Released late last week, the Securities and Exchange Commission’s 2013 Annual Report on the Dodd-Frank Whistleblower Program (the “Report”) revealed that the program has continued to grow in popularity. The Report, however, also reveals the seeds of what may become the program’s future tribulations.
As anticipated, the program certainly appears to be attracting more participants both at home and abroad. The SEC previously reported that it received 3,001 tips, complaints and referrals for fiscal year 2012. That number was up roughly 8%, for a total of 3,238 tips for fiscal year 2013, bringing the total number of tips from whistleblowers since the program’s inception in August 2011, to 6,573. Moreover, the number of those tips, complaints, and referrals which originated from abroad increased by almost 25% in fiscal year 2013 – from 324 in fiscal year 2012 to 404 in fiscal year 2013. The Report also demonstrated that the vast majority of the tips continue to come from generally the same states and countries as they did in 2012, with California, New York, Florida and Texas again leading the pack for the states, and China outpacing India (which fell to fifth place behind Russia this year) to take over the number three spot behind the leaders for the past two years, United Kingdom and Canada.
The Report also touts the six awards it has granted to whistleblowers since the program’s inception, including four awards in fiscal year 2013 totaling $14,831,965.64. But, the fact that the SEC has granted only six awards since the program started and that $14 million of that total pool went to just one whistleblower may prove problematic. In the SEC’s own words, the purpose of the whistleblower program is “to incentivize individuals to provide the [SEC] with specific, credible, and timely information about possible securities law violations, and thereby enhance the [SEC’s] ability to act swiftly to protect investors from harm and bring violators to justice.” Of the 6,573 individuals who have brought information to the SEC – many risking their jobs – only .09% received a payday, and of those only one – the $14 million whistleblower – has seen the type of award that made the program appear so irresistible when it first began.
Although it identifies this disparity, the Report fails to provide the public with any useful analysis as to how many of the remaining 6,573 tips are still under investigation and for how long these tips have been pending with the SEC. The Report also fails to identify how many of these tips can be connected to instances of retaliation against the whistleblower and whether the SEC has taken any action, as it previously suggested it would (see my last post), against companies violating the anti-retaliation provisions.
The Report also touches on related issues that could discourage potential whistleblowers from reporting misconduct to the SEC. As I discussed in another recent post, the federal courts are split on the validity of the SEC’s own regulations that for anti-retaliation purposes include under the definition of whistleblower, employees who report possible securities violations to persons or authorities other than the SEC. Although the Report asserts that the SEC has the authority to enforce the anti-retaliation protections of the Dodd-Frank Act, it acknowledges, in a footnote, this split among the federal courts and notes that several courts have contradicted the SEC’s interpretation of the breath of Dodd-Frank’s protections. The Report, therefore, highlights the disparity of the developing law but fails to address how the SEC intends to handle a decision that invalidates its own interpretation of its regulations.
The extent to which whistleblowers outside the United States are protected from retaliation under Dodd-Frank also remains uncertain. In a recent opinion in Liu v. Siemens A.G., Judge William H. Pauley III of the Southern District of New York held that the Dodd-Frank Act’s whistleblower anti-retaliation provisions do not protect overseas whistleblowers. That opinion acknowledged, however, that the case was “brought by a Taiwanese resident against a German corporation for acts concerning its Chinese subsidiary relating to alleged corruption in China and North Korea.” Although the Report identifies the significant increase of tips from overseas, it does not address how this burgeoning source of information may be impacted if the reasoning in Liu is extended beyond the facts of that case. Will domestic and overseas whistleblowers continue to make tips, complaints, and referrals if they are not protected from retaliation and have only a remote prospect of receiving an award? The limitations that the courts are finding in the Dodd-Frank anti-retaliation protections could be a significant blow to the SEC’s desire to expand its whistleblower program and to its efforts to attract tips from overseas.
The SEC has received high marks from commentators and from its Office of the Inspector General for administering its whistleblower program. The continued success of the SEC in attracting tipsters is clear from the Report. What is less clear is how the SEC is handling the tips and whether whistleblowers have a realistic prospect of an eventual payday. This uncertainty coupled with a lack of clarity concerning the scope of the Dodd-Frank anti-retaliation provisions raises questions as to whether the SEC will continue to see the increase in tips it has experienced to date.