The U.S. Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission(CFTC) Offices of the Whistleblower have issued their Fiscal Year (FY) 2018 Annual Reports to Congress on the agencies’ respective whistleblower programs. Both reports document dramatic increases in the numbers of whistleblower tips and dollar amounts of awards and punctuate the increasing role of whistleblowers in the enforcement programs at both agencies.
The SEC Office of the Whistleblower received a record number of almost 5,300 tips in FY 2018, an increase of nearly 20 percent over FY 2017 and an increase of over 75 percent since the first full year of the program (FY 2012). Even more dramatic, in FY 2018 the SEC awarded more than $168 million in awards to whistleblowers — more money in a single year than in the entire previous history of the whistleblower award program and more than half of the $326 million awarded to date. These awards included the two largest awards in the history of the program, $83 million to three whistleblowers (all in connection with the same enforcement action) in March 2018 and $54 million to two whistleblowers (both in connection with a different enforcement action) in September 2018. The entire $168 million awarded in FY 2018 went to just 13 whistleblowers. The SEC report indicates that since its program launched, it has imposed sanctions of $1.7 billion on defendants in whistleblower-related cases, although only $452 million of that money has been or will be returned to investors (barely 26 percent), with the remainder (including half of the disgorgement and prejudgment interest ordered in those cases) going to the U.S. Treasury.
Although the CFTC’s whistleblower program has been smaller than the SEC’s, its growth has been even greater. In FY 2018, the CFTC Office of the Whistleblower received 760 tips, an increase of more than 60 percent over its highest previous year (FY 2017), and a 13-fold increase from the program’s first full year (FY 2012). The CFTC made more whistleblower awards (five) in FY 2018 than it had made in the entire history of the program prior to this year, and the amount of the FY 2018 awards ($75 million) dwarfed the total awards made in its previous history ($12 million). The CFTC also issued its largest-ever award of $30 million in FY 2018, as well as its first-ever award to a foreign whistleblower.
The types of whistleblower tips investigated by the SEC staff have remained relatively constant since the program began after passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act, with the three largest categories being corporate disclosure and financials, offering frauds and manipulation. Tips about offering frauds and manipulation grew the most in FY 2018, with tips about cryptocurrency offerings growing so fast that the SEC staff has started capturing them as a new category. Although the SEC report continues to emphasize the importance of the antiretaliation provisions of its whistleblower rules, notably the SEC did not report bringing any enforcement cases in 2018 concerning retaliation or impeding whistleblower reporting. The CFTC report discusses whistleblower tips concerning virtual currencies, consistent with the CFTC’s visibility in bringing fraud cases in this area. The CFTC staff also received whistleblower tips in FY 2018 regarding activities such as spoofing and other forms of disruptive trading, market manipulation, wash trading, false reporting, misrepresentations to customers regarding the handling of their accounts, fraud involving precious metals or foreign currency exchange, as well as Ponzi schemes and other off-exchange investment scams involving futures. The CFTC report cites virtual currencies and fraud involving binary options as primary areas of increased outreach for potential future whistleblower tips.
The rapid growth in whistleblower tips and cases is in some contrast to the remainder of the SEC’s and CFTC’s enforcement programs. Both the SEC and the CFTC have had flat overall budgets the past two fiscal years, with the result that (because of cost-of-living payroll and benefits increases and facilities costs outside of the control of the agencies) the resources available for enforcement at both agencies have decreased. Both the SEC and CFTC recently issued annual reports on their overall enforcement programs. In both cases (and depending on which metrics one consults), the numbers of enforcement cases and recoveries were up somewhat in FY 2018 compared with the transition year of FY 2017 but below levels reached in some prior years.
The SEC and the CFTC believe that they must be diligent in following up on all whistleblower reports. As a result, the increases in whistleblower tips and resulting investigations mean that ever-growing percentages of the SEC’s and CFTC’s enforcement dockets are driven by whistleblowers. The agencies have found that investigations triggered by whistleblower tips can be more focused and thus more efficient than other types of enforcement actions. But this pressure to follow up on whistleblower tips necessarily means that some other parts of the SEC’s and CFTC’s dockets (for instance, potential investigations from both agencies’ investments in artificial intelligence to better monitor trading data) must receive less attention, especially in an era of constrained budgets and limited resources. While the SEC and CFTC express enthusiasm about the success of their whistleblower programs, the question is whether the ever-increasing size of the programs may crowd out meritorious investigations not triggered by whistleblower tips.
Particularly in light of the U.S. Supreme Court’s decision in Digital Realty Trust, Inc. v. Somers, 138 S. Ct. 767 (2018), which provides antiretaliation protections only to whistleblowers who report directly to the SEC or CFTC (not through internal reporting mechanisms to the companies themselves), the incentives for a potential whistleblower to report to the agencies have only increased. In any event, the increasing size and number of whistleblower awards continue to provide a powerful incentive for potential whistleblowers to bring alleged misconduct to the attention of the agencies. Please contact us if you would like to discuss ways to implement effective corporate compliance programs to anticipate potential whistleblower claims, or how best to conduct internal investigations in which there are whistleblower issues.