John McPherson was almost certain he’d get rich from the Securities and Exchange Commission’s whistleblower program. Instead, he ended up bankrupt

Whistleblower Thought He Would Get a Big Payout. Instead He Got Nothing and Went Broke

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2021-06-28 04:00:14

John McPherson was almost certain he’d get rich from the Securities and Exchange Commission’s whistleblower program. Instead, he ended up bankrupt and embittered.

Despite what the SEC called his “extraordinary and continuing” assistance in helping the agency shut down an alleged $1.4 billion investment scam, Mr. McPherson was notified last year that his whistleblower award would likely be close to zero.

The reason? The target company, Life Partners Holdings Inc., had declared bankruptcy, and the SEC never collected financial penalties it was owed. Investors, however, were able to recoup more than $1 billion through the bankruptcy process.

Mr. McPherson’s experience illustrates a little-known facet of the SEC’s whistleblower program: The regulator won’t pay awards for financial recoveries in bankruptcy proceedings, even if the affected company entered bankruptcy as a result of the agency’s enforcement actions.

Some critics say that discourages people from reporting the most egregious frauds—Ponzi schemes and companies with major accounting chicanery—which often collapse or end up in bankruptcy court.