Assessment of the SEC’s Bounty 

Program 

March 29, 2010 

Report No. 474
Assessment of the SEC’s Bounty Program March 29, 2010 

Report No. 474 

Page i 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON. D.C. 20154~

OI"I"'CE 0 ..

I~.~ECTOR GI[~ln'AL

MEMORANDUM

March 29, 2010

To: Robert Khuzami, Director, Division of Enforcement

From: H. David Katz, Inspector General, Office of Inspector General (OI

Subject: Assessment ofthe SEC's Bounty Program, Report No. 474

This memorandum transmits the U.S. Securities and Exchange Commission

OIG's final report detailing the results of our assessment of the Commission's

bounty program. This review was conducted in accordance with our annual audit

plan.

Based on the written comments received to the draft report and our assessment

of the comments, we revised the r~port accordingly. This report contains nine

recommendations. Your office concurred with all the. recommendations.

Management's full comments to this report are included in the appendices.

Within the next 45 days, please provide OIG with a written corrective actiQn plan

that is designed to address the recommendations. The corrective action plan

should include information such as the responsible official/point of contact, time

frames for completing the required actions, milestone dates identifying how you

will address the recommendations cited in this report, etc.

Should you have any questions regarding this report, please do not hesitate to

contact me. We appreciate the courtesy and cooperation that you and your staff

extended to our auditor.

Attachment

G».t'

cc: Kayla J. Gillan, Deputy Chief of Staff, Office of the Chairman

Diego Ruiz, Executive Director, Office of the Executive Director

Joan McKown, Chief Counsel, Division of Enforcement
Assessment of SEC Bounty Program 

Executive Summary 

Background. There is evidence that bounty programs are an effective tool to 

encourage whistleblowers to come forward and provide necessary incentives for 

outside entities to bring complaints about possible illegal activity. 

Section 21A(e) of the Securities Exchange Act of 1934 (Exchange Act), 15

U.S.C. § 78u-1(e), authorizes the Securities and Exchange Commission (SEC or 

Commission) to award a bounty to a person who provides information leading to 

the recovery of a civil penalty from an insider trader, from a person who tipped 

information to an insider trader, or from a person who directly or indirectly 

controlled an insider trader. All bounty determinations, including whether, to 

whom, or in what amount to make payments, are within the sole discretion of the 

SEC. However, the total bounty may not currently exceed 10 percent of the 

amount recovered from a civil penalty pursuant to a court order. 

 

The SEC recently sent to Congress proposed legislation to expand its authority 

to permit bounties for any judicial or administrative action brought by the 

Commission under the securities laws that results in monetary sanctions 

exceeding $1,000,000. The proposed legislation was included in the Investor 

Protection Act of 2009 (H.R. 3817), which was introduced in the U.S. House of 

Representatives on October 15, 2009 by Representative Paul Kanjorski (D-Pa.) 

and referred to the House Committee on Financial Services. Variations of this 

legislation are being considered by both the U.S. House of Representatives and 

U.S. Senate. 

Objectives. This review was conducted as a result of an issue that we identified 

during the OIG’s investigation into the SEC examination and investigations of 

Bernard L. Madoff and related entities, OIG’s Report of Investigation,

Investigation of Failure of the SEC to Uncover Bernard Madoff’s Ponzi Scheme, 

Report No. 509, August 31, 2009. 

The primary objectives of the review were to: 

• Assess whether necessary management controls have been established 

and operate effectively to ensure bounty applications are routed to 

appropriate personnel and are properly processed and tracked; and 

 

• Determine whether other government agencies with similar programs 

have best practices that could be incorporated into the SEC bounty 

program. 

Assessment of the SEC’s Bounty Program March 29, 2010 

Report No. 474 

Page ii 
Assessment of the SEC’s Bounty Program March 29, 2010 

Report No. 474 

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Results. Although the SEC has had a bounty program in-place for more than 20 

years for rewarding whistleblowers for insider trading tips and complaints, our 

review found that there have been very few payments made under this program. 

Likewise, the Commission has not received a large number of applications from 

individuals seeking a bounty over this 20-year period. We also found that the 

program is not widely recognized inside or outside the Commission. Additionally, 

while the Commission recently asked for expanded authority from Congress to 

reward whistleblowers who bring forward substantial evidence about other 

significant federal securities law violations, we found that the current SEC bounty 

program is not fundamentally well-designed to be successful. 

More specifically, we found that improvements are needed to the bounty 

application process to make it more user-friendly and help ensure that bounty 

applications provide detailed information regarding the alleged securities law 

violations. We also found that the criteria for judging bounty applications are 

broad and the SEC has not put in place internal policies and procedures to assist 

staff in assessing contributions made by whistleblowers and making bounty 

award determinations. Additionally, we found that the Commission does not 

routinely provide status reports to whistleblowers regarding their bounty 

applications, even if a whistleblower’s information led to an investigation. 

Moreover, we found that once bounty applications are received by the SEC and 

forwarded to appropriate staff for review and further consideration, they are not 

tracked to ensure they are timely and adequately reviewed. Lastly, we found that 

files regarding bounty referrals did not always contain complete documentation, 

such as a copy of the bounty application, a memorandum sent to the 

whistleblower to acknowledge receipt of the application, and a referral 

memorandum showing the office or division and official to whom the bounty 

application was referred for further consideration. 

We wish to note that the SEC has begun to take steps to correct the deficiencies 

identified in its whistleblower/bounty program. The SEC has had consultations 

with the Department of Justice (DOJ), Internal Revenue Service (IRS), and other 

agencies, as well as the Financial Industry Regulatory Authority, to identify best 

practices from existing well-defined whistleblower programs. The SEC has also 

attempted to incorporate some of these best practices into legislation which it is 

seeking from Congress to include expanded authority to reward whistleblowers 

for securities law violations. The proposed legislation also takes into account 

some issues identified in this report in connection with the existing insider trading 

bounty program. 

We believe that it is critical for the SEC to implement the following 

recommendations to ensure that it has a fully-functioning and successful 

whistleblower program in place as its authority is potentially expanded. 
Assessment of the SEC’s Bounty Program March 29, 2010 

Report No. 474 

Page iv 

Summary of Recommendations. Specifically, the review recommends that the 

Division of Enforcement: 

(1) Develop a communication plan to address outreach to both the public and 

SEC personnel regarding the SEC bounty program. The plan should 

include efforts to make information available on the SEC’s intranet, 

enhance information available on the SEC’s public website, and provide 

training to employees who are most likely to deal with whistleblower 

complaints. 

(2) Develop and post to its public website an application form that asks the 

whistleblower to provide information, including, for example: 

a) The facts pertinent to the alleged securities law violation and 

explanation as to why the whistleblower believes the subject(s) 

violated the securities laws; 

b) A list of related supporting documentation in the whistleblower’s 

possession and available from other sources; 

c) A description of how the whistleblower learned about or obtained 

the information that supports the claim, including the 

whistleblower’s relationship to the subject(s); 

d) The amount of any monetary rewards obtained by the subject 

violator(s) (if known) as a result of the securities law violation, and 

how the amount was calculated; and 

e) A certification that the application is true, correct, and complete to 

the best of the whistleblower’s knowledge. 

(3) Establish policies on when to follow-up with whistleblowers who submit 

applications to clarify information in the bounty applications and obtain 

readily available supporting documentation prior to making a decision as 

to whether a whistleblower’s complaint should be further investigated. 

(4) Develop specific criteria for recommending the award of bounties, 

including a provision that where a whistleblower relies partially upon public 

information, such reliance will not preclude the individual from receiving a 

bounty. 

(5) Examine ways in which the Commission can increase communications 

with whistleblowers by notifying them of the status of their bounty requests 

without releasing non-public or confidential information during the course 

of an investigation or examination. 

(6) Develop a plan to incorporate controls for tracking tips and complaints 

from whistleblowers seeking bounties into the development of 

Enforcement’s tips, complaints, and referrals processes and systems for 
Assessment of the SEC’s Bounty Program March 29, 2010 

Report No. 474 

Page v 

other tips and complaints. These controls should provide for the collection 

of necessary information and require processes that will help ensure that 

bounty applications are reviewed by experienced Commission staff, 

decisions whether to pursue whistleblower information are timely made, 

and whistleblowers who provide significant information leading to a 

successful action for violation of the securities laws are appropriately 

rewarded. 

(7) Require that a bounty file (hard copy or electronic) be created for each 

bounty application. The file should contain at a minimum the bounty 

application, any correspondence with the whistleblower, documentation of 

how the whistleblower’s information was utilized, and documentation 

regarding significant decisions made with regard to the whistleblower’s 

complaint. 

(8) Incorporate best practices obtained from DOJ and the IRS into the SEC 

bounty program with respect to bounty applications, analysis of 

whistleblower information, tracking of whistleblower complaints, 

recordkeeping practices, and continual assessment of the whistleblower 

program. 

(9) Establish a timeframe to finalize new policies and procedures for the SEC 

bounty program that incorporates the best practices from DOJ and IRS as 

well as any legislative changes to the program. 
Assessment of the SEC’s Bounty Program March 29, 2010 

Report No. 474 

Page vi 

Table of Contents 

Executive Summary ........................................................................................

Table of Contents ............................................................................................

Background and Objectives 

Background................................................................................................

Objectives ..................................................................................................

Findings and Recommendations

Finding 1: SEC Bounty Program Has Made Very Few Payments and 

Received a Relatively Small Number of Bounty Applications ....

Recommendation 1...............................................................

Finding 2: Standardized Bounty Application Forms Would Help Make the 

Bounty Application Process More User Friendly for 

Whistleblowers...........................................................................

Recommendation 2...............................................................

Recommendation 3...............................................................

Finding 3: Criteria for Judging Bounty Applications are Broad and 

Somewhat Vague.......................................................................

Recommendation 4...............................................................

Finding 4: More Frequent Communication with Whistleblowers is Needed

Recommendation 5...............................................................

Finding 5: Better Tracking of the Use of Whistleblower Information is 

Needed ......................................................................................

Recommendation 6...............................................................

Finding 6: Bounty Files Did Not Always Contain Complete Information .....

Recommendation 7...............................................................

Finding 7: SEC Bounty Program Should Incorporate Best Practices from 

other Agencies with Whistleblower Programs ............................

Recommendation 8...............................................................

Recommendation 9...............................................................

Appendices 

Appendix I: Acronyms. ...............................................................................

Appendix II: Scope and Methodology.........................................................

Appendix III: Criteria...................................................................................

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....... vi 

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Assessment of the SEC’s Bounty Program March 29, 2010 

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Page vii 

Appendix IV: List of Recommendations .....................................

Appendix V: Management Comments........................................

Appendix VI: OIG Response to Management’s Comments .......

Table 

Table 1: Payments to Whistleblowers. .......................................

......................26 

......................28 

......................31 

........................5 
Background and Objectives

Background 

There is evidence that bounty programs are an effective tool to encourage 

whistleblowers to come forward and provide incentives for outside entities to 

bring complaints about possible illegal activity. We identified two government 

agencies, the Internal Revenue Service (IRS) and Department of Justice (DOJ), 

that have well-defined whistleblower functions. 

Section 21A(e) of the Securities Exchange Act of 1934 (Exchange Act), 15

U.S.C. § 78u-1(e), authorizes the Securities and Exchange Commission (SEC or 

Commission) to award a bounty to a person who provides information leading to 

the recovery of a civil penalty from an insider trader,1 from a person who tipped 

information to an insider trader, or from a person who directly or indirectly 

controlled an insider trader. All bounty determinations, including whether, to 

whom, and in what amount to make payments, are within the sole discretion of 

the SEC. However, the total bounty may not currently exceed 10 percent of the 

amount recovered from a civil penalty pursuant to a court order. 

Section 21A(e) of the Exchange Act was added by the Insider Trading and 

Securities Fraud Enforcement Act of 1988 (ITSEA), Pub L. No. 100-704. ITSEA 

embodied a series of statutory changes that Congress viewed as necessary at 

that time to augment existing methods of detection and punishment of insider 

trading behavior. Particularly in light of the stock market crash in October 1987, 

Congress viewed the changes as an essential ingredient to restore the 

confidence of the public in the fairness and integrity of the securities markets. 

The Commission has adopted regulations to provide for administration of the 

process for making bounty requests. These regulations are included in the Code 

of Federal Regulations, Title 17: Commodity and Securities Exchanges, Part 

201- Rules of Practice, Subpart C-Procedures Pertaining to the Payment of 

Bounties Pursuant to Subsection 21A(e) of the Securities Exchange Act of 1934,

Sections 201.61-201.68. The SEC bounty program regulations require that 

applications be in writing, and that applications be filed within 180 days after the 

entry of the court order requiring payment of the insider trading penalty from 

which the bounty is to be paid.2 An application for a bounty must contain, among 

 

1

 The term “insider trading” refers generally to buying or selling a security, in breach of a fiduciary duty or 

other relationship of trust or confidence, while in possession of material, nonpublic information about the 

security. Insider trading violations may also include tipping such information, securities trading by the 

person tipped and security trading by those who misappropriate such information. 

(http://www.sec.gov/answers/bounty.htm.) 

Assessment of the SEC Bounty Program March 29, 2010 

2

 17 C.F.R. §§ 201.62 and 201.63. 

Report No. 474 

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Assessment of the SEC’s Bounty Program March 29, 2010 

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other things, information concerning the dates and times upon which, and the 

means by which, information was provided, as well as the identity of the 

Commission staff to whom the information was provided.3

The SEC bounty program is administered by the Division of Enforcement 

(Enforcement). While the program has been in place for more than 20 years, 

there have been very few payments by the Commission under the program. 

Likewise, the Commission has not received a large number of applications from 

individuals seeking a bounty. The SEC bounty program is limited to insider 

trading cases and the stated criteria for judging bounty applications are broad, 

somewhat vague and not subject to judicial review. Moreover, there is no 

entitlement to a reward even if the whistleblower’s information causes the 

government to recover money from wrongdoers. 

In testimony before the House Subcommittee on Financial Services and General 

Government Appropriations of the House Committee on Appropriations in March 

2009, SEC Chairman Mary Schapiro spoke about the possible expansion of the 

SEC’s authority to award whistleblowers.4 Chairman Schapiro stated that “right 

now, the main reward for being a whistleblower is the good feeling you get of 

having done something important, because [the SEC does not] have the 

authority to pay except where the whistleblowing relates to insider trading.”5

Chairman Schapiro added that “[w]histleblowers tend to do a lot of the work for 

you, hand you something that is pretty fully baked.”6 She further stated that 

expanding authority would enable the SEC to “run with that kind of information 

and to pursue cases in a much more aggressive way.”7

The SEC recently sent to Congress proposed legislation to expand the authority 

of the program, in addition to other reforms, to permit bounties for any judicial or 

administrative action brought by the Commission under the securities laws that 

result in monetary sanctions exceeding $1,000,000. The proposed legislation 

was included in the Investor Protection Act of 2009 (H.R. 3817), which was 

introduced in the U.S. House of Representatives on October 15, 2009 by 

Representative Paul Kanjorski (D. PA) and referred to the House Committee on 

Financial Services. Variations of this legislation are being considered by both the 

U.S. House of Representatives and the U.S. Senate. 

 

3

 17 C.F.R. § 201.64. 

4 Securities and Exchange Commission Actions Relating to the Financial Crisis: Hearing Before the 

Subcommittee on Financial Services and General Government of the H. Comm. on Appropriations, 111 

Cong. (2010) (testimony of Mary Schapiro, Chairman, Securities and Exchange Commission). 5

 Id. 

6

 Id. 

7

 Id. 
Assessment of the SEC’s Bounty Program March 29, 2010 

Report No. 474 

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Objectives 

This review was conducted in accordance with our annual audit plan, as a result 

of an issue that we identified during the OIG’s investigation into the SEC 

examination and investigations of Bernard L. Madoff and related entities, OIG 

Report of Investigation, Investigation of Failure of the SEC to Uncover Bernard 

Madoff’s Ponzi Scheme, Report No. 509. The primary objectives of the review 

were to: 

• Assess whether necessary management controls have been 

established and operate effectively to ensure bounty applications are 

routed to appropriate personnel and are properly processed and 

tracked; and 

• Determine whether other government agencies with similar programs 

have best practices that could be incorporated into the SEC bounty 

program. 
Findings and Recommendations 

We found that while a bounty program has been in place at the SEC for more 

than 20 years, there have been very few payments made by the Commission 

under the program. Likewise, the Commission has not received a large number 

of applications from individuals seeking a bounty. The program is also not widely 

recognized inside or outside the Commission. We also found that the SEC 

bounty program is limited to insider trading cases and the stated criteria for 

judging bounty applications are broad, somewhat vague and not subject to 

judicial review. 

In addition, we generally found that bounty applications the Commission received 

were acknowledged in writing and were then forwarded to appropriate seniorlevel staff in headquarters and the regional offices for further consideration. 

However, bounty applications were not adequately tracked to ensure timely and 

adequate handling of the information. We did find that the Commission made 

formal determinations and notified bounty claimants, accordingly, with respect to 

all persons the Commission deemed eligible for award in accordance with the 

statute. We also found that on the few occasions when the Commission has 

made an award, it has paid the maximum allowed by the statute. 

We further identified areas that need increased management controls with regard 

to the bounty application process, maintenance of files pertaining to bounty 

applications, and correspondence with whistleblowers regarding the status of 

their bounty applications. 

Lastly, we identified several best practices utilized by agencies with similar 

programs that should be adopted by the SEC in developing a successful bounty 

program. 

Finding 1: SEC Bounty Program Has Made Very 

Few Payments and Received a Relatively Small 

Number of Bounty Applications 

The SEC bounty program has made very few payments to 

whistleblowers since its inception and received a relatively 

small number of bounty applications. As a result, the 

program’s success has been minimal and its existence is 

practically unknown. 

Assessment of the SEC’s Bounty Program March 29, 2010 

Report No. 474 

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Assessment of the SEC’s Bounty Program March 29, 2010 

Report No. 474 

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Since the inception of the SEC bounty program in 1989, the SEC has paid a total 

of $159,537 to five claimants as detailed in Table 1 below. 

 

 Table 1: Bounty Payments to Whistleblowers 

Bounty 

Claimant 

Year Bounty Amount 

1) Claimant 1 1989 $3,500 

2) Claimant 2 2001 $18,152 

3) Claimant 3 2002 $29,079 

4) Claimant 4 2005 $17,500 

4) Claimant 4 2006 $29,920 

4) Claimant 4 2009 $55,220 

5) Claimant 5 2007 $6,166 

Total $159,537 

 Source: OIG Generated 

As Table 1 illustrates, Claimant 4 received three payments because the 

information provided by the claimant led to the filing of three separate insider 

trading cases. All payments were for the 10 percent maximum amount permitted 

by statute. 

The Commission also formally denied five bounty applications since the inception 

of the program as summarized below. 

• In 1990, the Commission denied a bounty request to 

Claimant 6 on the grounds that the statute did not authorize 

payment for information provided prior to its effective date. 

• In 1990, the Commission denied a bounty request to 

Claimant 7 on the same ground asserted in the 

aforementioned bounty request for Claimant 6. 

• In 1996, the Commission denied a bounty request to 

Claimant 8 because, as with the aforementioned two bounty 

requests, Claimant 8 had provided information prior to the 

effective date of the statute. However, Claimant 8 also 

provided additional information after the effective date of the 

statute. SEC staff recommended denial of the bounty 

request on the grounds that the latter information did not 

result in the addition of any defendants, securities 

transactions or violations to the complaint. 
Assessment of the SEC’s Bounty Program March 29, 2010 

Report No. 474 

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• In 2001, the Commission denied the bounty request of 

Claimant 9. The Commission asserted that Claimant 9 had 

provided fictitious information that resulted in the 

unnecessary use of staff resources, and falsely claimed to 

have provided information to the Chicago Board Options 

Exchange, which had earlier alerted the Commission to 

suspicious trading. 

• In 2004, the Commission denied the joint bounty request of 

Claimant 10, Claimant 11, and Claimant 12, three brokerage 

employees. The Commission recommended denial on the 

grounds that the initial information about insider trading had 

been provided by the brokerage firm’s general counsel’s 

office. The SEC did not seek or obtain any information 

directly from Claimant 11 or Claimant 12. 

In addition to the aforementioned bounty applications that were formally 

approved or denied by the Commission, we determined that from January 1, 

2005 to January 1, 2010, the SEC received approximately 30 other bounty 

applications, but did not formally take action to approve or deny any of them and 

did not notify the bounty applicant accordingly. The person responsible for 

overseeing the SEC bounty program stated that this occurred because the 

Commission only makes a formal bounty determination and provides notice to an 

applicant when the bounty information results in the recovery of an insider trading 

civil penalty in accordance with the Exchange Act. Thus, while the Commission 

has made formal determinations with respect to all persons that it deemed 

eligible for award in accordance with the statute, the 30 bounty applicants were 

never notified of the results of the SEC’s review. 

Further, we found that while the Commission reported in its 2009 Performance 

and Accountability Report that only 6 percent of the Commission’s Enforcement 

cases in Fiscal Year 2009 related to insider trading,8

 the SEC filed or initiated 37 

insider trading cases in 2009. However, only one payment was approved under 

the SEC bounty program during Fiscal Year 2009. Additionally, the SEC filed or 

initiated a total of 204 insider trading cases between Fiscal Years 2005 - 2008, 

but only approved three payments under the SEC bounty program. Based on the 

number of insider trading cases initiated by the Commission during the past five 

years, it would appear that there could have been more utilization of the SEC 

bounty program. 

We believe that the minimal use of the SEC bounty program can be attributed 

primarily to the fact that the program has not been widely publicized, internally 

within the agency or externally to the public. We found that general information 

 

8

 http://www.sec.gov/about/secpar2009.shtml, Chart 2.10, at page 34. 
Assessment of the SEC’s Bounty Program March 29, 2010 

Report No. 474 

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on how to apply for a bounty can be found on the SEC’s public website, but there 

is no contact information or e-mail address to which potential bounty claimants 

can send questions. Also, there is no application form, only instructions on what 

type of information should be included in a narrative format.9 The SEC also 

developed an informational pamphlet for the bounty program that was intended 

to be used as an educational device to be routinely sent by staff to individuals 

who provide information that might lead to award of a bounty. While the 

pamphlet is a good tool for marketing the program, we found no evidence that 

staff members are generally aware of the pamphlet and provide it routinely to 

potential bounty applicants. In addition, the SEC has publicly released only 

limited information on Commission decisions regarding bounty awards and 

denials. Commission officials provided information showing that with the 

exception of one payment and one denial, the identity of bounty applicants has 

not been disclosed publicly, nor has the SEC disclosed that all bounty payments 

have been for the maximum 10 percent permitted by the statute. The years in 

which bounties have been awarded and the total amount of the payments, 

however, have been disclosed. 

In addition, based on discussions with various senior Enforcement staff in 

headquarters as well as the regional offices, we found varying degrees of 

knowledge regarding the SEC bounty program among Commission staff. Some 

staff who had received bounty applications for further consideration remarked 

that they knew nothing about the bounty program, while others had some 

knowledge of the workings of the program and associated laws and regulations. 

Therefore, more extensive marketing of the program both internally and 

externally is necessary to ensure Commission staff, as well as potential 

whistleblowers, are aware of the program. This holds especially true for staff 

who are in positions where they evaluate whistleblower information. 

We learned through discussions with responsible Commission officials that there 

has been extensive work performed by the Office of the Chairman, Enforcement, 

and the Office of General Counsel (OGC) on drafting proposed legislation to 

revamp the current bounty program in the wake of the Bernard Madoff scandal. 

The proposed legislation, among other things, would provide expanded authority 

for the program to permit bounties in connection with any judicial or 

administrative action brought by the Commission under the securities laws that 

result in monetary sanctions exceeding $1,000,000. The proposed legislation 

was included in the Investor Protection Act of 2009 (H.R. 3817), which was 

introduced in the U.S. House of Representatives on October 15, 2009 by 

Representative Paul Kanjorski and referred to the House Committee on Financial 

Services. We are encouraged by the actions the Commission has taken and 

support the timely passage of the proposed legislation as a necessary step to 

develop a successful SEC whistleblower/bounty program. Additionally, the SEC 

 

9

 http://www.sec.gov/divisions /enforce/insider.htm. 
Assessment of the SEC’s Bounty Program March 29, 2010 

Report No. 474 

Page 8 

has begun to explore ways to more extensively market the bounty program in an 

effort to increase awareness both inside and outside the Commission. 

 

Recommendation 1: 

The Division of Enforcement should develop a communication plan to 

address outreach to both the public and Securities and Exchange 

Commission (SEC) personnel regarding the SEC bounty program. The 

plan should include efforts to make information available on the SEC’s 

intranet, enhance information available on the SEC’s public website, and 

provide training to employees who are most likely to deal with 

whistleblower cases. 

 Management Comments. Concur. See Appendix V for management’s 

 full comments. 

OIG Analysis. We are pleased that Enforcement concurred with this 

recommendation. 

Finding 2: Standardized Bounty Application 

orms Would Help Make the Bounty 

pplication Process More User Friendly 

or Whistleblowers 

F

A

f

Information on the SEC’s public website regarding how an 

individual may apply for a bounty can be misleading and 

potentially a deterrent to prospective whistleblowers. 

With regard to how and when a prospective whistleblower may apply for a 

bounty, the SEC’s public website currently states in a section entitled, “How and 

When Do You Apply for a Bounty?” as follows: 

An application must be clearly marked as an “Application for 

Award of a Bounty,” and must contain the information 

required by the Commission’s rules. The application must 

give a detailed statement of the information that the 

applicant has about the suspected insider trading. 

Any person who desires to provide information to the 

Commission that may result in the payment of a bounty may 

do so by any means desired. The Commission encourages 
Assessment of the SEC’s Bounty Program March 29, 2010 

Report No. 474 

Page 9 

 

persons having information regarding insider trading to 

provide that information in writing, either at the time they 

initially provide the information to the Commission or as soon 

as possible afterwards. Providing information in writing 

reduces the possibility of error, helps assure that appropriate 

action will be taken, and minimizes subsequent burdens and 

the possibility of factual disputes. In any event a written 

application for a bounty must be filed with 180 days after the 

day on which the court orders payment of the civil penalty.10 

The SEC’s website also includes in a subsequent section entitled, “Statutory and 

Regulatory Provisions,” the Commission rules for bounty applications. Rule 64 

Form of application and information required, states that “[e]ach application 

pursuant to this subpart shall be identified as an Application for Award of a 

Bounty and shall contain a detailed statement of the information provided by the 

applicant that the applicant believes led or may lead to the imposition of a 

penalty.”11 The rule also states that “[w]hen the application is not the means by 

which the applicant initially provides such information, each application shall 

contain: the dates and times upon which, and the means by which, the 

information was provided; the identity of the Commission staff members to whom 

the information was provided; and if the information was provided anonymously, 

sufficient further information to confirm that the person filing the application is the 

same person who provided the information to the Commission.”12

Based on this language, a bounty applicant may be unclear as to what 

constitutes an acceptable application, i.e., what level of detail should be 

provided, if supporting documents should be included or referenced, etc. During 

our review we found that many bounty applications were essentially generalized 

tips and complaints about potential insider trading based on public information 

without any real evidence or actual knowledge that an individual or individuals 

used material non-public information when purchasing or selling securities. 

To illustrate, one bounty application included in our sample that was referred to a 

senior official in headquarters by the bounty program for further consideration 

stated: 

Company A doubled in price with extremely high volume 

prior to the announcement that Company B had loaned them 

(Company A) millions of $ to help in preventing bankruptcy. 

This possible insider trading occurred on Tuesday Aug 18. 13

10 http://www.sec.gov/divisions/enforce/insider.htm, at p. 2. 11 Id. at 4. 12 Id. 13 Information obtained from SEC bounty file maintained by the Office of Chief Counsel within the Division of 

Enforcement. 
Assessment of the SEC’s Bounty Program March 29, 2010 

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4

 Id. 

R

 

Because the bounty application was vague, the senior official that received it 

stated that it was not useful or relevant to his ongoing investigation into the 

subject. Additionally, the senior official dismissed the tip without contacting the 

bounty applicant to determine if he had further information. 

For another bounty application, the bounty applicant alleged the existence of a 

“wide ranging community of individual investors and investing business entities 

who willingly participate in, for lack of a better term, a group that trades on 

selected equities in various ways for the purpose of can’t lose investment 

transactions.” 14 The senior-level official who received the bounty application for 

further consideration stated that the complaint was not specific as to the 

securities (or even category of securities) in which the alleged insider trading 

occurred and contained no information on how insider trading information was 

allegedly shared. Further, the bounty applicant had submitted previous 

complaints of wide-ranging conspiracies that the official deemed to lack credible 

support upon which to base an investigation. Therefore, the bounty application 

was dismissed without further action. 

As part of our review, we contacted some bounty applicants to obtain feedback 

regarding the bounty application process. One individual stated that it would be 

useful if the SEC had a link on its website to an application form that can be 

downloaded. Another individual stated that he had additional information to 

support his bounty application, but that no one from the SEC had contacted him 

to follow up and ask for supporting information. 

To help ensure that bounty applications are complete and the information 

provided is useful, we believe the Commission should develop a standardized 

electronic form that can be downloaded. Also, at a minimum, whistleblowers 

should be asked to provide the following information, in addition to relevant 

contact information: 

• The facts pertinent to the alleged securities law violation and 

explanation as to why the subject(s) violated the securities 

laws. 

• A list of related supporting documentation in the 

whistleblower’s possession and/or available from other 

sources. 

• A description of how the whistleblower learned about/and or 

obtained the information that supports the claim, including 

the whistleblower’s relationship to the subject(s). 

1
Assessment of the SEC’s Bounty Program March 29, 2010 

Report No. 474 

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• The amount of any monetary rewards reaped by the subject 

violator (if known) as a result of the securities violation and 

how the amount was calculated. 

• A certification that the application is true, correct, and 

complete to the best of the whistleblower’s knowledge. 

Additionally, the Commission should follow up with whistleblowers, where 

appropriate, regarding their applications to ensure all available information has 

been obtained in order to effectively evaluate whether the information should 

result in further investigation. 

Recommendation 2: 

The Division of Enforcement should develop and post to its public website 

an application form that asks the whistleblower to provide information, 

including: 

(1) The facts pertinent to the alleged securities law violation and an 

explanation as to why the subject(s) violated the securities laws; 

(2) A list of related supporting documentation in the whistleblower’s 

possession and available from other sources; 

(3) A description of how the whistleblower learned about or obtained 

the information that supports the claim including the whistleblower’s 

relationship to the subject(s); 

(4) The amount of any monetary rewards obtained by the subject 

violator(s) (if known) as a result of the securities law violation and 

how the amount was calculated; and 

(5) A certification that the application is true, correct, and complete to 

the best of the whistleblower’s knowledge. 

 Management Comments. Concur. See Appendix V for management’s 

 full comments. 

OIG Analysis. We are pleased that Enforcement concurred with this 

recommendation. 

 

Recommendation 3: 

The Division of Enforcement should establish policies on when to follow 

up with whistleblowers who submit applications to clarify information in the 

bounty applications and obtain readily available supporting documentation 

prior to making a decision as to whether a whistleblower’s complaint 

should be further investigated. 
Assessment of the SEC’s Bounty Program March 29, 2010 

Report No. 474 

Page 12 

 Management Comments. Concur. See Appendix V for management’s 

 full comments. 

OIG Analysis. We are pleased that Enforcement concurred with this 

recommendation. 

Finding 3: Criteria for Judging Bounty 

Applications Are Broad and Somewhat 

Vague

The criteria for judging bounty applications are broad, 

somewhat vague and not subject to judicial review. As a 

result, the criteria may not be consistently applied by 

Enforcement staff. 

Although the Commission adopted bounty program regulations to provide a 

structure for the orderly administration of the process for making bounty 

payments, the regulations essentially repeat, instead of clarifying or 

supplementing, much of the language found in the statute regarding bounty 

determinations. 

The Code of Federal Regulations (CFR), Title 17: Commodity and Securities 

Exchanges, Part 201- Rules of Practice, Subpart C - Procedures Pertaining to 

the Payment of Bounties Pursuant to Subsection 21A(e) of the Securities 

Exchange Act of 1934, Section 201.61, Scope of Subpart, states as follows: 

Section 21A of the Securities and Exchange Act of 1934 

authorizes the courts to impose civil penalties for certain 

violations of that Act. Subsection 21A(e) permits the 

Commission to award bounties to persons who provide 

information that leads to the imposition of such penalties. 

Any such determination, including whether, to whom, or in 

what amount to make payments, is in the sole discretion of 

the Commission. This subpart sets forth procedures 

regarding applications for the award of bounties pursuant to 

Subsection 21A(e). Nothing in this subpart shall be deemed 

to limit the discretion of the Commission with respect to 

determinations under subsection 21A(e) or to subject any 

such determination to judicial review. 

Additionally, Section 201.68, No promises of payment, states as 

follows: 
Assessment of the SEC’s Bounty Program March 29, 2010 

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No person is authorized under this subpart to make any offer 

or promise, or otherwise to bind the Commission with 

respect to the payment of any bounty or the amount thereof. 

Because of the use of language such as “information that leads to the imposition 

of such penalties” and “in the sole discretion of the Commission,” the criteria for a 

bounty award are broad and subject to interpretation. In addition, Enforcement 

does not have internal policies and procedures to assist Commission staff in 

assessing contributions that are made by whistleblowers and recommending 

bounty award determinations. The Commission should establish internal policies 

and procedures to provide more specific guidelines for awarding bounties. 

 

Recommendation 4: 

The Division of Enforcement should develop specific criteria for 

recommending the award of bounties, including a provision that where a 

whistleblower relies partially upon public information, such reliance will not 

preclude the individual from receiving a bounty. 

 Management Comments. Concur. See Appendix V for management’s 

 full comments. 

OIG Analysis. We are pleased that Enforcement concurred with this 

recommendation. 

Finding 4: More Frequent 

Communication with Whistleblowers is 

Needed 

 

The Commission does not routinely provide status reports to 

whistleblowers regarding their bounty applications, even if 

there is an ongoing investigation or examination. This 

practice could discourage individuals from continuing to 

utilize the program and from providing useful follow-up 

information to their bounty applications. 

We found that the SEC bounty program only provides written notification to 

whistleblowers regarding the status of their bounty applications to: 

(1) Acknowledge receipt of the applications; and 

(2) Notify them if formal determinations are made by the SEC with respect to 

their bounty applications. 
Assessment of the SEC’s Bounty Program March 29, 2010 

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According to Commission officials, a formal determination is made only if the 

information provided by the whistleblower leads to an insider trading civil penalty 

being imposed by the court in a Commission civil action, and the penalty has 

actually been paid by the defendant. Consequently, if a whistleblower’s 

information was never pursued for one reason or another, or was pursued but did 

not lead to an insider trading penalty being recovered, the whistleblower would 

typically not receive any correspondence from the SEC regarding the status of 

his or her bounty request, other than the initial acknowledgement letter. This 

may result in a whistleblower wondering if the information provided even made it 

into the right hands. The initial acknowledgement letter sent to whistleblowers 

includes the following language: 

This is to acknowledge receipt of your Application for Award 

of a Bounty, dated XX. 

You may be assured that the information you have provided 

will receive full consideration by the Commission’s staff. 

Information from members of the public is an important 

source of information to the Commission in the conduct of its 

law enforcement functions. 

As a matter of policy, the Commission staff can neither affirm 

nor deny the existence of any investigation arising from the 

information you have provided until it files a public 

enforcement action. This policy is intended to prevent 

premature disclosure of information that may interfere with 

the successful completion of an investigation, and to protect 

the privacy of persons who have not been formally charged 

with violations of laws. 

All determinations with respect to bounties are made at the 

Commission’s discretion and no determinations are made 

until a civil penalty has been imposed and actually recovered 

in a Commission enforcement action. Section 21A(e) of the 

Securities Exchange Act of 1934 [15 U.S.C. 78u-1(e)]. You 

will be informed of any determination in accordance with our 

bounty regulations. See 17 C.F.R. 201.61-68.15

While we acknowledge that Commission staff cannot release non-public or 

sensitive information during the course of an investigation, the Commission 

should examine ways to notify whistleblowers of the status of their bounty 

15 Code of Federal Regulations, Title 17: Commodity and Securities Exchanges, Part 201-Rules of Practice, 

Subpart C-Procedures Pertaining to the Payment of Bounties Pursuant to Subsection 21A(e) of the 

Securities Exchange Act of 1934, Sections 201.61-201.68. 
Assessment of the SEC’s Bounty Program March 29, 2010 

Report No. 474 

Page 15 

requests beyond simply acknowledging receipt of the applications. This is 

especially needed when a whistleblower’s information results in an investigation 

that may take years to close. 

Recommendation 5: 

The Division of Enforcement, in consultation with the Office of General 

Counsel, should examine ways in which the Commission can increase 

communications with whistleblowers by notifying them of the status of their 

bounty requests, without releasing non-public or confidential information 

during the course of an investigation or examination. 

 Management Comments. Concur. See Appendix V for management’s 

 full comments. 

OIG Analysis. We are pleased that Enforcement concurred with this 

recommendation. 

Finding 5: Better Tracking of the Use of 

Whistleblower Information is Needed 

While we generally found that the SEC conducted an initial 

cursory review of bounty applications and forwarded them to 

appropriate senior-level program staff in the headquarters 

and regional offices for further consideration, we found that 

the recipient offices handled the applications on an 

individualized, ad hoc basis. Consequently, better tracking 

of bounty applications and related information is needed to 

ensure that bounty information is timely reviewed by 

experienced Commission staff and significant decisions are 

documented. 

Bounty applications received by the Commission are either filed after recovery of 

an insider trading civil penalty or prior to payment of an insider trading civil 

penalty, in connection with a tip or complaint about alleged insider trading. 

When an insider trading civil penalty has already been recovered and a related 

bounty application is received by the Office of the Secretary, the application is 

forwarded to the Office of the Chief Counsel (OCC) in Enforcement. OCC then 

contacts the appropriate staff in the headquarters or regional office responsible 

for the case in which the insider trading civil penalty was recovered and forwards 

them a copy of the bounty application. If the applicant’s information pertains to a 
Assessment of the SEC’s Bounty Program March 29, 2010 

Report No. 474 

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case in which there was recovery of an insider trading civil penalty, the office to 

whom the bounty application was referred may recommend that the Commission 

grant a bounty up to 10 percent of the amount recovered as an insider trading 

penalty. In those cases, the responsible headquarters or regional office, in 

consultation with OCC and OGC, prepares an action memorandum, which is 

then provided to the Chairman and Commissioners for final approval. Since 

inception of the bounty program, formal recommendations have only been 

prepared in response to 10 bounty applications, where there was recovery of an 

insider trading civil penalty. 

When applications are filed prior to the assessment of an insider trading civil 

penalty, the Office of the Secretary forwards the application to OCC. OCC then 

performs a search of the Commission’s electronic databases (NRSI,16 CATS 

2000,17 and the HUB18) to determine whether the application relates to conduct 

that is already the subject of an Enforcement investigation or action. If there is 

an investigation or action related to the conduct described in the application, the 

application is referred to the staff responsible for the investigation or action. If 

the database search does not result in the identification of an ongoing 

investigation or action, OCC staff determines the appropriate staff to whom the 

application should be directed. If the application alleges misconduct by officers, 

directors, or employees of a public company, OCC staff will determine the 

headquarters location of the issuer. The application will be referred to staff in the 

Commission office with responsibility for that geographic location. If the 

application alleges misconduct by individuals who are in a location other than the 

SEC region in which the issuer is headquartered, the application is referred to 

staff in the Commission office with responsibility for that geographic location. If 

the application does not contain information sufficient to identify the location of 

the alleged insider traders, the application is referred to staff in the Commission 

office with responsibility for the geographical location in which the whistleblower 

resides. 

Referrals of bounty applications to Commission staff are generally accompanied 

by a memorandum that states as follows: 

Attached is a copy of a bounty application submitted by X. 

The claim involves alleged insider trading violation by X 

company through its X office. The application seeks an 

insider trading bounty under Section 21A(e) of the Exchange 

16 Name Relationship Search Index (NRSI) provides an index to names contained in various internal and 

external automated SEC information systems, including filings with the Division of Corporation Finance, and 

Division of Enforcement inquiries and investigations. 

17 Case Activity Tracking System (CATS 2000) provides case tracking and workflow management for 

Division of Enforcement offices nationwide. 

18 HUB interfaces with CATS 2000 and provides case management and tracking for Division of Enforcement 

offices nationwide including the ability to produce various reports. 
Assessment of the SEC’s Bounty Program March 29, 2010 

Report No. 474 

Page 17 

Act. I have sent a letter acknowledging receipt of the 

application. A copy of my letter is attached. 

I am referring this matter to your office for such further action 

as you may consider appropriate. 

The whistleblower is also sent an acknowledgement letter, as discussed 

previously. 

During our review, we interviewed responsible Commission staff in Enforcement 

at headquarters, as well as Enforcement staff from three regional offices to gain 

an understanding of how offices tracked and utilized bounty application 

information. We also examined nine out of approximately 30 bounty applications 

(30 percent) submitted to the Commission between January 1, 2005 and January 

1, 2010 (that were neither formally approved or denied by the Commission), to 

determine if sufficient documentation existed to support timely and appropriate 

handling of the bounty applications. Further, we reviewed supporting 

documentation pertaining to five bounty applications that were formally denied by 

the Commission to determine if adequate documentation was maintained by the 

Commission to support the denial of the applications. 

We found that adequate documentation existed to support the disposition of the 

five bounty applications that were formally denied by the Commission. However, 

documentation was not readily available from OCC to show the disposition for 

the nine bounty applications that were forwarded to Enforcement staff in 

headquarters and the regional offices for further consideration, but were not 

formally approved or denied. 

We found that once a bounty application is referred by OCC to the appropriate 

senior-level official in headquarters or a regional office, it is up to that official to 

take whatever action he or she deems necessary and to document the results of 

any decisions that are made, according to that office’s procedures. Based on our 

review of available documentation from Enforcement staff in headquarters and 

three regional offices pertaining to the nine sampled bounty applications, it 

appears that the bounty applications were generally reviewed timely. However, 

we found that one application had been referred to a regional office on November 

18, 2009, by OCC and was still awaiting review as of January 6, 2009. We also 

found that Enforcement staff conducted preliminary reviews of the information 

contained in the bounty applications they received, but did not routinely go back 

to bounty applicants to clarify information or ask for additional supporting 

documentation. Rather, general or vague bounty applications were typically 

dismissed. In addition, for two of the nine bounty applications, we were unable to 

obtain specific information pertaining to the handling of the applications. We did 

find that based on information provided by one whistleblower, the responsible 
Assessment of the SEC’s Bounty Program March 29, 2010 

Report No. 474 

Page 18 

 

regional office filed both criminal and civil actions and also provided assistance to 

the whistleblower in the preparation of his bounty application. The whistleblower, 

however, was not awarded a bounty because no insider trading penalty was 

recovered. Lastly, we found that Enforcement staff documented the results of 

their reviews of bounty applications and decisions made using different methods, 

including personal notes and files and/or use of the Commission’s electronic 

complaint handling system (CTR 2009), as well as the HUB case tracking 

system. 

The SEC has recently taken steps to improve its ability to handle and track all 

tips and complaints. In February 2009, the SEC retained The MITRE 

Corporation: Center for Enterprise Modernization19 to complete a comprehensive 

review of internal procedures for evaluating tips, complaints, and referrals. The 

OIG has learned that the project is intended to be significant in scope. On 

August 5, 2009, Enforcement announced the creation of the Office of Market 

Intelligence (OMI). OMI is Enforcement’s liaison to the Agency’s Tip, Complaint, 

and Referral (TCR) process and system, which is responsible for the collection, 

analysis, risk-weighing, triage, referral and monitoring of the hundreds of 

thousands of tips, complaints and referrals that the Commission receives each 

year. By analyzing each tip according to internally-developed risk criteria and 

making connections between and among tips from different sources, 

Enforcement hopes to be able to better focus its resources on the tips that have 

the greatest potential for uncovering wrongdoing. OMI will also utilize the 

expertise of the SEC’s other divisions and offices as well as the newly-created 

specialized units within Enforcement, to help analyze tips and identify securities 

law violations. 

We believe that the Commission should incorporate necessary management 

controls in its new TCR process and information technology system to include 

complaints and tips from whistleblower’s who seek a bounty, in addition to other 

types of tips and complaints. This will help ensure that bounty applications are 

appropriately and timely evaluated by experienced Commission staff and bounty 

application information can be linked with other related complaints and tips. 

Recommendation 6: 

The Division of Enforcement should develop a plan to incorporate controls 

for tracking tips and complaints from whistleblowers seeking bounties into 

the development of its tip, complaints and referral processes and systems 

for other tips and complaints. These controls should provide for the 

collection of necessary information and require processes that will help 

19 The MITRE Corporation: Center for Enterprise Modernization (www.mitre.org) is a not-for-profit 

organization that provides systems engineering, research and development, and information technology 

support to the government.
Assessment of the SEC’s Bounty Program March 29, 2010 

Report No. 474 

Page 19 

ensure that bounty applications are reviewed by experienced Commission 

staff, decisions whether to pursue whistleblower information are timely 

made, and whistleblowers that provide significant information leading to a 

successful action for violation of the securities laws. 

 Management Comments. Concur. See Appendix V for management’s 

 full comments. 

OIG Analysis. We are pleased that Enforcement concurred with this 

recommendation. 

Finding 6: Bounty Files Did Not Always 

Contain Complete Information 

Some bounty files maintained by OCC were missing key

documents. 

We obtained and reviewed the hard-copy bounty files maintained by OCC 

(OCC’s primary recordkeeping method for the bounty program) for the nine 

sampled bounty applications. We found that generally the bounty files 

maintained by OCC contained a copy of the bounty application, an 

acknowledgement memorandum that was sent to the bounty applicant to 

acknowledge receipt of their application, and a copy of a memorandum showing 

to which senior-level official within the Commission the bounty application was 

forwarded for consideration. However, for the nine bounty applications the OIG 

reviewed, we found in some instances that not all these documents were 

maintained. 

Specifically, we found: 

• For one of nine bounty files, the actual bounty application was missing. 

• For three of nine bounty files, a copy of the acknowledgement 

memorandum that was sent to the whistleblower was missing. However, 

there was mention in other documentation in the file that an 

acknowledgement memorandum was sent. 

• For two of nine bounty files, the memorandum showing to which 

headquarters or regional office that OCC referred the bounty application 

for further consideration was missing. 
Assessment of the SEC’s Bounty Program March 29, 2010 

Report No. 474 

Page 20 

We believe that, at a minimum, OCC should maintain copies of pertinent data 

pertaining to bounty applications, including the application itself, a copy of any 

correspondence with the whistleblower, and documentation showing the 

Commission office(s) to which the information was referred for action. 

Recommendation 7: 

The Division of Enforcement should require that a bounty file (hard copy or 

electronic) be created for each bounty application. The file should contain 

at a minimum the bounty application, any correspondence with the 

whistleblower, documentation of how the whistleblower’s information was 

utilized, and documentation regarding significant decisions made with 

regard to the whistleblower’s complaint. 

 Management Comments. Concur. See Appendix V for management’s 

 full comments. 

OIG Analysis. We are pleased that Enforcement concurred with this 

recommendation. 

Finding 7: SEC Bounty Program Should 

ncorporate Best Practices from other Agencies 

ith Whistleblower Programs 

I

w

The IRS and the DOJ are two large government agencies that use whistleblower 

programs to identify cases that would otherwise go undetected. There is some 

evidence that DOJ’s whistleblower program has played a role in the increase of 

civil recoveries obtained by DOJ over a 10-year period. The IRS also has a 

system in place under which it provides bounties to individuals who present the 

IRS with information leading to the collection of federal taxes. 

We reviewed documentation related to these whistleblower programs and 

identified several best practices that the Commission should adopt in developing 

a successful SEC bounty program. In order to protect the confidentiality of 

privileged information we obtained during our review, the best practices are 

summarized and not specifically identified with a particular agency. We identified 

best practices related to tracking and handling whistleblower-type complaints as 

follows: 

• Establishment of a separate “Whistleblower Office” staffed with 

experienced officials that handles intake of whistleblower complaints and 
Assessment of the SEC’s Bounty Program March 29, 2010 

Report No. 474 

Page 21 

referral of complaints to other offices as appropriate, while maintaining 

authority to make award determinations. 

• Continual tracking and documentation of the handling of whistleblower 

complaints through a case tracking system, including information 

pertaining to the identification of the whistleblower and any 

representatives, actions taken to assign whistleblower claims to applicable 

offices and individuals, and the status of significant decisions made and 

still needed with regard to outstanding whistleblower claims (e.g., whether 

a claim will be paid and in what amount). 

• Use of standardized forms for the intake of whistleblower information as 

well as recording significant decisions made by operating divisions while 

processing a whistleblower claim (i.e. operating division assessments on 

how a whistleblower’s information aided in collection of funds pertaining to 

an examination). 

• Initial analysis of whistleblower information by the Whistleblower Office 

and then by Operating Division subject matters experts to evaluate the 

information and determine whether it may materially contribute to a case 

or examination. Additionally, subject matter experts meet with 

whistleblowers to clarify the whistleblowers’ submissions as necessary, 

gather information about the credibility of the whistleblowers, obtain 

information regarding legal issues that can affect the use of documents, 

and obtain possible leads to other sources of information. 

• Requirement that routine feedback in the form of status reports be 

provided to the Whistleblower Office by Operating Divisions regarding the 

status of cases and examinations that pertain to whistleblower complaints. 

• Establishment of a whistleblower award file (created in addition to a 

regular case file) that is sent by Operating Divisions at the conclusion of 

an examination to the Whistleblower Office that contains pertinent forms 

and data to enable the Whistleblower Office to make an award 

determination. 

• Establishment of a requirement that whistleblower complaints be reviewed 

and pursued, if applicable, within a specified time frame. 

• Continual assessment of whistleblower programs through feedback 

sought from Operating Divisions and others involved in processing 

whistleblower claims. 
Assessment of the SEC’s Bounty Program March 29, 2010 

Report No. 474 

Page 22 

Through discussions with Commission officials responsible for drafting the recent 

proposed legislation to expand the SEC’s authority to reward whistleblowers, we 

learned that the Commission met extensively with representatives from both DOJ 

and the IRS to identify best practices for revamping the SEC’s current bounty 

program. Commission officials stated they plan to incorporate many of these 

best practices into implementing regulations and policies and procedures, as 

appropriate, upon passage of the proposed legislation. Until such time as this 

legislation may be passed, the Commission should begin to incorporate best 

practices we identified from DOJ and the IRS. 

Recommendation 8: 

We recommend that the Division of Enforcement incorporate best 

practices from the Department of Justice and the Internal Revenue 

Service into the Securities and Exchange Commission bounty program 

with respect to bounty applications, analysis of whistleblower information, 

tracking of whistleblower complaints, recordkeeping practices, and 

continual assessment of the whistleblower program. 

 Management Comments. Concur. See Appendix V for management’s 

 full comments. 

OIG Analysis. We are pleased that Enforcement concurred with this 

recommendation. 

Recommendation 9: 

We recommend that the Division of Enforcement set a timeframe to 

finalize new policies and procedures for the Securities and Exchange 

Commission bounty program that incorporate the best practices from 

Department of Justice and the Internal Revenue Service, as well as any 

legislative changes to the program. 

 Management Comments. Concur. See Appendix V for management’s 

 full comments. 

OIG Analysis. We are pleased that Enforcement concurred with this 

recommendation. 

 
Appendix I 

Acronyms and Abbreviations

DOJ Department of Justice 

Enforcement Division of Enforcement 

Exchange Act Securities Exchange Act of 1934 

IRS Internal Revenue Service 

ITSEA Insider Trading and Securities Fraud 

Enforcement Act of 1988 

OCC Office of Chief Counsel, Division of 

Enforcement 

OIG Office of Inspector General 

OMI Office of Market Intelligence 

SEC or Commission U.S. Securities and Exchange Commission 

TCR Tip Complaint and Referral Process 

Assessment of the SEC’s Bounty Program March 29, 2010 

Report No. 474 

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Appendix II 

Scope and Methodology

This review was not conducted in accordance with the government auditing 

standards. 

Scope. We examined Enforcement program activities related to the SEC 

bounty program since its inception in 1989, and assessed whether necessary 

management controls have been established and operate effectively to ensure 

bounty applications are routed to appropriate personnel and are properly 

processed and tracked. We also determined whether other government 

agencies with similar programs have best practices that could be incorporated 

into the SEC bounty program. Fieldwork was performed during December 2009 

and January 2010. 

Methodology. In order to accomplish our audit objectives, we reviewed 

applicable Commission policies and procedures pertaining to the SEC bounty 

program; interviewed personnel from the Office of the Chairman, Enforcement 

and three regional offices to understand how bounty applications are processed; 

reviewed documentation to support all ten bounty applications that were formally 

approved or denied; and selected a sample of bounty applications that were not 

formally approved or denied to determine if sufficient documentation existed to 

support timely and appropriate handling of bounty applications. We also 

gathered information regarding the IRS and DOJ whistleblower programs to 

identify best practices. 

Judgmental Sampling. We judgmentally selected a sample of nine out of 

approximately 30 bounty applications that were received by the Commission, but 

were not formally approved or denied. We then reviewed applicable files and 

documentation maintained by Enforcement as well as three of the 11 regional 

offices to determine whether the bounty applications were tracked, reviewed by 

experienced Commission staff and appeared to be appropriately handled. 

Prior OIG Coverage. This review was conducted as a result of an issue that we 

identified during OIG’s investigation into the SEC examination and investigations 

of Bernard L. Madoff and related entities, OIG’s Report of Investigation, 

Investigation of Failure of the SEC to Uncover Bernard Madoff’s Ponzi Scheme, 

Report No. 509, August 31, 2009. 

Assessment of the SEC’s Bounty Program March 29, 2010 

Report No. 474 

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Appendix III 

Criteria

Section 21A(e) of the Securities Exchange Act of 1934, 15 U.S.C. § 78u-1(e), 

as added by the Insider Trading and Securities Fraud Enforcement Act of 

1988, Public Law 111-72 (enacted on October 13, 2009). Authorizes the 

SEC to award a bounty to a person who provides information leading to the 

recovery of a civil penalty from an insider trader, from a person who tipped 

information to an insider trader, or from a person who directly or indirectly 

controlled an insider trader. All bounty determinations, including whether, to 

whom, or in what amount to make payments, are within the sole discretion of the 

SEC, however, the total bounty may not currently exceed 10 percent of the 

amount recovered from a civil penalty pursuant to a court order. 

17 C.F.R., Part 201, Subpart C- Procedures Pertaining to the Payment of 

Bounties Pursuant to subsection 21A(e) of the Securities Exchange Act of 

1934. Sets forth procedures regarding applications for the award of bounties 

pursuant to Subsection 21A(e) of the Securities and Exchange Act of 1934. 

Assessment of the SEC’s Bounty Program March 29, 2010 

Report No. 474 

Page 25 
Appendix IV 

List of Recommendations

Recommendation 1: 

The Division of Enforcement should develop a communication plan to address 

outreach to both the public and the Securities and Exchange Commission (SEC) 

personnel regarding the SEC bounty program. The plan should include efforts to 

make information available on the SEC’s intranet, enhance information available 

on the SEC’s public website, and provide training to employees who are most 

likely to deal with whistleblower cases. 

Recommendation 2: 

The Division of Enforcement should develop and post to its public website an 

application form that asks the whistleblower to provide information, including, for 

example (1) the facts pertinent to the alleged securities law violation and an 

explanation as to why the subject(s) violated the securities laws; (2) a list of 

related supporting documentation available in the whistleblower’s possession 

and available from other sources; (3) a description of how the whistleblower 

learned about or obtained the information that supports the claim including the 

whistleblower’s relationship to the subject(s); (4) the amount of any monetary 

rewards obtained by the subject violator(s) (if known) as a result of the securities 

law violation and how the amount was calculated; and (5) a certification that the 

application is true, correct, and complete to the best of the whistleblower’s 

knowledge. 

 

Recommendation 3: 

The Division of Enforcement should establish policies on when to follow-up with 

whistleblowers who submit applications to clarify information in the bounty 

applications and obtain readily available supporting documentation prior to 

making a decision as to whether a whistleblower’s complaint should be further 

investigated. 

Recommendation 4: 

The Division of Enforcement should develop specific criteria for recommending 

the award of bounties, including a provision that where a whistleblower relies 

partially upon public information, such reliance will not preclude the individual 

from receiving a bounty. 

Assessment of the SEC’s Bounty Program March 29, 2010 

Report No. 474 

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Assessment of the SEC’s Bounty Program March 29, 2010 

Report No. 474 

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Recommendation 5: 

The Division of Enforcement, in consultation with the Office of General Counsel, 

should examine ways in which the Commission can increase communications 

with whistleblowers by notifying them of the status of their bounty requests 

without releasing non-public or confidential information during the course of an 

investigation or examination. 

Recommendation 6: 

The Division of Enforcement should develop a plan to incorporate controls for 

tracking tips and complaints from whistleblowers seeking bounties into the 

development of its tip, complaints and referral processes and systems for other 

tips and complaints. These controls should provide for the collection of 

necessary information and require processes that will help ensure that bounty 

applications are reviewed by experienced Commission staff, decisions whether to 

pursue whistleblower information are timely made, and whistleblowers that 

provide significant information leading to a successful action for violation of the 

securities laws. 

Recommendation 7: 

The Division of Enforcement should require that a bounty file (hard copy or 

electronic) be created for each bounty application. The file should contain at a 

minimum the bounty application, any correspondence with the whistleblower, 

documentation of how the whistleblower’s information was utilized, and 

documentation regarding significant decisions made with regard to the 

whistleblower’s complaint. 

Recommendation 8: 

We recommend that the Division of Enforcement incorporate best practices from 

the Department of Justice and the Internal Revenue Service into the Securities 

and Exchange Commission bounty program with respect to bounty applications, 

analysis of whistleblower information, tracking of whistleblower complaints, 

recordkeeping practices, and continual assessment of the whistleblower 

program. 

Recommendation 9: 

We recommend that the Division of Enforcement set a timeframe to finalize new 

policies and procedures for the Securities and Exchange Commission bounty 

program that incorporate the best practices from Department of Justice and the 

Internal Revenue Service, as well as any legislative changes to the program. 
Appendix V 

Assessment of the SEC’s Bounty Program March 29, 2010 

Report No. 474 

Page 28 

Management Comments

MEMORANDUM

TO: H. David Kotz, Inspector General, Office ofInspector General

FROM: Robert Khuzami, Director, Division ofEnforcement ~q

RE: Enforcement's Response to the Office ofInspector General's Report, Assessment

of SEC Bounty Program, Report No. 474

DATE: March 24, 2010

This memorandum is in response to the Office ofInspector General's Draft Report No.

474, entitled Assessment ofSEC Bounty Program. Thank you for the opportunity to review and

respond to this report. We concur in the report's recommendations.

E~ly last year, Chairman Schapiro directed staffto begin working to establish a wo~ldclass whistleblower program. To tJIat end, we. conducted an extensive review ofwhistleblower

programs at other government&l agencies and the Financial Industry Regulatory Authority

(FINRA) to identifY best practices for administering a successful program at the SEC. Our effort

resulted in legislation currently under consideration by Congress that would cre~te a new, morecomprehensive whistleblower program related to.all securities violations.

As a result ofour review, and as noted in your report, Division leadership was aware,

prior to the audit, ofthe issues with the insider trading bounty program raised in your report. The

Division's·independent findings, and its plans for developing a new whistleblower program, are

consistent with those set.forth in the report.

In addition, it is not ·surprising that only a small percentage of insider trading cases have

. been initiated as a result oftip submitted through the insider trading bounty program. The vast

_majority ofinsider trading cases arise from routine surveillance performed by the SEC staff and

the Self-Regulatory Organizations (SROs), such as FINRA and the stock exchanges, and not·

from tips submitted by members ofthe public.. For eXample, ofthe 37'insider trading action

brought by. the Commission in FY 2009, 31 were the result ofsurveillance by the SROs or the

Division itsel£ We believe .the principal reason that the current bounty program ~as not yielded·

more rewards derives more from its relatively narrow s.cope and the confidential natun::ofinsider.

trading violations than from the procedural shortcomings .we rec~gnize exist. Notwithstan<Ji~g

the program's limitations, the Commission has' an excellent track record of paying eligi~le.

cIairnahts, as each award has been for the maximum amount allowed by the bounty sta,tute

The proposed whistleblower legislation was drafted principally to broaden the nature of.

wrongdoing for which whistleblowers could receiye a bounty. In our efforts to craft this new.'

program, 'however, great care was taken to address and avoid problems identified with the insider

. 'trading ~ounty pr.ogiam; incJu~ing our desi~e to establish a formal program with dedicated staff

and:'state-of-the-art policies and procedures. It,"the propose<i legislation is enacted, thenew
Assessment of the SEC’s Bounty Program March 29, 2010 

Report No. 474 

Page 29 

whistleblower program would not be an extension ofthe current insider trading bounty program.

Instead, it would subsume the existing program and. thereby, constitute an entirely new program

based on the structure and best practices of other successful whistleblower programs.

We also have taken other steps that we believe will address some ofthe

recommendations. As indicated in the Draft Strategic Plan for 201 0-20J 5, the Commission is

centralizing the proeess for receiving, reviewing, and acting upon tips, complaints and referrals

(TCRs) so they can be handled consistently and appropri~tely.including through examinations or

enforcement investigations. In connection with this effort, the Commission hired the MITRE

Corporation to assist in revamping our intake, triage and analysis ofTCRs, and has adopted a

new agency-wide policy for handling TCRs, embodied in Tips, Complaints, and Referrals Intake

Policy, SeCurities Exchange Commission Regulation 3-2, March 10,2010 (SECR 3-2). The

Division has adopted supplemental guidance to implement this policy. Division of Enforcement,

Interim Policies and Proceduresfor Handling Tips. Complaints and Referrals (TCRs) (March

24,2010).

The'Division's new Office of Market Intelligence (OMI) will consolidate the Division's

handling ofTCRs in accordance with SECR 3-2 and our supplemental guidance. The principal

functions ofOMI will include coordination, consolidation and management ofthe Division's

proceSses with respect to TCRs that come to the Division's attention from any internal or

external source. Tips received through the insider trading bounty program will be covered by the

Commission's new TCR policy, as will the tips and complaints covered by the proposed new

whistleblow<:<r legislation. We have considered DIG's report in light ofthese developments.

While we concur with the recommendations, it1s our hope that pending legislation before

the Congress, as noted above, will create a new program wholly replacing the current one. In

such a case, we believe it would be appropriate to address many ofthe recommendations below

through enactment ofpolicies and procedures involving the agency's new authority as opposed

to embarking upon modifications ofthe current insider trading bounty program, which we hope

will soon be superseded.

Recommendation 1 relates to communicating infonnation about the bounty program, both

externally and internally. We coneur and will develop a plan consistent with this

recomm.endation.

Recommendation 2 relates to the development of a fonn for requesting infonnation from

whistleblowers. We concur with this recommendation. In connection with the revamped TCR

system, the electronic fonn in which infonnation is collected will·be updated, and we expect to

have a fonn directed specifically to whistleblowers.

Recommendation 3 relates to policies for fo.llow-up with whistleblowers to obtain any

additional infonnation they may have. We concur with this recommendation. Tht;: Division will

be developing processes arid procedures for follow up with whistleblowers.

2
Assessment of the SEC’s Bounty Program March 29, 2010 

Report No. 474 

Page 30 

3

Recommendation 4 relates to the criteria for recommending the award of bounties. We concur

with this recommendation. The Division will develop criteria consistent with this

recommendation.

Recommendation 5 relates to the examination of ways to provide notice to whistleblowers as to

the status oftheir bounty requests. We COnCur with this recommendation. The Division will

work with the Office ofGeneral Counsel to address this recommendation.

Recommendation 6 relates to controls for tracking tips and complaints from whistleblowers.

We concur with this recommendation. The Commission's TCR project has already focused on

particular capabilities necessary to track whistleblower tips and complaints, and the system

currently in development will incorporate controls to ensure that tips are reviewed and track

whether timely decisions are made whether to pursue tips.

Recommendation 7 relates to maintenance of whistleblower complaint files. We concur with

this recommendation. The Division will adopt procedures for creation and retention of

information relevant to a whistleblower complaint.

Recommendation 8 relates to incorporation ofbes! practices from the Department ofJustice and

the Internal Revenue Service with respect to bounty app.lications. We concur with this

recommendation. As the report notes, the Division has already met with these agencies to

identify best practices. The Division will adopt best practices for the existing insider trading

bounty program or will incorporate such practices into any new program should the proposed

legislation be enacted.

Recommendation 9 relates to formulation of a" timeline for policies and procedures for the

existing bounty program. We concur with this recommendation. The Division will develop an

appropriate timeline.
Appendix VI 

Office of Inspector General 

Response to Management’s Comments 

We are pleased that Enforcement fully concurred with all nine of the report’s 

recommendations and are encouraged that the SEC has begun to take steps to 

correct the identified deficiencies. 

Enforcement noted in its response that it believes the principal reason that the 

current bounty program has not yielded more rewards derives more from its 

relatively narrow scope and the confidential nature of insider trading violations

than from procedural shortcomings that it recognizes exists. Enforcement further 

stated that the newly proposed whistleblower legislation was drafted principally to 

broaden the nature of wrongdoing for which whistleblowers could receive a 

bounty. 

As we discussed in our report, although we noted the limitations in scope, we 

also found that the minimal use of the SEC bounty program can be attributed to 

the fact that the program has not been widely publicized and that information on 

the SEC’s public website was misleading and may have deterred prospective 

whistleblowers from applying. We also found that more frequent communication 

with whistleblowers would encourage applications. 

We believe it is critical for the SEC to implement the report’s recommendations to 

ensure that it has a fully functioning and successful bounty program in place as 

its authority is potentially expanded. 

Assessment of the SEC’s Bounty Program March 29, 2010 

Report No. 474 

Page 31 
Audit Requests and Ideas

The Office of Inspector General welcomes your input. If you would like to 

request an audit in the future or have an audit idea, please contact us at: 

U.S. Securities and Exchange Commission 

Office of Inspector General 

Attn: Assistant Inspector General, Audits (Audit Requests/Ideas) 

100 F Street, N.E. 

Washington D.C. 20549-2736 

Tel. # 202-551-6061 Freedom of Information Act (FOIA) 

Fax # 202-772-9265 

Email: oig@sec.gov 

Hotline To report fraud, waste, abuse, and mismanagement at 

Commission, contact the Office of Inspector General at: 

Phone: 877.442.0854 

Web-Based Hotline Complaint Form: 

 www.reportlineweb.com/sec_oig