An announcement by the SEC of a $400,000 award to a whistleblower highlights the need for companies to properly investigate and address complaints raised internally. 

On July 31, the SEC announced that it paid an award to a whistleblower who first reported fraud internally (several times, according to the SEC press release), only to have his claims ignored.  The whistleblower eventually took his claims to the SEC Office of the Whistleblower.

The SEC’s Office of the Whistleblower oversees the SEC whistleblower program, which was created by the Dodd-Frank Act.  The program rewards high-quality, original information that leads to an enforcement action resulting in sanctions over $1 million.  Awards can range from 10 percent to 30 percent of the money collected.  The SEC received 3,328 tips and complaints in 2013 alone.

Under the SEC program, whistleblowers are eligible for an award if they “voluntarily provided original information to the Commission that led to the successful enforcement” of the claim.  The claim in this matter did not meet the “voluntary” requirement as implemented by the SEC’s Rule 21F-4(a), because the matter had been subject to a prior inquiry by a self-regulatory organization (“SRO”).  The SEC nonetheless found that it was appropriate to waive the regulatory “voluntary” requirement and grant the award, because the whistleblower had worked “aggressively internally” to bring the violations to the attention of appropriate personnel, and because the SRO inquiry was based, in part, on the whistleblower’s efforts in identifying the issue, as told to the SRO by a third party.  “When it became apparent that the company would not address the issue, the whistleblower came to the SEC in a final effort to correct the fraud and prevent investors from being harmed.”

The award highlights the need for companies to have robust internal reporting procedures, to follow through with proper investigations of claims, and to take necessary steps to address complaints that are raised.