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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.

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