U.S. Attorney General Eric Holder today called on Congress to provide bigger financial rewards to Wall Street whistleblowers, arguing that the current payoffs are too small to entice executives to provide evidence against their employers who have committed wrongdoing. He is hopeful that such cooperation would lead to criminal cases connected to the financial crisis.
Under The Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA), which deals with fraud committed against investors, whistleblower awards are capped at $1.6 million. Holder argues that is a "paltry sum" for a highly paid financial services executive who is aware of illegal activities to report them to the government. He wants FIRREA's awards to be more in line with the False Claims Act under which whistleblowers are entitled to up to one-third the settlement amount.
"This could significantly improve the Justice Department's ability to gather evidence of wrongdoing while complex financial crimes are still in progress -- making it easier to complete investigations and to stop misconduct before it becomes so widespread that it foments the next crisis," according to the text of a speech Holder gave at New York University School of Law on Wednesday.
Holder's push for bigger whistleblower awards comes amidst widespread criticism of the Obama administration for failing to charge any high-ranking executives in connection with their roles in events leading up to the worst financial crisis since the Great Depression.
According to Holder, it isn't because of lack of trying. But figuring out the chain of responsibility for actions in a multi-billion financial services firms is difficult. He said that there were active investigations focused on the conduct of individuals "which involve conduct that has undermined the integrity of our markets." Charges in these cases will be filed soon. He declined to elaborate further.
"Responsibility remains so diffuse, and top executives so insulated, that any misconduct could again be considered more a symptom of the institution's culture than a result of the willful actions of any single individual," Holder says.
In the past few months, federal and state officials have won billions in civil settlements from the top Wall Street firms including Citibank, JPMorgan Chase and Bank of America. The companies were required to make amends to their affected customers as part of the agreements. Credit Suisse and BNP both pled guilty to criminal charges. No high-ranking banker has been charged individually.
Peter J. Henning, a professor of Law at Wayne State University, who is a former federal prosecutor, told MoneyWatch that it comes down to proving criminal intent. Merely showing the ramifications of bad decisions isn't enough. "Stupidity is not a crime," he said in an interview.
The path of the whistleblower, isn't an easy one. Former UBS banker Bradley Birkenfeld , who helped uncover $5 billion that wealthy Americans had illegally hidden in overseas bank accounts, won a $104 million award in 2012, the largest ever given to an individual. He also did jail time for his role in the scheme. Others people who expose illegal activity face social ostracism and financial difficulties.
"It can be an effective tool but it is certainly not a cureall," says Henning regarding whistleblower awards. "You won't see a flood of cases. For one thing, a lot of the tips never pan out."
"I don't rule out the possibilities of some individual prosecutions but I am not banking on it," Cornell Law School Professor Robert C. Hockett said.
Whistleblowers are most effective when they "get the ball rolling" by sharing facts about wrongdoing that they wouldn't have known about otherwise, Henning said.
His view was echoed by Russell Duncan, a partner at Shulman, Rogers, Gandal, Pordy & Ecker, in Potomac, Maryland, who specializes in white collar defense. He is also a former federal prosecutor. The most effective whistleblowers in Duncan's experience are those motivated by a desire to "do the right thing" and who try at first to work within the system.
"My thought is that many of them wish they had never started the process," he said in an email . "I assume that an award of several million dollars, which occasionally occurs, might make an individual feel satisfied and vindicated but those are few and far between. ... Starting off with dollar signs in your eyes is great way to be disappointed."
With reporting by CBS News reporter Paula Reid.
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