- Complaints and referrals from whistleblowers increased 8 percent compared to the previous year, particularly relating to offering fraud and manipulation.
- Whistleblowers span all 50 states and are particularly active in California, New York and Florida.
The Securities and Exchange Commission’s 2013 Annual Report To Congress On The Dodd-Frank Whistleblower Program provides the second complete year of data on the activities of the Office of the Whistleblower (“OWB”) since the office’s establishment in 2011. The SEC distributed $14,831,965.64 in award payments during fiscal year 2013, including $14 million to one whistleblower for information that led to an enforcement action that recovered substantial investor funds less than six months after the SEC received the information.
The Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) empowers the SEC to pay financial awards to whistleblowers who provide significant, original information that leads to a monetary sanction greater than $1 million. The SEC enjoys the discretion to award the whistleblower(s) 10 to 30 percent of the sanctions collected. Awards are paid from an Investor Protection Fund. The Dodd-Frank Act requires the SEC to establish a separate office – the OWB – to administer the whistleblower program. The OWB is statutorily required to report annually to Congress on its activities, whistleblower complaints, and the SEC’s response.
This year’s Annual Report, released on November 15, 2013, reveals that the SEC received 3,238 tips, complaints, and referrals from whistleblowers across the country and abroad in fiscal year 2013 (October 1, 2012 through September 30, 2013). This represents an 8 percent increase from fiscal year 2012. The most common complaint categories relate to:
- corporate disclosures and financial statements (17.2 percent, or a 6 percent decrease from the prior year);
- offering fraud (17.1 percent, or an 11 percent increase from the prior year); and
- manipulation (16.2 percent, or a 7 percent increase from the prior year).
Other categories of complaints had significantly lower reporting percentages, including:
- insider trading (6.1 percent);
- trading and pricing (5.2 percent);
- Foreign Corrupt Practices Act, also known as the “FCPA” (4.6 percent);
- unregistered offerings (3.3 percent);
- market event (2.8 percent); and
- municipal securities and public pension (1.5 percent).
Two categories not referenced above, “other” and “blank,” together constituted the remaining 26.2 percent of the total tips calculated.
Geographically, whistleblowers span all 50 states, the District of Columbia, the U.S. territories of Puerto Rico, Guam and the U.S. Virgin Islands, as well as 55 countries outside of the United States. Domestically, the largest number of tipsters came from:
- California (375);
- New York (215); and
- Florida (187).
The total number of tips received from abroad was 404, which constituted approximately 11.8 percent of the total tips received for the period covered in the Annual Report. The largest number of tipsters from outside the United States came from:
- United Kingdom (66);
- Canada (62); and
- China (52).
Tips from Russia, India and Ireland totaled 20, 18 and 18, respectively.
There were 118 enforcement judgments and orders issued during fiscal year 2013 that potentially qualified as eligible for a whistleblower award. The OWB provided the public with notice of these actions because they involved sanctions exceeding the statutory threshold of more than $1 million and analyzed each claim for an award relating to the tips that led to these judgments. Since inception of the program in August 2011, the SEC has granted awards to six whistleblowers, four of those in fiscal year 2013.
Employers should continue to encourage employees to report possible corporate wrongdoing internally. And robust policies and procedures designed both to prevent and detect criminal and fraudulent conduct will inure to a company’s benefit in the event the SEC determines that wrongdoing has in fact occurred. The SEC has made clear that it will not process awards in a manner that undercuts bona fide compliance programs.
But there is still work that companies can do. The complaint numbers we have reported can and should guide companies and market participants as to where they allocate their training and educational resources. For example, public reporting companies should focus on training and compliance issues related to corporate disclosures and financial statements and make certain they have a robust disclosure control program in place. In addition, market participants, including broker-dealers and investment advisers, should have robust compliance programs to prevent and detect offering fraud and stock price manipulation. Companies and market participants also should not ignore issues that trigger relatively low numbers of complaints. Some of these issues – like insider trading and FCPA violations – carry such high reputational risk, or have such a high priority for enforcement within the SEC, that they warrant educational and training resources disproportionate to their complaint rate.
In sum, the SEC’s Annual Report provides helpful guidance on how best to allocate educational and training resources in the context of a robust corporate compliance program. We note also that periodic program assessments are an integral part of every bona fide compliance regime, and we stand ready to help in this regard – before an employee blows the whistle.