Why it matters: A year ago, we surveyed some of the government whistleblower programs that were put in place to reward individuals who report corporate wrongdoing with big payouts. Flash forward twelve months, and whistleblower programs continue to be an effective tool in the government's arsenal to combat corporate malfeasance. Here, we focus on recent announcements by the SEC and the CFTC about payouts under their respective whistleblower programs, including the CFTC's announcement about a $10 million payout under its whistleblower program, only the third such award—and by far the largest—since the program's inception in 2011. In addition, we briefly touch upon recent legislation relating to financial crimes and trade secret theft, respectively, which contains enhanced protections for whistleblowers and underscores the importance Congress is placing on incentivizing individuals with knowledge of corporate wrongdoing to come forward.
Detailed discussion: In our May 2015 newsletter, we surveyed the substantially similar whistleblower programs being implemented by the SEC and the CFTC that were created by the 2010 Dodd-Frank reforms and launched in 2011, pursuant to which the government will pay monetary awards—ranging from 10% to 30%—to individuals (whose identities remain confidential) that provide "original" information about corporate wrongdoing that leads to a successful enforcement action with sanctions exceeding $1 million. Recent announcements by the SEC and CFTC illustrate that their whistleblower programs continue to be powerful tools in the government's arsenal to fight financial crimes. In addition, whistleblower protections in newly proposed legislation illustrate the importance legislators are placing on programs to incentivize individuals with evidence of corporate wrongdoing to come forward.
SEC whistleblower program: On March 8, 2016, the SEC announced that it had awarded almost $2 million to three whistleblowers under its whistleblower program. The SEC said that the largest of the three awards, $1.8 million, was being awarded to an individual who voluntarily provided original information that prompted the SEC to open its investigation and continued to provide valuable information throughout the investigation. The other two whistleblowers received approximately $65,000 each for providing information after the investigation started. These awards followed the SEC's January 15, 2016, announcement that, for the first time, it had awarded a "company outsider"—i.e., an individual not employed by the company—more than $700,000 under its whistleblower program for providing "a detailed analysis that led to a successful SEC enforcement action" against the company. In the March 8 press release, the SEC noted that, since its inception in 2011, its whistleblower program had to date paid more than $57 million to 26 individuals. Said Sean X. McKessy, Chief of the SEC's Office of the Whistleblower, "[w]e're seeing a significant uptick in whistleblower tips over prior years, and we believe that's attributable to increased public awareness of our program and the tens of millions of dollars we've paid to whistleblowers for information that helped us bring successful enforcement actions."
CFTC whistleblower program: On April 4, 2016, the CFTC announced an award of more than $10 million—the third such award under the CFTC's whistleblower program and by far the largest—to an individual who provided "key original information" that led to a successful CFTC enforcement action. In stark contrast to the SEC, the CFTC had previously only made two awards under its whistleblower program, the first in 2014 in the amount of $240,000 and the second in September 2015 in the amount of $290,000. Recent indications are that the CFTC is ramping up its whistleblower program, starting with the CFTC's highly publicized launch in January 2016 of a new whistleblower website designed to encourage the public to submit tips about potential financial crimes under the Commodity Exchange Act. In addition, we spoke in our May 2015 article about a potential multimillion-dollar payout by the CFTC to a whistleblower in connection with the "Flash Crash" case, where a U.K. futures trader was arrested—based on information provided by the whistleblower—for allegedly manipulating the U.S. stock market in May 2010, causing a 600-point drop in a five-minute span and gaining $40 million in illegal profits. This case has not yet been resolved—the trader is still in the U.K. although it was announced in March 2016 that a U.K. judge had ordered him extradited to the U.S. to face trial (the first step in a lengthy process)—but assuming a resolution of the case results in a "successful enforcement action," another multimillion-dollar CFTC whistleblower award can be expected. The Director of the CFTC's Division of Enforcement, Aitan Goelman, said of the $10 million payout that "[a]n award this size shows the importance that the Commission places on incentivizing future whistleblowers." Added Christopher Ehrman, Director of the CFTC's Whistleblower Office, "[t]he Whistleblower Program is working. My hope is that this multimillion dollar award will encourage others to come forward with information that will assist the Commission in protecting our markets."
New whistleblower legislation:
- On February 25, 2016, Rep. Elijah E. Cummings, D-Md., the ranking member of the House Committee on Oversight and Government Reform, and Senator Tammy Baldwin, D-Wis., introduced the Whistleblower Augmented Reward and Non-Retaliation Act of 2016 (WARN Act), which would expand protections for those who blow the whistle on financial crimes. Rep. Cummings said of the bill that "[w]hen we in Congress passed the Dodd-Frank Act, we put in place protections for whistleblowers that are now being undermined by financial firms. Our bill would address these abuses and create stronger protections for whistleblowers who shine a light on corporate malfeasance." Added Senator Baldwin, "[t]he middle class has paid a steep price for the irresponsible actions of others, yet only one top banker went to jail for the financial crisis. If we strengthen and empower whistleblowers in the financial industry, we can do a better job of holding Wall Street accountable. These reforms will help us do that."
- On April 4, 2016, the Senate unanimously passed the Defend Trade Secrets Act of 2016, which, among other things, creates a private civil right of action in federal court for the misappropriation of trade secrets. The Senate version of the bill was approved by the House Judiciary Committee on April 20, 2016, and at press time a vote before the full House was imminent, where it was expected to pass easily. President Obama has indicated that he will sign the bill into law as soon as it hits his desk. Relevant here, the legislation contains whistleblower protections for individuals who disclose trade secrets in the course of reporting violations of the law, and imposes obligations on employers to reference the new whistleblower provisions in any employment contract that governs the use of a trade secret or other confidential information.
See here to read the SEC's 3/8/16 press release entitled "SEC Awarding Nearly $2 Million to Three Whistleblowers" and here to read the SEC's 1/15/16 press release entitled "SEC Awards Whistleblower More Than $700,000 for Detailed Analysis."
See here to read the CFTC's 4/4/16 press release entitled "CFTC Announces Whistleblower Award of More Than $10 Million."
See here to read the 2/25/16 press release entitled "Cummings and Baldwin Introduce Legislation to Expand Protections for Wall Street Whistleblowers" and here to read the 4/12/16 Daily Business Reviewarticle entitled "Trade Secrets Bill Likes Quiet Whistleblowers, Not News Hogs" by Monika Gonzalez Mesa.
See here to read the article in our May 2015 newsletter entitled "Whistle While You Work: April Showers Bring Big Whistleblower Awards, Some to Compliance Officers."