On August 21, 2012, the SEC announced its first whistleblower award payout of nearly $50,000 to a whistleblower who helped the agency halt a multi-million dollar fraud. The SEC’s release indicated that the anonymous award recipient provided documents and other “significant information” that allowed the SEC’s investigation to move at an accelerated pace and prevent the fraud from ensnaring additional victims. The SEC stated that the whistleblower’s assistance led to the court ordering over $1 million in sanctions, of which $150,000 has already been collected. A final judgment against other defendants may issue and the sanctions may increase. If the monies collected do increase, the whistleblower, who received the maximum available 30% award, may receive additional payments. The SEC rejected another tipster’s claim for a whistleblower award in the same matter, as the would-be whistleblower’s tip did not lead to or significantly contribute to the SEC’s enforcement action.
The Dodd-Frank Wall Street Reform and Consumer Protection Act amended the Securities Exchange Act of 1934 by, among other things, adding Section 21F entitled, “Securities Whistleblower Incentives and Protection.” The whistleblower program became effective on August 12, 2011. It directs the SEC to make monetary awards to eligible whistleblowers who provide information to the agency that leads to successful enforcement actions resulting in the imposition of monetary sanctions over $1 million. Awards are required to be made in the amount of 10% - 30% of the monetary sanctions that are collected.
An “eligible whistleblower” is a natural person (or persons acting jointly) who voluntarily provides the SEC with original information about a possible violation of the federal securities laws that has occurred, is ongoing, or is about to occur. Information is provided “voluntarily” if it is provided to the SEC or another regulatory or law enforcement agency before the SEC, the Public Company Accounting Oversight Board, Congress or other regulatory or self-regulatory organization requests it from the whistleblower. “Original information” is information derived from the whistleblower’s independent knowledge (and not derived from publicly available sources) or the whistleblower’s independent analysis (evaluation of information that may be publicly available but which reveals information that is not generally known), and that is not already known by the SEC. Information satisfies the “leads to” requirement if it causes the SEC to open a new investigation, re-open a previously closed investigation or pursue a new line of inquiry regarding an ongoing investigation, and the SEC brings a successful enforcement action based at least in part on the information provided by the whistleblower. The SEC may also pay an award based on amounts collected in certain related actions. The million dollar threshold is an “all in” number and includes penalties, disgorgement and interest. Whistleblowers need not be employees of the subject company to be eligible for an award. Certain people may not be eligible for whistleblower awards, including outside auditors and, with certain exceptions, persons who receive information through attorney-client privileged communications. Whistleblowers can come from certain internal governance, compliance or audit roles but they must wait until 120 days after first reporting internally, unless they reasonably believe disclosure is necessary to prevent the entity from causing substantial injury or impeding an investigation.
Whistleblowers can attempt to keep their identity confidential and can submit tips through an attorney. In announcing the first whistleblower program award, the SEC went to great lengths to protect the whistleblower’s identity. The agency did not provide details about the fraud, the nature of the underlying business or whether the whistleblower was an employee of the business. The whistleblower program has express provisions to protect the identities of whistleblowers who elect to remain anonymous as well as severe anti-retaliation provisions. To be entitled to protection from retaliation a whistleblower must have a reasonable belief that the information he or she is providing relates to a possible securities law violation. The whistleblower does not need to qualify for an award to receive the protections of the anti-retaliation provisions. Although the identity of a whistleblower may eventually be revealed should, for example, the SEC be compelled by a court to reveal that information, companies may be hard-pressed to uncover the information and should be careful to remain compliant with the anti-retaliation provisions.
Even before announcing the much anticipated first whistleblower award, the SEC declared the program a huge success. The Chief of the SEC’s Whistleblower Office has stated that since implementation of the program a year ago, the SEC is receiving on average approximately eight tips a day. Tips are coming in to the Whistleblower Office from all over the world. The SEC also reports that the quality of the tips and extent of documentation has improved.
Although the SEC has lauded the success of the whistleblower program, the structure of the program has many critics. Business interests lobbied the SEC to require whistleblowers to first report alleged wrongdoing to companies’ internal compliance programs before filing claims with the SEC’s Whistleblower Office, for fear that to do otherwise would undermine internal efforts to detect and stop fraud. The SEC rejected this recommendation and instead adopted a provision that incentivizes employees to first report alleged wrongdoing to their employers. Whistleblowers who first report internally can be eligible for an award even if their employer subsequently informs the SEC about the violations. Whistleblowers who report internally before or at the time they report to the SEC will be treated as if they reported the information to the SEC as of the internal company reporting date if the whistleblower provides the information to the SEC within 120 days of reporting to the company. Thus, whistleblowers should be less concerned that a competing tipster will beat them to the SEC’s Whistleblower’s Office and qualify for an award. Whistleblower participation in internal compliance systems may also result in an increase in the amount of the award.