A man dressed in a business suit with a whistle symbolizes a whistle blower.

TEXT OF STORY

Kai Ryssdal:Nobody wants to relive the last two years of our collective financial lives. That's just a cold hard fact. Almost as cold and hard as this one. Changing the global financial system so it works better, works better for everybody, is going to be really difficult.

Our special correspondent David Brancaccio has been following that quest for a better financial system in our series Economy 4.0. Today, a story of change from within. This is the last day for public comments on some new SEC rules for whistleblowers in financial fraud cases. Here's David.


David Brancaccio: In his home office in San Diego, Calif., Gary Aguirre has until midnight tonight to get a letter he's working on over to the Securities and Exchange Commission. The deadline's looming for the public to comment on how to carry out a new law to entice whistleblowers to report financial crimes.

Aguirre, a securities attorney, sees the law as Congress saying to the SEC, "We're handing you a gift."

Gary Aguirre: We're going to create a mechanism so that people within Wall Street can provide you with smoking guns, and maybe with the help of this statute, you can keep or contain Wall Street so it doesn't deliver another financial crisis to us.

Aguirre is quite the whistleblower himself. He once worked as a senior investigator at the SEC but was fired after pushing forward with a politically-sensitive insider-trading investigation. He eventually went to the FBI and Congress. And after years, the SEC finally took action. The hedge fund under investigation, Pequot Capital, paid a $28 million settlement. And Aguirre received years in back wages from the SEC for wrongful termination. Given his experience, there is one thing he knows.

Aguirre: The whistleblower has to be protected. If you don't protect the whistleblower, he or she is simply not going to step forward. And Wall Street, which is really what this is about will have its way.

The Dodd-Frank financial reform law requires that the identity of informers be kept secret. But the SEC favors a system where the government investigators can take a whistleblower tip and hand it back to the accused company, so the firm can look into it internally. Aguirre says that's a risk for whistleblowers.

Aguirre: CEO's gonna be thinking, "Well now, who could that be? How many people knew about this transaction?" There are four people. General Counsel calls the four in. They question three of them. Three of them say, "No way. We never talked to anybody." The fourth one is a little equivocal about it. Guess what they're gonna know? Now, that's what the SEC is getting ready to do.

Businesses are worried about a different part of the whistleblower system: The size of potential bounties, as much as 30 percent of a resulting settlement, fine or disgorgement. Think what a whistleblower could have gotten in the case that Aguirre handled: 30 percent of $28 million is -- do the math -- a potential reward of more than $8 million. In a letter to the SEC, 266 companies including the accountants KPMG, warn these bounties could represent a quote "gold mine" for employees.

Harvey Pitt: The size of these awards makes them far more lucrative than playing the lottery.

Harvey Pitt was chairman of the SEC during the George W. Bush administration. He now heads a business consulting firm in Washington. Pitt does not want any rules that would undermine earnest efforts at companies to stamp out fraud internally.

Pitt: By offering these bounties, there is a real possibility that there will be a circumvention of the normal review functions performed by the firms themselves.

...If employees make an end-run around their company's own investigation and contact the government. And, he says the SEC could get simply inundated with tips.

Pitt: If one assumes that one out of a thousand may have some validity, the difficulty is going to be separating the wheat from the chaff.

Pitt says the SEC doesn't have endless resources. In fact, blaming a limited budget it's put off the creation of a dedicated "whistleblower office." Overall, however, Pitt believes the SEC's plans represent a nice "balance."

Stephen Kohn who heads the National Whistleblowers Center in Washington had a different reaction.

Stephen Kohn: It was shocking. These proposed rules were clearly written on Wall Street, by Wall Street for Wall Street.

For instance, the SEC is thinking people who do fraud detection inside companies shouldn't be eligible for rewards. Barring payments to informants who go public, Kohn believes, is another unreasonable hurdle under the SEC rules.

Kohn: The rules as proposed set up procedures that are so complex that the vast majority of whistleblowers would probably fall into some trap or other.

The SEC now begins a period where it reads and analyzes the public input. Its final plan for handling whistleblowers is due in April.

In Washington, I'm David Brancaccio for Marketplace.

Ryssdal: There's more on the new whistleblower rules. It's not just financial companies, for instance, on David's Economy 4.0 blog.

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