The Shortseller Enrichment Commission?: Whistleblowers, Activist Short Sellers, and the New Privatization of Public Enforcement

Two developments have transformed the detection of corporate fraud since the global financial crisis: the SEC whistleblower bounty program (WBP) and the rise of activist short sellers. Considered separately, these are generally understood to be two valuable innovations that help detect and deter fraud.

But, it turns out, they are not so separate.

In a new paper, I document extensive activist short involvement in the WBP, show why this involvement may undermine deterrence, and offer reforms.

Drawing on data obtained under the Freedom of Information Act, I find that activist shorts and other outsiders account for about 40% of awards issued by the WBP in the most recent years. In addition to supplying their own tips directly to the SEC, activist shorts also frequently recruit insider tipsters to participate – in some cases offering up trading profits in exchange for cooperation. These well-financed outsider tipsters often go far beyond providing factual evidence, and also provide the SEC with legal analysis, expert reports, witness lists, and draft pleadings.

Source: The Shortseller Enrichment Commission?: Whistleblowers, Activist Short Sellers, and the New Privatization of Public Enforcement