An SEC whistleblower program aimed at helping the regulator detect fraud at public companies has attracted some high-profile tipsters among the short-selling community, including star names such as Carson Block and Nate Anderson.

The program, established in 2011, pays whistleblowers around 10% of the fines collected from the successful prosecution of a company found guilty of fraud.

Payments to whistleblowers are made out of an investor protection fund, established by Congress. It’s financed entirely through monetary sanctions paid to the SEC by securities law violators. No money has been taken or withheld from harmed investors to pay whistleblower awards.”

So what’s in it for short sellers?

Large short positions, usually adopted by institutions such as hedge funds, only follow extensive research into a company’s activities. If there is any hint of wrongdoing, such as fraudulent accounting or misrepresenting the effectiveness of products or services, hedge fund research is likely to spot it.

“Many of the really good external fraud detectives are short sellers,” Block said in an interview with Bloomberg. “If you want the whistleblower program to be open to external whistleblowers, you have to be open to short sellers and can't discriminate against them.”

Whistleblower filings to the SEC are confidential. That is, unless, the tipster wants to go public with their claims.

SEC data showed that in 2021, four in 10 of the payments paid following successful prosecutions went to non-insiders.

“Whistleblowers continue to play an essential role in assisting the agency in detecting misconduct and bringing securities law violators to justice,” said Creola Kelly, Chief of the SEC's Office of the Whistleblower, following a payment of $18M to a single tipster whose information and assistance led to a successful SEC enforcement action.

The SEC’s whistleblower has become a victim of its own success, however, having been deluged with tips in recent years. Bloomberg reports that it received 18,000 formal tips in the 2023 fiscal year, double the total seen in the past 10 years.

Short sellers remain on the SEC’s radar

Hedge fund research revealing corporate wrongdoing may be helping the regulator sort through this flood of tip-offs. But short sellers themselves remain a target of SEC scrutiny.