Uncle Sam cleverly goes long on short sellers

NEW YORK, Nov 15 (Reuters Breakingviews) – The $279 million award paid to an informant by the U.S. Securities and Exchange Commission earlier this year is a global oddity, and not just because of its size. The United States is a rare place where financial regulators hand out cash for information that leads to successful enforcement. Moreover, the rewards are not just for corporate insiders, but also short sellers. It makes for a helpful kind of outsourcing for overstretched agencies.
Carson Block and Kyle Bass, who bet against companies through their respective Muddy Waters and Hayman Capital investment shops, are among those who have supplied useful tips to the SEC, according to Bloomberg. The watchdog, along with the Commodity Futures Trading Commission, shares a portion of fines collected with anyone who steers them in the right direction. The number of hints has ballooned, as have the prizes. In 2019, the SEC doled out $60 million, a sum it has already exceeded nearly five-fold this year.
Most countries don’t encourage whistleblowers or bounty hunters this way. After giving the idea consideration in 2014, British financial authorities decided it wasn’t their cup of tea. The European Union has laid out a process to protect informants, but not to remunerate them. There are benefits to doing so, however. Researchers at Harvard University, for example, found such payouts helped expose misconduct and compensated employees who lost income.
What’s even quirkier is that U.S. rules enacted following the 2008 financial crisis allow payment not just for genuinely non-public information, but also for independent analysis, which can include conclusions reached by short sellers using what’s often hidden in plain sight. They aren’t the same, though. Workers take big risks by turning on their employers. Skeptical investors – notwithstanding their sleuthing skills – generally trade on information regulators could in theory find themselves.
Nonetheless, this use of market forces makes sense. For one thing, the SEC really is punishing more bad behavior. The amount returned to harmed investors has tripled to $1.5 billion since 2019. It’s also beneficial for the growing group of Americans worried about excessive government spending. After all, rewards are paid entirely out of the financial penalties to which a tipster personally contributed, a classic Wall Street eat-what-you-kill incentive. Short sellers aren’t always welcome, but some are undeniably being put to good use.
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(The author is a Reuters Breakingviews columnist. The opinions expressed are their own.)
CONTEXT NEWS
Short sellers are sharing their findings with the U.S. Securities and Exchange Commission, making them eligible for awards given to whistleblowers whose tips lead to successful enforcement, Bloomberg reported on Nov. 15.
The SEC, like some other U.S. financial regulators, can award up to 30% of a given fine to providers of information, including those who supply analysis as well as insiders offering non-public information. The agency explained in 2020 that this could include using “publicly available information in non-obvious ways that reveal patterns indicating possible violations that would not be otherwise inferable from the public information.”
In May, a single award of $279 million went to a whistleblower, the SEC’s biggest on record.
Editing by Jeffrey Goldfarb and Sharon Lam
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