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ABSTRACT-The SEC's new whistleblower bounty program has provoked significant controversy. That controversy has centered on the failure of the implementing rules to make internal reporting through corporate compliance departments a prerequisite to recovery. This Article approaches the new program with a broader lens, examining its impact on the longstanding debate over fraud-on-the-market (FOTM) class actions. The Article demonstrates how the bounty program, if successful, will replicate the fraud deterrence benefits of FOTM class actions while simultaneously increasing the costs of such suits-rendering them a pointless yet expensive redundancy. If instead the SEC proves incapable of effectively administering the bounty program, the Article shows how amending it to include a qui tam provision for Rule 10b-5 violations would offer several advantages over retaining FOTM class actions. Either way, the bounty program has important and previously unrecognized implications that policymakers should not ignore.Introduction"Fraud-on-the-market" (FOTM) securities class actions have been under sustained attack.1 Congress dealt them a major blow by enacting the Private Securities Litigation Reform Act of 1995 (PSLRA),2 and the courts have been whittling away at them for decades.3 Last year, four Supreme Court Justices went so far as to suggest it is time to reconsider Basic v. Levinson, the case that gave FOTM class actions life,4 and the Court has since granted certiorari in a case that presents it with such an opportunity.5 Scholars, for their part, have grown increasingly critical of FOTM class actions.6 None seriously defend them as a compensatory tool, and many question their deterrence benefits. But professors are cautious types, and academic proposals to eliminate the FOTM class action have tended to be conditional on concurrent changes to the U.S. securities fraud enforcement regime-changes that would compensate for any loss in deterrence that might result from their elimination.This Article demonstrates that the new Whistleblower Bounty Program (WBP) created by the Dodd-Frank Wall Street Reform and Consumer Protection Act is the proverbial nail in the FOTM class action coffin.7 The WBP mandates that the Securities and Exchange Commission (SEC) pay significant financial rewards to eligible individuals who voluntarily provide the agency with original information about securities law violations if that information leads to an enforcement action resulting in $1 million or more in sanctions. The program has prompted a firestorm of controversy, but the discussion thus far has been insular-one focused on the efficacy of the WBP as a stand-alone program. Little attention has been paid to the program's impact on the desirability of FOTM class actions. But if it works as intended, the WBP promises to supplant the deterrence benefits of FOTM class actions, while simultaneously increasing their costs. Even if the SEC fails to effectively administer the WBP as currently designed, the program has important implications for the FOTM class action debate: coupling the elimination of FOTM class actions with the addition of a qui tam provision to the WBP would be a significant improvement over the status quo.Understanding the relationship between the WBP and FOTM class actions requires a sophisticated appreciation of the social welfare function FOTM class actions actually play. Part I provides this needed background, explaining why traditional rationales for corporate liability fail to justify the large transfer payments FOTM suits effect between diversified shareholders-the primary victims of fraud-on-the-market. It demonstrates that if FOTM suits aid in deterrence, it is by virtue of the information they produce about firm governance, not the circular remedies they impose. To the extent they expose frauds, FOTM suits help to trigger severe market- based punishment of not only the officers responsible for the fraud (who will also face a heightened probability of government sanction as a result of the suit), but their overseers as well. … |