Why it matters: The government is paying out big money to individuals who report corporate wrongdoing under various whistleblower programs. In April, the SEC and the DOJ announced that they were paying an aggregate amount exceeding $8 million to whistleblowers in three separate cases. In addition, a whistleblower in the “Flash Crash” prosecution announced on April 21 that he or she stands to gain millions if a claim made under the CFTC’s whistleblower program ultimately proves successful.
Detailed discussion: In April, the SEC and the DOJ announced they were paying out an aggregate of over $8 million to whistleblowers in three separate actions. Moreover, a lawyer for the alleged whistleblower in the high profile “Flash Crash” case announced on April 21 stands to be rewarded with millions if a claim is successfully made under the CFTC’s whistleblower program.
SEC Awards: Since the inception of the SEC’s whistleblower program—created by the 2010 Dodd-Frank reforms and launched in 2011—the SEC has paid more than $50 million to 16 whistleblowers who provided the SEC with (as alternately described in SEC press releases) “unique and useful” and “high-quality, original” information that contributed to successful enforcement actions in those cases. In April, the SEC announced that it was awarding a combined amount exceeding $2 million to two additional whistleblowers (bringing the total number of such awards up to 18).
First, a brief primer on the mechanics of the SEC’s whistleblower program: Whistleblower awards can range from 10%-30% of the money collected by the SEC in a successful enforcement action with sanctions exceeding $1 million. All rewards are paid out of an investor protection fund established by Congress that is comprised entirely of monetary sanctions paid to the SEC through enforcement actions. The SEC is required by law to keep the identity of whistleblowers confidential and cannot disclose information about them that could directly or indirectly reveal their identities.
On April 22, 2015, the SEC announced that it would be paying an award in the range of $1.4 million to $1.6 million to a corporate compliance officer “who provided information that assisted the SEC in an enforcement action against the whistleblower’s company.” In that case, the award involved a compliance officer who had a “reasonable basis” to believe that alerting the SEC about wrongful goings-on at his company was “necessary to prevent imminent misconduct from causing substantial financial harm to the company or investors.” The press release pointed out that this was the second whistleblower award it had paid out to compliance personnel, referring to the award of over $300,000 it announced on August 14, 2014 to a compliance/internal audit employee who reported corporate wrongdoing to the SEC. As SEC Enforcement Director Andrew Ceresney said in the April 22 press release, “[w]hen investors or the market could suffer substantial financial harm, our rules permit compliance officers to receive an award for reporting misconduct to the SEC… This compliance officer reported misconduct after responsible management at the entity became aware of potentially impending harm to investors and failed to take steps to prevent it.”
On April 28, 2015, the SEC announced that it was paying a whistleblower award of over $600,000 in connection with what it described as its “first retaliation case.” The award constituted the maximum whistleblower award payment possible of 30% of the monetary sanctions collected in connection with In the Matter of Paradigm Capital Management, Inc. and Candace King Weir, File No. 3-15930 (June 16, 2014). The SEC stated in its press release that the whistleblower in this case “suffered unique hardships, including retaliation, as a result of reporting to the Commission.” The retaliation against the whistleblower included removal from then-current job position, stripping of supervisory responsibilities, changing of job function (from head trader to compliance officer), and otherwise “marginalizing” the whistleblower. SEC Enforcement Director Ceresney was again quoted in the press release, saying that “[w]e appreciate and recognize the sacrifice this whistleblower made and the important role the whistleblower played in the success of the SEC’s first anti-retaliation enforcement action.” Sean McKessey, Chief of the SEC’s Office of the Whistleblower, added that “[m]y hope is that the award today encourages potential whistleblowers to come forward in light of our demonstrated commitment to protect them against retaliatory conduct and make significant financial awards to whistleblowers who suffer employment hardships as a result of reporting possible securities law violations.”
On April 30, SEC Chair Mary Jo White gave a speech at the Corporate and Securities Law Institute at Northwestern University School of Law entitled “The SEC as the Whistleblower’s Friend” where she reviewed the 4-year history of the SEC’s whistleblower program and lauded its increasing success, saying that “it is past time to stop wringing our hands about whistleblowers. They provide an invaluable public service, and they should be supported. And, we at the SEC increasingly see ourselves as the whistleblower’s advocate.”
DOJ False Claims Act Qui Tam Award: To briefly recap, the qui tam provisions of the FCA permit private citizens to bring lawsuits on behalf of the government and share in any recovery.
On April 21, 2015, the DOJ announced that three cardiologists would be splitting a whistleblower award of almost $6 million in connection with the settlement of a lawsuit they had brought under the qui tam provisions of the FCA against Citizens Medical Center, a county-owned hospital in Victoria, Texas. In the settlement, Citizens Medical Center agreed to pay the government over $21.7 million to resolve allegations that it violated both the Stark Act and the FCA by engaging in improper financial relationships with referring physicians, which included paying cardiologists amounts in excess of the fair market value of their services and paying bonuses to emergency room doctors that didn’t take into account their cardiology referrals. The nearly $6 million dollar qui tam whistleblower award represents a percentage of the $21.7 million settlement amount and will be shared by the three whistleblowers.
On April 9, 2015, Health Diagnostics Laboratory and Singulex Inc., both cardiovascular disease testing labs based in Virginia and California, respectively, agreed to pay the government a combined total of $48.5 million to resolve allegations that they had violated the anti-kickback provisions of the FCA by paying physicians in exchange for patient referrals and billing federal health care programs for medically unnecessary testing. The case arose from three related qui tam whistleblower lawsuits, but the whistleblowers’ share of the settlement has not yet been determined.
Possible CFTC Award?: A whistleblower in the “Flash Crash” case has come forward. On April 21, 2015, the CFTC and the DOJ both issued press releases announcing the arrest of a U.K. futures trader by the name of Navinder Singh Sarao, who’s long-term “dynamic layering” manipulation via automated trading program of the market for E-Mini S&P 500 futures contracts on the Chicago Mercantile Exchange allegedly contributed to a drop in the U.S. stock market of over 600 points in a five minute span on May 6, 2010, an incident that came to be known as the “Flash Crash.” Sarao is alleged to have gained over $40 million in illegal profits from his manipulation scheme. The CFTC civil enforcement action complaint, filed under seal in Illinois district court on April 17 and unsealed upon Sarao’s April 21 arrest, charged Sarao and his eponymous firm with market manipulation, attempted market manipulation, and “spoofing” (a practice of bidding or offering with the intent to cancel the bid or offer prior to execution). The DOJ’s criminal complaint, which had been filed under seal with the Illinois district court on February 11, was similarly unsealed upon Sarao’s arrest and also charged Sarao and his firm with spoofing as well as wire fraud, commodities fraud, and commodities manipulation.
Also on April 21, the attorney representing an anonymous whistleblower stated that, “after hundreds of hours spent analyzing data and other information,” his client provided the CFTC with “original analysis” that led to Sarao’s arrest, adding that “[o]ur anonymous whistleblower client stands as a testament to the indispensable role whistleblowers play in detecting and reporting market manipulation and other forms of financial fraud.” The CFTC’s whistleblower program, also created by the Dodd-Frank reforms in 2010, is almost identical to that of the SEC—whistleblowers who provide “high quality” information to the CFTC that leads to a successful enforcement action with sanctions in excess of $1 million are eligible for 10%-30% of the money collected. Unlike the SEC, which, as pointed out above, has given out in excess of $50 million in 18 whistleblower awards since 2011, the CFTC only gave its first award of $240,000 in 2014. At any rate, the Flash Crash whistleblower stands to gain millions under the CFTC’s whistleblower program if the CFTC determines that the “original analysis” provided to the CFTC proved to be instrumental in a successful enforcement action against Sarao.
The take-away from April’s abundance of whistleblower awards? Look to more claims being made in the future under the government’s various whistleblower programs as huge awards incentivize individuals to report corporate wrong-doing.
See here to read the SEC’s press release dated 4/22/15 entitled “SEC Announces Million-Dollar Whistleblower Award to Compliance Officer.”
See here to read the SEC’s press release dated 4/28/15 entitled “SEC Announces Award to Whistleblower in First Retaliation Case.”
See here to read the DOJ’s press release dated 4/21/15 entitled “Texas-Based Citizens Medical Center Agrees to Pay United States $21.75 Million to Settle Alleged False Claims Act Violations.”
See here to read the press release dated 4/21/15 issued by the “Flash Crash” whistleblower’s attorneys Hagens Berman entitled “Hagens Berman CFTC Whistleblower Helps CFTC and DOJ Bring Charges Against Flash Crash Market Spoofing Fraudster.”
For more on this matter, read the following:
The CFTC’s press release dated 4/21/15 entitled “CFTC Charges U.K. Resident Navinder Singh Sarao and His Company Nav Sarao Futures Limited PLC with Price Manipulation and Spoofing.”
Order Determining Whistleblower Award Claim in connection with In the Matter of Paradigm Capital Management, Inc. and Candace King Weir, File No. 3-15930 (6/16/14).
Speech given by SEC Chair Mary Jo White on 4/30/15 entitled “The SEC as the Whistleblower’s Advocate.”
DOJ’s press release dated 4/9/15 entitled “Two Cardiovascular Disease Testing Laboratories to Pay $48.5 Million to Settle Claims of Paying Kickbacks and Conducting Unnecessary Testing.”