On March 2, 2015, the SEC announced an expected award of $475,000 to $575,000 to a former company officer “who reported original, high-quality information about a securities fraud that resulted in an SEC enforcement action with sanctions exceeding $1 million.” The officer reported information to the SEC more than 120 days after other responsible compliance personnel at the company in possession of the information purportedly failed to adequately address the issue. This is the first of its kind under the SEC’s whistleblower program, and the first award announced this year.
The SEC’s Order explained that, although officers who learn of fraud through other employees or the company’s internal compliance processes are generally not eligible for whistleblower awards under the Dodd-Frank bounty program because such information is not derived from the officer’s “independent knowledge or independent analysis,” the officer here could receive an award due to the exception for officers who report to the SEC more than 120 days after other responsible individuals at the company were in possession of the information and failed to take appropriate actions to address the issue. In this regard, the SEC explained that the former officer
“reported the information to other responsible persons at the entity . . . or such persons knew about it, at least 120 days before [the former officer] reported the information to the Commission.”
The Director of the SEC’s Division of Enforcement indicated that the SEC values tips of this nature, stating:
“[c]orporate officers have front-row seats overseeing the activities of their companies, and this particular officer should be commended for stepping up to report a securities law violation when it became apparent that the company’s internal compliance system was not functioning well enough to address it.”
Sean McKessy, Chief of the SEC’s Office of the Whistleblower, similarly expressed the SEC’s desire to continue to obtain such information from high-level officers, stating:
“[r]eceiving information and cooperation from company insiders is particularly useful in the early detection of securities fraud, and we will continue to leverage whistleblower information to help combat securities law violations and better protect investors and the marketplace.”
Mr. McKessy also stressed that “companies must have rigorous internal compliance programs that adequately address and remedy potential violations voiced by their employees as well as by their officers, directors, or other individuals.”
This most recent award highlights the importance of effective internal compliance procedures that providing for robust training for all levels of employees; an appropriate tone at the top and in the middle with respect to ethics and compliance; rigorous audit protocols and processes; triage and escalation processes; and structures to ensure that the audit committee, chief compliance officer, and compliance committees are fully informed and appropriately empowered.