With the passage of the Dodd-Frank Act (AKA the Financial Reform Bill), the SEC now has more power to reward whistleblowers who report securities law violations with substantial payments. The first of these rewards came on July 23rd when Karen and Glen Kaiser of Connecticut received $1 million for their assistance in proving insider trading allegations against Pequot Capital Management, one of its employees, and a former Microsoft employee.
The Kaisers information helped make the case that Arthur J. Samberg, a former employee of the now defunct hedge fund advisor, solicited former Microsoft employee David E. Zilkha for information regarding whether Microsoft would meet its earnings estimate. Zilkha allegedly obtained this information from Microsoft employees and reported back to Samberg. Samberg then used this information to earn Pequot $14 million. With the help of the Kaisers, Pequot and Samberg settled for $28 million and the case against Zilkha is still pending.
This case illustrates the valuable role whistleblowers can provide in catching violators of securities fraud, and may highlight a new era of enforcement now that the Financial Reform Bill is law. When the government started investigating this case in 2005, it did not have enough evidence to file any charges. However, after Karen Kaiser divorced Mr. Zilkha, she found a hard drive which contained incriminating evidence that she then turned over to the SEC. With this new information, the SEC was able to collect $28 million it otherwise would not have been able to recover.