The US Securities and Exchange Commission’s (SEC’s) whistleblower bounty program has paid nearly $300 million to activist short sellers and other “outsider” tipsters since its creation in 2010, according to a new report by Alexander Platt, an associate professor at the University of Kansas School of Law, reports Institutional Investor.
Platt said that more than a third of all the awards have gone to activist short sellers, or about 40% of the funds disbursed by the SEC. The largest known award went to Carson Block’s Muddy Waters, a $14 million bounty for bringing the fraud of Focus Media to light in 2011.
Platt further argues that it has become a “covert outsourcing program” for SEC enforcement that accounts for roughly 12% of the agency’s total enforcement budget. That money, he argued, should instead be going to beef up the SEC’s own enforcement.
In what appears to be a nod to the much-hyped investigation of short sellers by the SEC and the Department of Justice that has gone nowhere, he also claimed that the awards lend credibility to short sellers and may even “help insulate activist shorts from regulatory and legal attacks of various types going forward.”
For their part, short sellers have long claimed that their work is necessary precisely because the SEC isn’t often doing that work and would not be able to deter as many frauds without them.
It can take years for whistleblower awards to be given. For example, Block only received his award more than 10 years after his short of Focus Media. The only other known short activist award mentioned in the report was to Greenlight Capital’s David Einhorn, for his 2010 short of The St. Joe Company. Einhorn told investors in a 2020 investor letter that he had received the award that year, but he did not disclose the size.
“It is so rare for short sellers to receive a whistleblower award that the author has to go back more than a decade to highlight our success with St. Joe, which we received upon appeal after the SEC improperly denied us a rightful award,” a Greenlight spokesman said. “The much bigger problem is that the SEC has in recent years substantially abandoned its efforts to police corporate fraud based on the flawed philosophy that the shareholders who are the victim of the fraud would be punished should the SEC act.”
“It’s very hard to make money with these trades,” said one short seller mentioned in Platt’s report who requested anonymity. “It’s risky and it’s dangerous.” He said that short selling has become even riskier since the GameStop short squeeze of 2021. “Even assuming you do make money, you have a lot of constraints. One of them is the cost of borrowing the stock.” Other times, an expensive investigation may not turn up any evidence of wrongdoing, he noted.
“Only about 10 people make money at it,” he said. “How idiotic would it be that you would think of removing the biggest single source of whistleblowing?”