On Monday, September 22, 2014, the Securities and Exchange Commission announced an award of between $30 and $35 million dollars to a whistleblower residing overseas.1 The award is more than double the Commission’s previous record award of $14.7 million in October 2013. In addition, it is nearly twice the $16.75 million total awarded to all whistleblowers, cumulatively, since the program began in 2011. The award will be the fourth given to a whistleblower in a foreign country since the program’s inception.2
SEC Enforcement Director Andrew Ceresney said that the “record-breaking award sends a strong message about [the Commission’s] commitment to whistleblowers and the value they bring to law enforcement.”3 Sean McKessy, the Chief of the SEC’s Office of the Whistleblower, added that the award shows “the international breadth of [the Commission’s] whistleblower program” and that “[w]histleblowers from all over the world should feel similarly incentivized to come forward with credible information about potential violations of the U.S. securities laws.”4
The award comes on the heels of the Second Circuit’s decision in Liu v. Siemens A.G., which held that the anti-retaliation provisions of the Dodd-Frank Act do not apply outside the United States.5 The Second Circuit’s decision led some commentators to posit that the decision would have a chilling effect on foreign-based whistleblowers. The remarks from the SEC leadership following this latest award serve as a timely reminder to prospective whistleblowers that the SEC will award a significant amount of money to whistleblowers, regardless of whether they reside in the United States or abroad.
Background of the SEC Whistleblower Bounty Program
The Commission’s Whistleblower Program began in 2011, with the first award of $200,000 in August 2012 going to one individual.6 In 2013, the Commission announced awards to five individuals, including a payout of $14 million to one individual in October of that year.7 So far in 2014, the Commission has announced whistleblower awards to five individuals, including an award to an audit and compliance professional in August 2014.8
Media reports indicate that many earlier whistleblower awards related to enforcement actions involving Ponzi-type schemes where the SEC recovered a small amount of money.9 In the case of the $14.7 million dollar award, however, the whistleblower received the award as a result of a tip regarding a scheme to defraud Chinese investors who gave $147 million to a Chicago promoter to build a convention center complex in order to increase their chances of obtaining a U.S. visa.10 In the most recent case, the SEC Order did not provide information regarding the misconduct that the whistleblower reported or how much the SEC recovered from its successful enforcement.
SEC Whistleblower Bounty
A whistleblower who voluntarily provides original information that leads to a successful enforcement action in which the SEC recovers more than $1,000,000 is eligible to receive between 10 and 30 percent of the total amount recovered.11The Commission considers several factors that may increase or decrease the percentage of the award, but the largest driver is the amount of the recovery.12 With the latest award, the Commission explained that the total percentage, which was not disclosed, was increased because of the significance of the information provided, the assistance that the whistleblower provided, and the law enforcement interest in the matter.13 The Commission also explained that the total percentage was decreased because the whistleblower delayed reporting to the Commission after he had learned of the violations, “during which time investors continued to suffer significant monetary injury that otherwise might have been avoided.”14
Monday’s announcement marks the fourth time a foreign whistleblower has received an award.15 In its Order approving the award, the Commission went to great lengths to justify its award to a foreign resident, in response to Liu. The Commission explained that in its view, "there is a sufficient territorial nexus for a whistleblower award whenever there is successful enforcement of a covered action brought in the United States, concerning violations of the U.S. securities laws, by the Commission.”16 In even stronger language, the Commission stated that the nationality, residence or location of the whistleblower or even whether the misconduct comprising the U.S. securities law violation occurred entirely overseas “make no difference”, and that the SEC intended to effectuate the intent of Congress to encourage whistleblowers with knowledge of violations of the securities laws to come forward.
Finally, the Commission dismissed Liu as “non-controlling” because the “whistleblower award provisions have a different Congressional focus than the anti-retaliation provisions.”17 The language of the Commission’s Order that corresponds with this latest whistleblower award echoes the reasoning and tone of its amicus curiae brief in Liu and sends a strong signal to would-be whistleblowers that, even if they cannot bring anti-retaliation claims in a U.S. court, they still will face the prospect of receiving a significant bounty for assisting the SEC.
Incentives to Whistleblowers
Over the last three years, the SEC has used prominently the whistleblower bounty program to demonstrate to foreign individuals, company employees, and even compliance personnel that a significant reward is available if they report potential securities law violations to the SEC. As the latest award makes clear, the SEC’s whistleblower bounty program is a powerful incentive for individuals to report potential violations to the SEC. This award also provides a concrete example to potential whistleblowers that the SEC can and will pay significant bounties which may induce other individuals to come forward with information, regardless of the possibility of retaliation.18 Although SEC Staff have indicated repeatedly in speeches and at conferences that the bounty program has resulted in a significant increase in the quality of the tips to the SEC, awards in the tens of millions of dollars may have the unintended consequence of increasing the number false reports that the SEC’s Office of the Whistleblower must investigate which, in turn, could make the Office less effective.
The strong monetary incentive to report to the SEC raises serious challenges for companies subject to the federal securities laws. The monetary incentive nevertheless may cause some whistleblowers to circumvent internal reporting mechanisms and report directly to the SEC, even though the Commission will assess whether a whistleblower participated in internal compliance systems in reporting possible securities violations in calculating the percentage of an award.19 In addition, the monetary award for whistleblowers increases the regulatory and law enforcement scrutiny and increases the threat of more derivative and private securities class actions as plaintiffs’ firms seek to entice potential whistleblowers.20 Importantly, the increased likelihood that whistleblowers report directly to the SEC may lose the opportunity to address potential wrongdoing, undertake remedial action, and self-report potential misconduct to the government.21
Companies should seek to encourage internal reporting, foster trust in the internal system among employees, and demonstrate the company’s commitment to compliance with the law.22 Companies also must ensure to conduct appropriate training on their own code of conduct and relevant legal and regulatory requirements in order to reduce violations of the law and mitigate any sanctions if employees violate the law.23 And, when whistleblowers do report—whether internally or to the SEC—companies must be swift to investigate the allegations and respond effectively.24