and recordings. There are also quasi-insiders — such as contractors or professional service providers — who somehow come into contact with nonpublic information that exposes fraud.
Facing Retaliation
A: It’s hard to generalize. There’s always the risk of retaliation — some scenarios are riskier than others. Let’s say somebody is making a disclosure that puts a powerful person — or a dangerous person in a bad light – retaliation can be more serious than losing your job.
Insiders & Informed Outsiders
A: Sometimes the fraud is well-known to a small group of people — like WorldCom — there are others where the fraud is well-known throughout the organization.
Just from reading the complaint against Binance, I can’t say how widespread the knowledge was — can’t say how many people in Binance International knew — they may have pulled the wool over people’s eyes at Binance.US — but the head of compliance allegedly texted about Russian users, “Like come on. They are here for crime.” It’s hard for me to believe that most people at Binance International didn’t share some level of understanding that the platform was being used to do things that are not legal in many countries.
Wash trading, Ponzi schemes, Spoofing, Oh My!
A: It’s hard to say, there are good cases or bad cases. Rug pulls happen all the time, but if the money is gone to a jurisdiction where the US can’t recoup it, I don’t want that case. I’d lose money. They’ll ask: “Can you sue the person who stole my money?” and I tell them it might not be not worth their while. There are exceptions.
I refer a lot of people to law enforcement. “Go to the FBI, the IRS, someone who can go after your money.” Federal investigators are getting better. The IRS was ahead of the curve. The FBI has good people. On the state level, New York and California are also good at this.
Erin West and Alona Katz (prosecutors who specialize in cybercrime and crypto in Santa Clara County and Manhattan, respectively) promote training investigators across the country in blockchain research. They have emphasized the need to go after pig-butchering, a.k.a. romance scams. When appropriate, I will refer victims to people like them.
For me, I’m first focused on money-laundering and failures to implement AML-KYC and sanctions compliance programs — the CFTC and FinCEN have pursued very significant cases — Bittrex, BitMEX, and Binance are examples.
Then, I’m looking for market manipulation — pump and dump — SEC and CFTC often both go after them, so I will usually file complaints with both agencies — given that there may be jurisdictional arguments for either or both agencies. The SEC has been more focused on market manipulation and fraud than on money laundering.
Digital assets have been a place where not a lot of people have complied with tax obligations. People thought you didn’t have to pay taxes on the money you made. There’s more compliance now than there was three years ago. But if someone has cheated the IRS out of more than $2 million — the threshold to qualify for a 15-30% share of collections based on a tip — I’m interested.
Is the FBI swamped with tips?
A: My assumption is that they can’t respond to every tip. If somebody comes to me and they have a really good case, one of my advantages is that I can package information in a readable and compelling manner so that the government will be more likely to pursue the whistleblower’s information.
The other advantage is making sure the right eyes see the information. If it goes through the bureaucracy, it can get lost. I try to get the tips in front of the right people. They are willing to hear me out and consider it. There’s never a guarantee that the government will investigate. But if they are willing to lend an ear, that’s a major step forward.
Because #DisruptionBanking is a UK publication, I’ll mention that you don’t have to be a US citizen or resident to be a whistleblower.
Author: Tim Tolka, writer, journalist, and BI researcher
The editorial team at #DisruptionBanking has taken all precautions to ensure that no persons or organizations have been adversely affected or offered any sort of financial advice in this article. This article is most definitely not financial advice.
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