Why it matters: On September 14, 2016, SEC Director of Enforcement Andrew Ceresney gave what in effect amounted to a “state of the union” speech about the SEC’s whistleblower program. In it he gave an overview of the program and touted its successes to date, saying that “I am proud of the program’s accomplishments during its brief existence and anticipate that the whistleblower program will continue to be a game changer in future years.” We cover Ceresney’s remarks, and the current state of the SEC’s whistleblower program, here.
Detailed discussion: In a speech before the Sixteenth Annual Taxpayers Against Fraud Conference in Washington, D.C., on September 14, 2016, SEC Director of Enforcement Andrew Ceresney touted the accomplishments of the SEC’s whistleblower program. The speech was entitled “The SEC’s Whistleblower Program: The Successful Early Years,” and we’ve recapped some of the highlights here, updated with statistics for fiscal year 2016 that were released by the SEC on October 11, 2016 (FY 2016 report):
- Ceresney said that “[t]he success of the program can be seen, in part, in the over $107 million we have paid to 33 whistleblowers for their valuable assistance, in cases with more than $500 million ordered in sanctions.” Indeed, on August 30, 2016, the SEC announced that it had awarded approximately $22 million—its second largest award—to a whistleblower under its program, and later that day it issued a press release that the earlier-announced award had served to tip (no pun intended) total payouts under the program over the $100 million threshold. On this point Ceresney predicted that, at the rate the program was performing, “it will take us significantly less time to announce that we have passed the $200 million milestone than it did to pass the $100 million mark.” In the FY 2016 Report, the SEC said that the program awarded over $57 million to 13 whistleblowers in fiscal year 2016 alone, which “is more than in all previous years combined.”
- Ceresney pointed out that many of the SEC’s investigations are instigated by a whistleblower’s tip, and highlighted a few of the “significant actions” the SEC has taken to “ensure that employees feel secure in reporting wrongdoing.” Here, Ceresney referenced, among other things, the SEC’s recent actions against companies for violations of Exchange Act Rule 21F-17, which prohibits the use of severance, confidentiality or other types of employment agreements that impede a whistleblower—via the imposition of financial punishments or other “chilling” provisions—from communicating with the SEC.
- Ceresney said that “as imitation is the sincerest form of flattery, other domestic and foreign regulators have sought to replicate the successes of our program.” As one illustration of this, on August 30, 2016, the Commodity Futures Trading Commission posted proposed amendments to its whistleblower program in the Federal Register that would bring it more in line with the SEC’s program, including the creation of a dedicated Office of the Whistleblower and specialized staff to handle tips and claims review.
- Ceresney highlighted the following types of cases where the Whistleblower Office has found “whistleblower assistance [to be] particularly invaluable”: (1) issuer reporting and disclosure cases—Ceresney said tips relating to these cases are the most common and accounted for 18% of all tips received in fiscal year 2015; (2) offering frauds and Ponzi schemes—Ceresney said that tips relating to these cases are also common and accounted for 16% of all tips received in fiscal year 2015; and (3) Foreign Corrupt Practices Act (FCPA) cases—Ceresney said that tips related to FCPA violations increased 62% from 115 in fiscal year 2012 to 186 in fiscal year 2015, and Ceresney is hopeful this upward trend will continue given the difficulties of overseas investigations. He said that the SEC has to date made eight awards to whistleblowers living in foreign countries: “In fact, our largest whistleblower award to date — $30 million — went to a foreign whistleblower who provided us with key original information about an ongoing fraud that would have been very difficult to detect.” Again, the FY 2016 Report did not update these specific statistics for fiscal year 2016.
- Ceresney addressed the question of who qualifies as a “Dodd-Frank whistleblower,” pointing out that through fiscal year 2015 “almost half of the award recipients were current or former employees of the companies for which they reported wrongdoing.” Particularly helpful were tips from corporate “insiders” such as personnel from the compliance and internal audit divisions. Ceresney did not address the issue of the language in Section 922 of the Dodd-Frank Act and SEC Rule 21F-2 that defines a “whistleblower” as someone who gives information to the SEC, but the issue of whether someone can qualify as a whistleblower if they just report misconduct internally without going to the SEC has been litigated and the circuits are split. We covered the issue in our October 2015 newsletter under “Do You Have to Whistle to the SEC to Get Protection Under Dodd-Frank? The Second Circuit Says No, Splits With Fifth Circuit.” The most recent case on this issue is Lamb v. Rockwell Automation Inc., where on August 12, 2016, a Wisconsin district court followed the Fifth Circuit and held that a whistleblower must specifically give information to the SEC in order to qualify for Dodd-Frank protection. In so ruling, the court adopted the Fifth Circuit’s holding in the 2013 case of Asadi v. F.E. Energy (USA), LLC and rejected the Second Circuit’s contrary holding in 2015 in Berman v. Neo@Ogilvy LLC as well as the SEC’s own regulatory guidance on the matter.
Ceresney’s speech gave us helpful insight into the SEC’s whistleblower program from the SEC’s perspective and portrays a system where the SEC and the whistleblowers work together to stanch corporate misconduct. We therefore found the following news item to be intriguing, as it gave us a rare view of the program from the standpoint of an unsatisfied whistleblower who was actually granted a significant monetary award and turned it down. On August 18, 2016, Reuters reported that Deutsche Bank whistleblower Eric Ben-Artzi wrote an opinion article in the Financial Times in which he said that he turned down his 50% share—$8.25 million—of the total $16.5 million awarded by the SEC under its whistleblower program because of the SEC’s “failure to punish Deutsche Bank executives.” The SEC had made the award in connection with its May 2015 settlement with Deutsche Bank, pursuant to which the bank agreed to pay $55 million for filing misstated financial reports during the financial crisis that “failed to take into account a material risk for potential losses estimated to be in the billions of dollars.” Whistleblower Ben-Artzi said in his opinion article that the “true perpetrators of the fraud,” the Deutsche Bank executives, went unpunished because of a “revolving door” situation in which top SEC lawyers who had held senior posts at Deutsche moved “in and out of top positions at the regulator even as the investigation into malfeasance at Deutsche were [sic] ongoing.” Ben-Artzi wrote that he wanted his $8.25 million share of the award to be given to “Deutsche Bank and its stakeholders” and that the award money should be “clawed back” from bonuses paid to Deutsche executives. The other whistleblower presumably accepted his share of the award.