On November 15, 2012 the Securities and Exchange Commission’s Office of the Whistleblower (the “OWB”) issued its 2012 Annual Report on the Dodd-Frank Whistleblower Program (the “Report”).1 The Report, which is required by the Dodd-Frank Wall Street Reform and Consumer Protection Act, summarizes the activities of the SEC’s Office of the Whistleblower and is the first full-year analysis of the Program since the Office opened its doors on August 12, 2011. The OWB reports that in Fiscal Year 2012, it received 3,001 tips through its Form TCR via facsimile, mail, and the Commission’s online TCR questionnaire portal.2 The SEC received whistleblower submissions from individuals in all 50 states, the District of Columbia and the U.S. territory of Puerto Rico, as well as 49 countries outside of the United States. Almost 10% of the TCRs came from New York. The most common complaint categories reported by whistleblowers were Corporate Disclosures and Financials (18.2%), Offering Fraud (15.5%), and Manipulation (15.2%). Only 3.8% of the tips received concerned the Foreign Corrupt Practices Act.
On August 21, 2012, $50,000 was awarded to a whistleblower that had helped the SEC stop a multi-million dollar fraud. The award represented 30% – the maximum percentage payout allowed by law – of the amount collected in the SEC’s enforcement action against the perpetrators of the scheme. This was the only bounty issued to a whistleblower by the SEC in Fiscal Year 2012. In that same matter, the SEC did not approve a claim from a second individual seeking an award because the information provided allegedly did not lead or significantly contribute to the SEC’s enforcement action, as required for an award.
While only one bounty was awarded by the SEC in Fiscal Year 2012, the OWB posted 143 Notices of Covered Action during the applicable period for enforcement judgments and orders which included sanctions exceeding the $1 million statutory threshold. Once a Notice of Covered Action is posted, individuals have 90 calendar days to apply for an award. Applications for awards received during the 2012 fiscal year are still being reviewed and processed. As such, additional bounties concerning “covered actions” in 2012 may be forthcoming.
In our September 2011 Client Alert on the Whistleblower Program, we had noted that it was widely anticipated that the financial incentives provided by the Program, together with the current economic climate and recent uptick in publicized fraudulent financial activity, might lead to whistleblowers coming out of the woodwork to try to collect the statutory bounty. At an average rate of 8 tips per day during the 2012 fiscal year, that has in fact come to pass. Moreover, as stated by outgoing SEC Chairman Mary L. Schapiro in the August 21, 2012 SEC Release 2012-162 concerning the $50,000 bounty discussed above, the “[SEC] is seeing highquality tips that are saving [its] investigators substantial time and resources.”
It thus remains important for companies to implement and/or continue to closely monitor their own policies to detect fraud and other wrongdoing, and to promote internal reporting by whistleblowers before they reach out to the SEC, so as to avoid significant monetary exposure, including legal costs, as well as potential damage to their reputation. Companies should not be misled by the fact that only one bounty was awarded during fiscal year 2012, and should remain cognizant of the fact that the quality of the tips received by the SEC has increased. This may be due to the fact that whistleblowers are engaging counsel to assist in preparing sophisticated presentations of alleged fraudulent activity to the SEC.
In our September 2011 Client Alert we had listed possible strategies for companies to encourage internal reporting. In light of the fact that the Whistleblower Program is likely here to stay and has produced a significant number of tips, those strategies should continue to be considered. Companies should work diligently at promoting a culture of openness so that potential whistleblowers reach out to management first, rather than to the SEC. This can be done by, among other things, assuaging any fears that employees may have of retaliation and also by communicating to employees that their complaints are not futile; i.e., that they will be vigorously investigated. The tone should also be set at the top – upper management should encourage mid-level and junior staff to ask questions and should follow through with answers.