The Securities Exchange Commission (SEC) filed its first anti-retaliation case against a New York-based hedge fund advisory firm. While the SEC continues encouraging employees to share information regarding potential wrongdoing with the authorities through its bounty system (recent reward, USD 875,000 in June 2014), the SEC also sends a clear message to employees: we will not allow retaliation against whistleblowers. From corporations’ perspective, retaliation against whistleblowers is a wrong strategy not only because it discourages internal reporting by employees, but also because it may put the organisation in trouble with the SEC.
On 16 June 2014, the SEC charged a New York-based hedge fund advisory firm with engaging in prohibited principal transactions and then retaliating against the employee who reported the trading activity to the SEC. This is the first time the SEC has filed a case under its new authority pursuant to the Dodd-Frank Act to bring anti-retaliation enforcement actions.
According to the SEC order, the company engaged in a series of retaliatory actions after learning that the whistleblower reported potential violations to the SEC: the company removed the whistleblower from his head trader position, tasked him with investigating the very conduct he reported to the SEC, changed his job function from head trader to a full-time compliance assistant, barred him from performing his supervisory responsibilities and otherwise demoted him.
The company and its owner each agreed to cease and desist from committing or causing future violations without admitting or denying the findings in the order. They each agreed to jointly and severally pay a disgorgement of USD 1.7 million for distribution to current and former investors in the hedge fund, a prejudgment interest of USD 181,771 and a penalty of USD 300,000. They also agreed to retain an independent compliance consultant.
The SEC’s order and the subsequent comments made by SEC representatives emphasise the SEC’s clear intention to pursue those who retaliate against whistleblowers. Andrew J. Ceresney, director of the SEC Enforcement Division stated: “Those who might consider punishing whistleblowers should realize that such retaliation, in any form, is unacceptable.” In the same vein, Sean McKessy, chief of the SEC’s Office of the Whistleblower: “For whistleblowers to come forward, they must feel assured that they’re protected from retaliation and the law is on their side should it occur”[…] We will continue to exercise our anti-retaliation authority in these and other types of situations where a whistleblower is wrongfully targeted for doing the right thing and reporting a possible securities law violation.”
From the start of the SEC Bounty program for whistleblowers pursuant to the Dodd Frank Act, a total of 8 whistleblowers have received awards by the SEC.
The SEC is not the only US law enforcer who is using bounties to encourage whistleblower to bring forward information. On 26 June 2014, the US Department of Justice (DOJ) announced the whistleblowing award of USD 17.2 million as part of a settlement resolving allegations brought in two lawsuits filed by whistleblowers under the qui tam provisions of the False Claims Act.