WASHINGTON/NEW YORK - An anonymous tipster who claims to have led the U.S. government to bring charges against alleged "flash crash" trader Navinder Singh Sarao could potentially reap millions of dollars under a federal whistleblower award program.
The U.S. Commodity Futures Trading Commission's (CFTC) whistleblower program, created after the 2010 Dodd-Frank Wall Street regulatory reform, awards tipsters between 10 percent and 30 percent of the total sanctions collected if the government collects $1 million or more.
In order to qualify for an award, the tip must prove to be pivotal in the government bringing the case.
The amount of the award, if one is given, would be based on the total amount of money actually collected, which could include payback of illegal proceeds, interest and penalties, as well as money collected from other potential defendants.
Sarao, of suburban London, made $40 million in profits with his trading, the CFTC said in a lawsuit against him that was disclosed on Tuesday along with criminal charges of fraud and market manipulation.
It's likely that authorities will pursue the full amount or more, said Jordan Thomas, a lawyer at Labaton Sucharow and a former assistant director at the U.S. Securities and Exchange Commission (SEC).
"Financial regulators like the CFTC and SEC regularly demand disgorgement of illegal profits along with interest and penalties," Thomas said. "In the flash crash case that was just filed, the whistleblower could be entitled to a minimum of $4 million to $12 million."
The amount sought by the government could be higher than $40 million. The CFTC's lawsuit seeks civil penalties up to triple Sarao's monetary gain, or $120 million, as well as the return of ill-gotten gains.
A corporate lawyer who asked not to be named to protect business relationships said that, on top of that, U.S. criminal authorities could seek twice the gross gains, or another $80 million.
However, it is unclear whether Sarao would have access to anything like that amount of money.
A British court heard on Wednesday that Sarao had 100,000 pounds in various betting accounts and another 5 million pounds ($7.5 million) in a personal trading account of which 4.7 million pounds was a loan.
A whistleblower's award is only based on the money collected not on the penalties and payback imposed.
"POWERFUL, ORIGINAL ANALYSIS"
U.S. prosecutors and the CFTC allege Sarao manipulated the futures market using an automated program to generate large sell orders that pushed down prices.
He then canceled those trades and bought the contracts at the lower prices to benefit when the market recovered, authorities said. Sarao, who appeared in a London court on Wednesday after being arrested in Britain, said he would oppose extradition to the United States.
Shayne Stevenson, an attorney for the anonymous whistleblower, said on Tuesday that his client provided "powerful, original analysis to the CFTC" which helped expose Sarao's allegedly illegal trading activity.
Stevenson, of Hagens Berman in Seattle, has worked with some high-profile whistleblowers in the past.
He represents Haim Bodek, who provided the SEC with a tip that he says led the agency to fine BATS Global Markets $14 million to settle charges that two exchanges formerly owned by Direct Edge Holdings gave advantages to certain high-frequency trading firms.
Bodek is still awaiting a decision from the SEC on a possible award.
The CFTC's program has taken longer to start paying out awards than a virtually identical program at the SEC, largely because the latter has broader jurisdiction over various financial market players.
Derivatives cases that rest with the CFTC tend to be complex, take more time to investigate and the agency typically brings fewer cases than the SEC.
Last year, the CFTC gave its first award, of $240,000. By contrast, the SEC has paid out more than $50 million to 16 whistleblowers since 2011, including a single record payout that exceeded $30 million in 2014.