The U.S. Securities and Exchange Commission (SEC) Office of the Whistleblower (OWB) has filed its Annual Report to Congress for FY 2019, highlighting the continued success of the SEC Whistleblower Program established by the Dodd-Frank Act of 2010.
Since the program began in 2010, the Commission has issued awards that total approximately $387 million to 67 individuals. In FY 2019, the SEC awarded nearly $60 million in whistleblower awards to eight individuals, a drop from the record it set in FY 2018, during which the Commission awarded $168 million to 13 individuals. This decrease is likely at least partially attributable to the federal government shutdown in December 2018 and January 2019, which brought the SEC to a near standstill.
Since August 2011, the Commission has received over 33,300 whistleblower tips. It received the most tips in FY 2018, at 5,282, but FY 2019 was close behind at 5,212. A testament to the program’s success, the number of tips has grown significantly over the years, increasing by approximately 74 percent between FY 2012 (the first year for which the Commission has complete data) and FY 2019.
Of those who submitted tips in FY 2019, 1,307 whistleblowers (21%) characterized their tips as relating to “Corporate Disclosures and Financials,” 692 (13%) characterized their tips as relating to “Offering Fraud,” and 535 (10%) characterized their tips as relating to “Manipulation.” The fourth most popular category, relating to cryptocurrencies, is an emerging category, introduced into SEC records in the fourth quarter of FY 2018, and selected by 289 whistleblowers (6%) as the proper categorization of their tip.
In FY 2019, the Commission received whistleblower submissions from individuals in all fifty states and 71 countries, with the most tips outside the United States coming from individuals in Canada, Germany, and the United Kingdom.
Largest SEC Whistleblower Awards in FY 2019
Below are details of the three largest whistleblower awards that the SEC issued in FY 2019. Dodd-Frank prohibits the SEC from providing information that could reveal a whistleblower’s identity, but in these cases, counsel to the whistleblowers offered more information to the press.
- Awards totaling $50 million to two whistleblowers who provided information contributing to the SEC’s 2015 settlement with JPMorgan Chase & Co. In December 2015, JPMorgan agreed to pay $307 million to settle the SEC’s charges that it failed to disclose conflicts of interest to its wealth management customers. The Commission awarded $37 million to one individual, and $13 million to the other. The whistleblower who received the $37 million award—the Commission’s third largest since to date—met with SEC staff “multiple times” and provided “critically important” information and documents “of significantly high quality.”
- A $4.5 million award to a former orthopedic surgeon in Brazil who reported an alleged kickback scheme by a subsidiary of a medical device maker. In 2017, the subsidiary’s parent company Zimmer Biomet Holdings Inc. settled investigations by the SEC and the U.S. Department of Justice into alleged violations of the U.S. Foreign Corrupt Practices Act. This was the first whistleblower award under Rule 21F-4(c)(3), which rewards whistleblowers who report information internally if the entity later provides the whistleblower’s internal report to the SEC. The whistleblower’s tip led the company to review the allegations as part of an internal investigation, and the company subsequently reported the whistleblower’s allegations to the SEC, which then opened its own investigation. The SEC credited the whistleblower for the company’s internal investigation because the company reported the allegations to the Commission within 120 days. The surgeon therefore qualified for an award, even though neither he nor his counsel ever communicated directly with the SEC.
- A joint $3 million award to two former Merrill Lynch financial advisers who reported alleged misleading statements relating to a struggling investment product. In 2016, Merrill Lynch paid $10 million in fines to settle the SEC’s claims that it failed to adequately disclose certain fixed costs in a structured-note product. The whistleblowers promptly participated in the company’s internal compliance system, then took “significant and timely steps . . . to have the firm remediate the harm caused by the alleged violations, including advocating for full disclosure of the violation and for compensation of harmed investors.” The claimants also met in person with SEC staff and identified potential witnesses.
SEC Whistleblower Award Recipients
The SEC report explained that the more detail a whistleblower’s tip provides, the more likely it is to lead to an award. The SEC is most likely to follow up on tips that are “specific, credible, and timely, and that are accompanied by corroborating documentary evidence.” Whistleblowers who receive awards typically identify particular individuals involved in the misconduct, identify specific financial transactions that evidence fraud, provide a detailed assessment of the wrongdoing, and/or provide specific documents that substantiate their allegations or explain where to find such documents. Further, most award recipients provide SEC staff with additional information after submitting their initial tips. Approximately 68% of award recipients provided information that led the SEC to open an investigation, and approximately 32% provided information that significantly assisted with an ongoing investigation or examination. The Commission typically denies awards to whistleblowers whose tips do not result in the opening of an investigation or examination, or the opening of a new line of inquiry in an existing investigation or examination, or in significantly contributing to an ongoing investigation or examination.
A whistleblower need not be an employee or company insider of the entity about which they report wrongdoing. 69% of award recipients were insiders of the company or entity, and of these, 85% raised concerns internally as well as to the SEC. The 31% of award recipients who were not insiders included harmed investors, other industry professionals, industry experts, or individuals with a personal relationship with the wrongdoer.
Combatting Retaliation and Reporting Obstruction
The whistleblower program only works effectively if individuals can report information to the SEC without fear of retaliation, and the report identifies retaliation protection as a “key tenet” of the whistleblower program. Section 21F(h)(1) of Dodd-Frank expanded protections for whistleblowers, includes protection from retaliation. SEC rules allow the Commission to take legal action against employers or individuals who have retaliated against whistleblowers, and it has brought three anti-retaliation enforcement actions to date. However, in Digital Realty Trust, Inc. v. Somers, 138 S. Ct. 767 (2018), the Supreme Court held that such enforcement actions can be brought only when a whistleblower reports to the SEC. The Commission is continuing to consider the public comments on the Whistleblower Rule amendments it proposed in 2018, one of which would modify the Whistleblower Rules to comport with the ruling in Digital Realty that an employee must report possible securities law violations to the Commission to qualify for protection against retaliation. Meanwhile, Congress is currently considering proposals to amend Dodd-Frank to address the gap caused by Digital Realty.
In addition to providing protection from retaliation, the law prohibits interference with an individual’s ability to report information to the SEC. Under Exchange Act Rule 21F-17(a), “[n]o person may take any action to impede an individual from communicating directly with the Commission staff about a possible securities law violation, including enforcing, or threatening to enforce, a confidentiality agreement . . . with respect to such communications.” The Commission has brought eleven enforcement actions or administrative proceedings involving violations of Rule 21F-17. The OWB is working to identify and investigate additional practices, such as the use of confidentiality agreements, that interfere with individuals’ abilities to report potential wrongdoing to the Commission.
Protecting whistleblowers is a priority for the SEC, but guaranteeing these protections may require legal action. Particularly in light of the potential changes to the law reflected in the SEC rulemaking and the bills introduced in Congress, individuals in the financial sector who believe they have information about securities violations should seek legal advice from an attorney well versed in the intricacies of whistleblower protections to help protect their rights and to navigate the submission, investigation, and award process. Ideally, individuals should seek such advice before blowing the whistle.