"New rewards for informants who help the Securities and Exchange Commission uncover fraud are already prompting a surge in tips [concerning alleged financial and white collar fraud]," according to a recent Wall Street Journal article. Many attribute this flood of activity to a broadly expanded whistleblower program in the new Dodd-Frank Financial Reform Act, which incentivizes tipsters—by offering lucrative rewards of up to 30 percent of the funds collected by the SEC—to report "original information" about corporate fraud. The new program could result in millions of dollars in payments to employee informants who report on the activities of their employers and co-workers. Strengthened whistleblower protections shielding employees from workplace retaliation, coupled with the generous payouts to informants, may motivate employees to inform the SEC directly of potentially improper activities instead of reporting suspicions to a company's compliance department to allow it to investigate and address the matter.
The Dodd-Frank Act's bounty program rewards any individual who voluntarily gives "original information" to the SEC that leads to an enforcement action resulting in monetary sanctions in excess of $1 million. The reward will be between 10 and 30 percent of the total monetary sanctions collected by the enforcement action and any related actions. For example, an individual who discloses a $10 million insider trading ring to the SEC could be in line for payments of $1 million to $3 million. "Original information" is generally defined as information (i) derived from independent knowledge or analysis; and (ii) not known to the SEC from any other source. The bounty program applies to all securities violations, including breaches of the Foreign Corrupt Practices Act (FCPA), which bans companies from bribing foreign officials to obtain or keep business.
We are concerned that the bounty program will motivate individuals to circumvent the normal corporate channels that encourage employees to report suspicious activities to their supervisors or compliance departments, and that it will lead to a higher volume of false or baseless allegations which will nevertheless result in heavy burdens to the subject companies. From the government's perspective, the program is already reaping dividends. A Wall Street Journal blog post reports that the SEC "has been receiving at least one tip a day about potential foreign bribery violations" since the whistleblower bounty program became law in July, although the quality of the tips was described as "mixed."
What This Means to You
In the face of lucrative incentives for informants, it is more important than ever to ensure that your company has a robust compliance program. Your program should include policies that encourage employees to report troublesome issues to corporate management before contacting the SEC to prevent the potentially devastating effects of an SEC inquiry or formal investigation.
Your company's management must lead by example and handle each complaint seriously by conducting an internal investigation to see if it has merit. Do not avoid or cover up the problem. If your internal investigation uncovers improper activities, you should consider self-reporting to the SEC to minimize the (potentially) more damaging consequences of a full-blown SEC investigation down the road.