Earlier this week, the United States Securities and Exchange Commission sent shockwaves through the financial-industry legal-and-compliance communities, announcing its largest-ever Dodd-Frank whistleblower awards, totaling $83 million.
The awards, which were widely reported by the press, are a clear message from the SEC to would-be whistleblowers that coming forward with helpful information about federal securities-law violations can be extremely lucrative. These awards could lead to an uptick in the number of SEC enforcement actions, as well as the number of voluntary self-disclosures by regulated entities.
On March 19, 2018, the SEC announced that it would award roughly $83 million allocated to three whistleblowers who provided information in connection with a single SEC enforcement action.
Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, and the SEC’s implementing rules, whistleblowers are eligible for a monetary award when they voluntarily submit original, timely, and credible information to the SEC that leads to a successful enforcement action. Such awards range from 10 percent to 30 percent of the funds collected when sanctions are more than $1 million.
Although the SEC did not identify the enforcement action—and, by law, the SEC does not reveal the identities of whistleblowers—counsel for one of the whistleblowers revealed that the awards arise from the SEC’s $415 million settlement with Merrill Lynch, back in 2016. In that case, the SEC had principally alleged that Merrill Lynch violated the SEC’s Consumer Protection Rule by misusing customer cash that should have remained in reserve accounts, and by failing to comply with a requirement that certain securities paid for by customers be held in lien-free accounts that would be shielded from claims by third parties if the firm were to collapse. The $83 million in awards represents approximately twenty percent of the overall recovery by the SEC, which is in the middle of the range of what is permissible for an award.
The three awards announced this week—which eclipse the $30 million award announced in 2014, previously the highest award—continue a trend of substantial SEC whistleblower recoveries. The announcement comes on the heels of a $16 million award, announced in November of 2017, allocated to two whistleblowers. In total, the SEC has awarded more than $262 million to fifty-three whistleblowers since the whistleblower program’s formation.
The SEC intends to use these awards as examples to encourage other would-be whistleblowers to come forward. Jane Norberg, Chief of the SEC’s Office of the Whistleblower, issued a statement seeking to underscore whistleblower incentives, remarking: “We hope that these awards encourage others with specific, high-quality information regarding securities laws violations to step forward and report it to the SEC.” Thus far, the incentives seem to have had their intended effect. The SEC’s Office of the Whistleblower reports that it has received more than 22,000 tips from 115 countries from 2011 through FY 2017.
Although the whistleblower program is only in its seventh year, the number of actionable tips that lead to whistleblower recoveries could rise as the program continues to gain traction. In an analogous context, under the False Claims Act’s qui tam provisions, the Department of Justice awarded nearly $393 million in whistleblower awards in FY 2017 alone to “relators” who provided information that led to government recoveries. In fact, every year since FY 1995, whistleblowers have been DOJ’s most significant source of new FCA matters, representing roughly 84% of new FCA matters in FY 2017. The SEC is undoubtedly seeking to leverage whistleblowers with the same degree of success that DOJ has enjoyed.
To regulated entities, this week’s unprecedented whistleblower awards reinforce the need for robust compliance programs that decrease the likelihood of federal securities-law violations, as well as internal controls that facilitate reporting and remediation of potential compliance lapses within the company.
The awards announced this week also serve as a reminder that, faced with potential federal securities-law violations, regulated entities should promptly consult with counsel and determine whether an internal investigation is warranted to further evaluate the facts and mitigate potential risk. These risks include the threat of a whistleblower, in addition to a government investigation and potential liability. If an entity learns of a whistleblower, the entity should also work with counsel to ensure that the company does not run afoul of Dodd-Frank’s anti-retaliation provisions aimed at protecting whistleblowers.