SEC pays $1 million to woman who ratted on her ex
By Zach Goldfarb
With powerful senators watching with a close eye, federal investigators search and search for evidence of insider trading in shares of Microsoft. One of Wall Street's best-known hedge fund managers is targeted, but the feds can't find proof. Years pass, and they close the case.
Then a nasty, and apparently unrelated,divorce battle ensues in Connecticut. A woman discovers evidence potentially implicating her husband and the hedge fund in an insider trading scandal. Investigators believe they've found a smoking gun; they shut down the fund and assess tens of millions of penalties. And then they pay $1 million to the woman for ratting on her ex.
It sounds like a movie script, but in fact it's the real-life story behind a recent Securities and Exchange case and could hint at the course of future cases as the agency capitalizes on brand-new powers to give out financial awards to a wide range of whistleblowers.
On Friday, the SEC said it would pay $1 million to Karen and Glen Kaiser of Southbury, Conn., who provided information and documents that helped the SEC finalize its case against Arthur J. Samberg, founder of the hedge fund Pequot Capital Management, and David E. Zilkha, a former Microsoft employee. Karen Kaiser was once married to Zilkha.
This whistleblower award is the largest amount ever by the SEC and is being paid out under an old authority to reward whistleblowers in insider-trading cases. But the $1 million amount underscores how the SEC is planning to use an expanded power to reward people who come forward with information that can help stop securities fraud.
The new financial regulatory law signed by President Obama last week grants allows the SEC to pay up to 30 percent of any monetary sanction to a whistleblower -- even if the whistleblower took part in misconduct. While the old law limited payments to insider trading cases, now the money can be doled out for information related to any securities law violation.
The SEC's whistleblower system has been considered ineffective. Only five people had received whistleblower payments before the Kaisers. The biggest payment was $55,220, while the lowest was $3,500.
Harry Markopolos, the whistleblower who tried to persuade the SEC that Bernard Madoff was running a Ponzo scheme, blasted the agency's program last year. "If my experience is any guide, the treatment accorded whistleblowers ranges from dismissive to outright unwelcome," he told a congressional committee.
The agency's internal watchdog has been equally critical. "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," inspector general H. David Kotz wrote in a report earlier this year.
Even before passage of the new law, SEC officials said they were working to improve the agency's whistleblower procedures, building a database to consolidate whistleblower complaints and creating a new whistleblower office.
In the recent case, the SEC charged that Pequot, Samberg and Zilkha engaged in insider trading in shares of Microsoft. The case alleged that, in 2001, Samberg reached out to Zilkha for information on whether the software company would meet its earnings estimate. Zilkha, then working for Microsoft, checked by e-mail with fellow employees to find out whether Microsoft would meet or beat its earnings estimate for the quarter.
Zilkha then gave Samberg this information, the SEC said, and Samberg traded, earning Pequot more than $14 million.
Pequot and Samberg agreed to settle the charge for $28 million, including a $10 million penalty, the basis for the whistleblower payment. The case against Zilkha continues in administrative court. Pequot and Samberg didn't admit or deny the wrongdoing.
Originally posted on Market Cop.
Ariana Eunjung Cha
July 26, 2010; 5:35 PM ET
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