An article by Scott Patterson and Jenny Strasburg in the Wall Street Journal today revealed that, during an investigation of Pipeline Trading Systems LLC, an SEC attorney showed a witness a notebook which included handwritten notes from a whistleblower, and the witness recognized the handwriting and was able to tell his employers who the whistleblower was. The Whistleblower agreed to speak to the Journal and be identified, and detailed how he was treated both before and after he blew the whistle on Pipeline’s activities.  UPDATE: As discussed below, the SEC denies inadvertently disclosing the whistleblower’s identity.  

According to papers filed in a settled Administrative Proceeding filed in October 2011, Pipeline operated an alternative trading system ("ATS"), a private stock-trading platform commonly referred to as a "dark pool." Pipeline represented that its trading system anonymously matched customers’ interests in trading large amounts of stock. What Pipeline did not disclose to its customers was "that the overwhelming majority of the shares traded on its ATS were bought or sold by a wholly owned subsidiary of Pipeline." In settling the matter, Pipeline did not admit or deny the SEC’s findings, but agreed to pay a $1 million penalty. The company’s founder and chief executive officer, Fred Federspiel, and its chairman and former CEO, Alfred Berkeley, also settled (without admitting or denying the claims) by paying $100,000 each.

In May 2011, the SEC adopted final rules to implement Section 922 of the Dodd-Frank Act regarding securities whistleblower incentives and protection. One of the significant highlights of the final rules is that the Commission has sought to struck a compromise between the importance of the corporation’s compliance programs on the one hand, and the incentive for the whistleblower to report anonymously and directly to the SEC (and by-pass the corporation) on the other hand. One school of thought was that if employee whistleblowers simply presented information to the Commission, without reporting to the corporation, it would have an impact on compliance programs by depriving companies of one of the key sources of information necessary to identify and resolve potential issues. On the other hand, allowing whistleblowers to go directly to the SEC, as Commissioner Elisse Walter explained would encourage those sources "who fear for their jobs, their livelihood and their families’ welfare."

According to the Journal, the SEC’s practice "has been to avoid unnecessarily revealing an informant’s identity. The agency asserted that it followed its policy, but "officials said there is always a risk a whistleblower’s identity might be disclosed during an investigation." The Commission acknowledged that the notebook with the handwriting was shown to a witness during the investigation. That witness, the head of Pipeline’s trading affiliate, Milstream Strategy Group, said that he recognized the handwriting and discussed the matter with others at Pipeline, identifying the whistleblower.

The Journal article identified that whistleblower as Peter Earle, a former employee, (who sat near Gordon Henderson, the head of Milstream who was shown the notebook and able to identify his handwriting). He agreed to be publicly identified and told the Journal he was "disappointed" that his identity was revealed. According to the Journal, Mr. Earle "raised concerns internally about Milstream’s trading activities" and "made other internal complaints about trading." He was fired in April, 2009, for allegedly poor performance (which Mr. Earle called "ridiculous"). He then contacted the SEC shortly after his dismissal. Mr. Earle said "Pipeline’s efforts at all junctures have been to malign me. That’s one of the reasons I went to the SEC in the first place." Mr. Earle further told the Journal that current and former Pipeline employees remain angry at him

UPDATE: On April 25, 2012, the Journal published a letter from George S. Canellos, the Director of the SEC’s New York regional office in which he stated that the SEC did not expose Mr. Earle as a whistleblower and stated that the agency’s use of notebooks with his handwriting was not "inadvertent" and not a "gaffe.