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  • Writer's pictureKirk Hartley

SEC’s WhistleBlower Office is Now Open for Business Seeking Tips on Securities Law Violations

The SEC’s new online whistleblower office is open for tips on securities law violations. Good – let’s hope they ferret out more fraudsters before we get another Bernie Madoff, and the many others who’ve been missed.

DealBook’s entry on the subject describes fervent opposition from the US Chamber of Commerce. The Chamber tie its opposition to the supposed evils of fees being earned by lawyers who represent plaintiffs in lawsuits. The Chamber’s argument cannot be squared with the reality that lawyers representing plaintiffs include legions of lawyers who represent corporations against insurance companies, myriad legions more insurance company lawyers who bring lawsuits and cross-claims pursuant to subrogation rights, and, for example, AIG (here), Allstate (here), states (here) and others filing fraud lawsuits against financial houses in the US. There’s also the burgeoning collection of lawsuits against indisputable frauds in securities offerings related to Chinese entities.

The plaintiff’s bar also includes an increasing number of inside lawyers working for corporate America. The trend to "revenue-enhancing litigation" has been obvious for quite some time, and is described in this May 13, 2011 WSJ article . Some key quotes are below but the entire article merits a read:

Companies are warming to a new way of generating revenue: suing for it.

Ford Motor Co., Tyco International Ltd. and Michelin SCA, among others, say their lawyers are devoting more time and effort to bringing in extra cash by thinking like plaintiffs.

Following in the footsteps of several big drug and technology companies, which have aggressively pursued alleged patent infringers, companies in a range of industries have stepped up legal action, not only in the patent arena but also against suppliers, insurers and even utilities they think have done them wrong or owe them money.

The sums they win from these "plaintiff recovery" lawsuits usually aren’t big enough to be singled out in earnings statements. Nor do individual cases typically have a material impact on the bottom line. But, taken together, they can produce hundreds of millions of dollars in added revenue for a company in a single year, potentially turning its legal department into a profit maker.

"It adds up to real money over time," says Tom Sager, general counsel at chemical makerDuPont Co. In one case, DuPont won roughly $92 million in a settlement with its insurers, which it had sued in Texas seeking reimbursement of asbestos claims against the company."

Lawsuits are a fact of modern life, which is why we have a litigation industry. One could argue the Chamber would be more credible if it acknowledged the realities of the litigation industry, and welcomed the use of the free enterprise model. To do so, it could say something accurate, such as:

"Our members are collectively hurt when corporate fraud diminishes trust and confidence in our nation’s corporations. So long as the SEC exercises care in screening tips and decision-making, we applaud and welcome the new whistleblower office."

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