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News April 30, 2012 Issue

SEC Gaffe Reveals Anonymous Whistleblower’s ID

It didn’t take the SEC long to send a chilling message to whistleblowers everywhere – your anonymity will be protected with the greatest care, unless we forget, or change our mind, or it isn’t convenient any more.

Whistleblowers have the option of remaining anonymous under the program established by the Dodd-Frank Act that went into effect last August. This is helpful when a whistleblower fears reprisal either from his or her own firm or from the industry generally, especially when the time comes to find a new job.

Last week, in what the Wall Street Journal described as a "sensitive breach," it was revealed that an SEC investigator had exposed the identity of the anonymous whistleblower in the SEC’s investigation of dark pool Pipeline Trading Systems.

While questioning a Pipeline executive about certain trades, the SEC investigator showed the executive a notebook with handwritten information about trades, calls and meetings. The executive recognized the handwriting.

In response to the incident, the SEC said there is always the risk that a whistleblower’s identity may be revealed during an investigation. On its whistleblower web site, the SEC discloses that "as part of our ongoing investigatory responsibilities, we may use information you have provided during the course of our investigation."

In a statement, the SEC said it tries to avoid "unnecessary" disclosures, and it does not reveal which witnesses may be cooperating with the government except as required by law or the governing rules of civil procedure. The SEC said "[o]ur review of the facts confirms that we followed this practice in this case."

Tell that to Peter Earle, who was outed by the SEC’s actions after he went to the regulator confidentially with evidence of Pipeline’s undisclosed trading arrangements. Since the breach, Earle subsequently permitted the press to identify him.

Pipeline, now named Aritas Securities, is a dark pool that established a wholly owned affiliate to help fill customer orders, although it told customers it was a crossing network where orders were being matched with the orders of other customers. The Pipeline affiliate, which employed Earle as a trader, initially provided 97.5 percent of Pipeline’s liquidity when the platform was launched in 2004. As late as 2009, the affiliate was still providing 80 percent of Pipeline’s liquidity.

Earle claims that since he was identified, he has been the subject of retribution at all levels within Pipeline – the foreseeable problem that anonymity was designed to help mitigate. He ultimately was fired in 2009 for "poor performance" and allegations that he was having an affair with a colleague’s wife. Denying both allegations, he called Pipeline’s charge of poor performance "ridiculous."

Whether Earle is an unsung hero or a guy you wouldn’t want to work with, he arguably provided valuable information to the SEC that contributed to Pipeline’s settlement of the matter for $1 million, and fines for two Pipeline executives of $100,000 each.

Because the fines exceed the whistleblower award program’s minimum $1 million in sanctions eligibility threshold, Earle is eligible to claim a whistleblower award.

The SEC does not disclose whether applications for an award have been made, but does publish an annual report that discloses the number of eligible actions and whether any bounties have been awarded. The program was too young in the SEC’s 2011 fiscal year for any awards to have been made. 170 eligible sanctions resulting from enforcement judgments and orders issued from July 21, 2010 through July 31, 2011, were posted on the SEC’s web site on August 12, 2011, the effective date of the Whistleblower Program rules. Applicants had 90 days from notification of eligibility to submit for an award, a time period that extended beyond the September 30, 2011 end of the SEC’s fiscal year.

An award would be nice, but what to do about retaliation?

Apparently, whistleblowers could use the money. They need it to combat the retaliation. The SEC says it can – not that it will – bring an enforcement action against employers who retaliate against their whistleblowing employees. Barring that however, the SEC acknowledges that a whistleblower’s only other recourse may be taking his or her own chances by bringing a private lawsuit in federal court.