The SEC announced that a compliance professional has been awarded $1.4 million to $1.6 million for reporting misconduct inside his firm to the SEC. The SEC recently noted that it has paid $50 million to 17 whistleblowers, out of fines collected by the SEC. The previous award to a compliance officer whistleblower was $300,000. In both instances, the compliance officer made a report to management, concluded that no appropriate action was taken, and then took the matter up with the SEC.
The SEC’s whistleblower program rewards high-quality, original information that results in an SEC enforcement action with sanctions exceeding $1 million. In addition, the SEC has vigorously responded in connection with a retaliation case – awarding $600,00 to a whistleblower victim of employer retaliation. The whistleblower award stemmed from a June 2014 enforcement action with $2.2 million in fines.
In the matter of Paradigm Capital Management, the SEC found that a hedge fund portfolio manager caused a hedge fund to trade with a broker-dealer (acting as principal) that was under common control with the hedge fund by virtue of the fact that the portfolio manager was a control person of both the fund and the broker-dealer absent the requisite client disclosure and consent mandated by Section 206(3) of the Investment Advisers Act. The SEC also found the adviser’s Form ADV to be misleading, for failure to disclose the improper principal transactions. (The Paradigm case is interesting not only as a whistleblower case, but as an example of the difficulty of obtaining consent from an un-conflicted person, in the context of a hedge fund with an general partner under common control with the broker-dealer on the other side of the principal trade.) The then head trader of the adviser who placed the inappropriate trades on the portfolio manager’s instructions reported the adviser’s misconduct to the SEC and then informed his employer of his whistleblowing, setting in motion a series of retaliatory actions by the employer. The SEC found that the employer’s retaliation violated Section 21(F) of the Exchange Act, which prohibits any form of discrimination against a whistleblower, as well as Advisers Act Sections 206(3)(principal trades without valid client consent) and 207 (misleading Form ADV disclosure).
By way of reminder, the SEC operates an Office of the Whistleblower. Under the SEC’s whistleblower policies, compliance and internal audit professionals are seen to be on the front lines of addressing compliance matters, but can and (evidently) do become whistleblowers if management’s response proves inadequate. Equally, officers and directors of firms that have engaged in misconduct are generally not considered eligible for whistleblower awards. However, if a corporate officer (such as the head trader) or director reports information to the SEC 120 days after other responsible officers (particularly compliance officers) fail to take appropriate action, then the SEC is prepared to reward officer/director whistleblowers. Whistleblower awards can range from 10 percent to 30 percent of the money collected in a case. By law, the SEC must protect the confidentiality of whistleblowers and cannot disclose any information that might directly or indirectly reveal a whistleblower’s identity.