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The SEC vs Whistleblowers: Round 2

Posted by Larry Doyle on April 26, 2012 8:28 AM |

Yesterday’s story regarding the SEC inadvertently, or not, blowing the cover of a whistleblower generated a lot of interest here at Sense on Cents and elsewhere. So much interest, in fact, that parties in both camps, the SEC and the whistleblower, got right back in the ring to make their case.

While I have my own strongly held beliefs, stated yesterday, as to the real driving force within SEC Enforcement, fairness dictates that I highlight competing views as well. On that note, what does the director of the New York Office of the SEC have to say on this matter? Let’s review a letter to the editor in today’s WSJ

SEC Did Not Blow Source’s Cover
The Securities and Exchange Commission in no way exposed Peter Earle as a whistleblower, and our use of his notebooks in an investigative deposition was neither “inadvertent” nor a “breach” or “gaffe” (“Source’s Cover Blown by SEC,” Page One, April 25). It was a deliberate decision, which SEC lawyer Daniel Walfish discussed in advance with his supervisor, who was present for the deposition in which the notebooks were exhibited. Nor did the fully authorized use of the notebooks in any way compromise Mr. Earle or the integrity of the SEC’s investigation of the Pipeline Trading Systems matter.

Although it was widely known among executives of Pipeline and Milstream Strategy Group that Mr. Earle had approached the SEC after he was terminated from Milstream—a fact volunteered by several witnesses and acknowledged by Mr. Earle long before any use of his notebooks—the SEC declined to confirm his identity and still treated his status as a cooperating witness as confidential. The SEC made sure to obtain all of the notes of the approximately six Milstream traders, and in the SEC’s deposition of Gordon Henderson (the supervisor of Mr. Earle and the other traders), the SEC used other traders’ notes along with those of Mr. Earle. The use of these traders’ notes—highly relevant evidence prepared in the ordinary course of their work at Milstream—in no way revealed whether Mr. Earle or any other trader was or was not cooperating with the SEC.

George S. Canellos
New York Regional Office
U.S. Securities and Exchange Commission
New York

Does Mr. Canellos have a real appreciation for the pressure and insecurity surrounding whistleblowers, in general, and Mr. Earle specifically? Does Mr. Canellos appreciate the impact of yesterday’s story on other whistleblowers? To address these questions, let’s move into the other corner in this ring and review, SEC Faces Questions About Tipster Policy:

Mr. Earle said the events could have a “chilling” effect on whistleblowers. “It’s unfortunately possible that would-be whistleblowers will see my situation, think twice and not come forward at all,” Mr. Earle said.

Mr. Earle said in an earlier interview that he was “disappointed” that the SEC took steps in its probe that ended up disclosing his identity to Pipeline.

His experience immediately raised concerns among other whistleblowers who haven’t been named, lawyers said.

On Tuesday night, three clients of New York securities lawyer Rebecca Katz—all themselves whistleblowers—emailed her the Journal story asking about the potential for their own confidentiality to be compromised, she said.

“On Wall Street, if you’re a whistleblower, you can kiss your career goodbye,” said Ms. Katz, a former senior enforcement lawyer for the SEC who said she was surprised the SEC would show a whistleblower’s handwritten notes to anyone at a company under investigation.

“There are so many ways to ask questions” while not exhibiting identifying documents, Ms. Katz said, adding that in her experience, SEC lawyers “are really careful, and worried about protecting confidentiality.”

Ms. Katz and other lawyers said it shouldn’t matter if employees of a company under investigation express theories about who is talking to regulators. To the SEC, she said, “it doesn’t matter if the company has suspicions. Their investigations are confidential.”

One lawyer, Richard Holwell, who this year resigned as a New York federal judge and is launching a law firm, said the SEC made a mistake that will cost it informants.

“It’s a blunder, and it will inevitably scare off some whistleblowers, particularly those who are still employed,” said Mr. Holwell, who as a judge presided over last year’s insider-trading trial of Raj Rajaratnam. “The cleanest response would have been, this was a mistake and it will never happen again.”

Strikes me that the SEC, in trying to fend off criticism in this particular skirmish, displays little regard or concern for the position of whistleblowers overall. For an entity supposedly trying to promote a new whistleblower initiative, this situation is particularly damaging. Could our lead financial cops be so brazen and myopic? Have they learned nothing from the Madoff and Stanford fiascos? If the SEC were trying to cement its image as ne’er do well nitwits aligned with the industry, I think they just accomplished it.

God help us . . . and navigate accordingly!!

What do readers think?

Larry Doyle

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I have no affiliation or business interest with any entity referenced in this commentary. The opinions expressed are my own. I am a proponent of real transparency within our markets so that investor confidence and investor protection can be achieved.

  • Peter Sivere

    Hi Larry,

    Thanks for exposing this issue. Our frends at POGO have the same concerns you do.

    POGO: Here we Go Again: SEC Reveals Whistleblower’s Identity to Company Under Investigation

  • Russ


    The SEC sides with the crooked companies and WANTS to scare off potential whistle blowers. (note that the SEC sided with Madoff by warning their junior staffers to stay away from Madoff’s glaring improprieties).

    As Wall Street and the SEC trade players back and forth each year, it’s obvious that their goals are the same…to benefit Wall Street. The players from both sides eventually play on the Wall Street team. With a wink and a nod, both teams (SEC and Wall Street) TOGETHER accomplish their mutual goal of eliminating those who can or will whistle blow.

    • danielle

      And nobody, in either party, wants to put a stop to it.

  • Mike


    Keep up the fight! You are becoming the Mike Wallace of the Internet.


  • In the absence of justice, what is sovereignty but organized robbery? ~ Saint Augustine, circa 410 AD
    I’m not willing to live in a society where a few criminals can hijack the rules and enforcement of them. We will continue to demand justice and we will free our political and economic systems from this small organized crime syndicate.

  • Ivana Boastsky

    The SEC takes extreme caution in protecting an informant’s identity. While I don’t know the circumstances of this particular situation, I’d rely on Mr. Canellos’ statements rather than those of a former SEC attorney or her clients.

    Check out item 11 on the SEC’s official TCR (tips, complaintes, referrals) form. Very proaction and sensitive about protecting an informant’s identity.

    • LD


      Not sure if you are being serious or cynical but if serious, how does one reconcile item 11 with actually bringing in a former trader’s notebook into a meeting with an executive at the targeted firm?

      That type of practice sounds like a middle school maneuver and certainly not one consistent with protecting a whistleblower’s identity.

      Given your knowledge of that specific SEC item, I hope you will offer added insights and perspectives on the wide array of articles covering regulatory capture here at SoC.

  • Ivana Boastsky


    Having been in the former trader’s situation a time or two and being asked (for my own good) what the Commission may or may not show a POI (person of interest) or an enforcement target, I surmise that former trader may have been asked if his notebooks could be used or shown.

    As I understand it, his employer terminated him before the SEC took any action. He expects to collect a bounty if the SEC collects, right? He voluntarily went to the SEC with his information. Do you know if he was represented by counsel prior to doing this? My guess is probably.

    Item B on the TCR form is for informants represented by counsel.

    D 11 is the section which specifically asks the informant if any information he provided could be used to identify him.

    Let me delve into this matter in a little greater depth and get back to you, LD.

    Nice blog, by the way.

    • LD

      Thanks for this feedback. I am not sure if we will ever know what really happened before the fact but certainly after the fact there is a decidedly different spin put on it by both camps.

      What does not appear to be open for interpretation is the impact this situation has on other potential whistleblowers. For that reason alone I would think the SEC should and would take EVERY precaution possible INCLUDING NOT openly using any current whistleblower’s materials in the presence of a targeted person of interest.

      That strikes me as basic common “sense” on cents!!

      Thanks for the plug. I hope you will visit and comment often as these are VERY serious issues.

  • LD

    The Project on Government Oversight weighs in with its thoughts and strongly held opinion on this situation and protecting whistleblowers generally,

    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 urge the SEC to review its enforcement policies to ensure that investigators take every possible step to protect the identity of informants.

    Here We Go Again: SEC Reveals Whistleblower’s Identity to Company Under Investigation

  • Clevergirl

    The former SEC attorney agreed that since Dodd-Frank was enacted, the SEC is very cautious in protecting the identity of whistleblowers. That did not happen in the case of Mr. Earle, which was pre-Dodd-Frank. Please read more carefully.

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