On Dec.10, an anonymous party filed an unusual petition with the U.S. Court of Appeals for the D.C. Circuit. It was a petition for a writ of mandamus requesting that the court order the Securities Exchange Commission (SEC) to rule on an anonymous whistleblower’s (“Anonymous’s”) claim for an award under the Commission’s Whistleblower Program, which was enacted in 2010 pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act. A writ of mandamus is a rare and dramatic intervention by a court into a government entity’s operations. Requesting such relief is typically reserved for situations in which a government agency has clearly refused to abide by the law.
So what was the reason for this request for dramatic action? The answer is a delay of more than three years in the SEC’s disposition of Anonymous’s claim for an award resulting from a major backlog in unresolved claims for whistleblower awards.
Anonymous’s petition might be the canary in the coal mine for a potentially serious problem at the SEC’s Office of the Whistleblower (OWB). As the backlog of claims for whistleblower rewards grows at the OWB, whistleblowers who have provided vital information about serious wrongdoing – often at serious risk to their professional careers – are waiting much longer than they expected before collecting awards to which they may be entitled under the program. Should this problem persist, the Commission risks diminishing the incentive for SEC whistleblowers to step forward and help the SEC hold corporate wrongdoers accountable.
About the SEC Whistleblower Rules
As part of the Dodd-Frank Act, Congress instructed the SEC to establish a whistleblower program that would reward individuals who provide information on SEC violations that lead to an enforcement action resulting in more than $1 million in monetary sanctions. Under the program established by the SEC, whistleblowers are eligible for between 10% and 30% of the amount the SEC collects, depending on the value of his or her contribution to the SEC’s investigation.
A typical SEC whistleblower tip follows a fairly straightforward process. First, the whistleblower submits a prescribed form containing information about an alleged securities violation to the OWB. Whistleblowers often submit anonymously, but some identify themselves in their submissions. After the form is submitted, the SEC may contact the whistleblower either directly or through counsel to follow up on the information provided. If the information submitted is actionable, the SEC may investigate further and possibly take an enforcement action. Upon the conclusion of any enforcement action resulting in monetary sanctions of more than $1 million, the SEC publishes a Notice of Covered Action (NOCA) to alert any potential whistleblowers to the possibility that they are eligible for a reward.
When a whistleblower who submitted information to the OWB sees a NOCA indicating that the SEC acted on the information he or she submitted, he or she must submit an application for a reward within 90 days. The OWB reviews each such application to determine whether the applicant is entitled to a reward before issuing a preliminary determination as to whether the applicant should receive an award.
Playing the Waiting Game
It is this final stage of the process that led to Anonymous’s petition. Anonymous claims that he or she applied for a reward in October 2012 after seeing a NOCA referencing information Anonymous submitted to the OWB. Anonymous’s application has been pending before the OWB for more than three years without resolution. Understandably frustrated with a years-long delay in learning about their entitlement (or not) to a significant award, Anonymous took the SEC to court. According to the Wall Street Journal, no whistleblower has attempted this maneuver in the five-year history of the SEC Whistleblower Program.
Anonymous claims that his or her three-year wait for a preliminary determination is among the longest of any whistleblower in the program, but Anonymous is not the only one waiting for an answer from the SEC. In May, using information obtained through the Freedom of Information Act, the Wall Street Journal reported that of the 297 whistleblowers who applied for a reward following the issuance of a NOCA, 247 had not yet received a decision. That would mean that 83% of applicants were still waiting. The article does not break down the backlog by the length of time each applicant had waited, but the petition filed by Anonymous includes an analysis of publicly available data showing that the majority of applicants have waited for more than a year for the issuance of a preliminary determination.
With whistleblowers waiting this long for a resolution, it was perhaps inevitable that somebody would eventually attempt an end-around to force the SEC to act more quickly.
Fallout from Lack of Funding
The SEC is in a difficult position in all of this. As the SEC’s enforcement director, Andrew Ceresney, told the Wall Street Journal, “[t]hese claims involve complex issues, many of which are being considered for the first time in the whistleblower program. We remain committed to ensuring the correct result for each claim and processing them as quickly as possible.” That is a labor-intensive process, especially in light of the fact that SEC staff review each award application thoroughly, whether meritorious or not.
Of course the SEC, like all federal agencies, has to operate within the budget Congress gives it. The backlog in claims for whistleblower awards is a clear indication that the SEC, and the OWB in particular, needs more resources. In FY 2015, for example, a budget shortfall resulted in the SEC having 272 fewer full-time employees than it requested. Shortfalls like that inevitably lead to backlogs, as we are now seeing with the claims for whistleblower awards. If Congress wants the whistleblower program to continue to succeed, adequately funding the SEC is a must.
Katz, Marshall & Banks partner David J. Marshall, who regularly works with whistleblowers who submit SEC whistleblower tips, echoed these sentiments in comments he made to the National Law Journal, noting that “[T]imeliness is an important feature of the program . . . but the problem is that Congress and the SEC leadership need to make sure that the whistleblower program has enough staff to process the growing number of tips and award applications.” Mr. Marshall went on to explain that the number of award applications from whistleblowers has increased significantly in recent years, and the OWB “has not been able to ramp up its staff in the appropriate proportion.”
Even with Delays, the Program Works
As frustrating as these delays can be for whistleblowers, there is good news: The resolution is often worth the wait. The backlog aside, the SEC Whistleblower Program can and should be considered a rousing success for whistleblowers and the American public.
As of Nov. 16, 2015, the SEC had issued 17 awards to 22 whistleblowers. In FY 2015 alone, the SEC issued rewards totaling more than $37 million. Individual whistleblowers have been well compensated for their efforts, with one receiving a $30 million reward. These rewards are a byproduct of an increase in successful enforcement actions aimed at protecting the American public from securities fraud.
Whistleblowers like Anonymous who are waiting for the OWB to make a preliminary determination are understandably frustrated by the delays, but that frustration is likely to seem like a distant memory if the SEC issues them significant rewards. Anonymous’s petition shines a light on a real concern within the program, and the court’s resolution of the petition is worth watching. But regardless of how the case is decided, whistleblowers still have many reasons to be encouraged by the OWB's management of the program thus far.