By a 3-2 vote, the Securities and Exchange Commission today approved final rules that financially reward whistleblowers whose tips lead to successful SEC enforcement.
For years, the federal government has benefited greatly as a result of the False Claims Act. Thanks largely to tips provided by whistleblowers, the government recovered more than $5.5 billion over the past two fiscal years alone. Much of this amount, particularly in the context of claims of health care fraud, has been recovered via tips from whistleblowers. Whistleblower tips also have led to significant settlements and judgments against defense contractors and others who contract with, or receive funding from, the federal government.
Whistleblowers have had incentives to report suspected fraud to the government. Depending upon whether the government decides to prosecute the case or allows the whistleblower to sue on its behalf, whistleblowers may recover between 15 and 30 percent of what the government recovers.
Before the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, whistleblowers had no such incentive to come forward to report securities fraud. The Sarbanes-Oxley Act of 2002 protects whistleblowers against retaliation but does not provide for a bounty for reporting securities fraud. Similarly, although the Securities Exchange Act of 1934 did provide for rewards to whistleblowers, those provisions applied only to insider-trading cases and were rarely utilized.
The Dodd-Frank Act attempted to step into this gap by providing whistleblower incentives in a wide variety of securities cases, including Foreign Corrupt Practices Act violations, insider trading, and accounting fraud. An eligible whistleblower may qualify for rewards between 10 and 30 percent of the amounts recovered, so long as the total amount recovered as a result of the tip exceeds $1 million. The Dodd-Frank Act, however, left the issue of eligibility for the reward largely to the SEC.
Today’s SEC vote excludes the following categories of potential whistleblowers from being eligible for rewards:
- People who have a pre-existing legal or contractual duty to report their information to the Commission
- Attorneys (including in-house counsel) who attempt to use information obtained from client engagements to make whistleblower claims for themselves (unless disclosure of the information is permitted under SEC rules or state bar rules)
- People who obtain the information by means or in a manner that is determined by a U.S. court to violate federal or state criminal law
- Foreign government officials
- Officers, directors, trustees, or partners of an entity who are informed by another person (such as by an employee) of allegations of misconduct, or who learn the information in connection with the entity’s processes for identifying, reporting, and addressing possible violations of law (such as through the company hotline)
- Compliance and internal audit personnel
- Those who are criminally convicted in connection with the conduct at issue
- Public accountants working on SEC engagements, if the information relates to violations by the engagement client
Critically, the rules passed today provide for several exceptions to these exclusions. Compliance and audit personnel, as well as public accountants, could become eligible whistleblowers in several circumstances, including when the whistleblower believes disclosure may prevent substantial injury to the financial interest or property of the entity or investors.
The final rules do not require whistleblowers to first report suspected irregularities through internal channels before informing the SEC. This issue has been the subject of intense scrutiny and lobbying, but the majority of the Commission was not persuaded that such a requirement should be imposed.
According to the SEC, “the rules strengthen incentives that had been proposed and add certain additional incentives intended to encourage employees to utilize their own company’s internal compliance programs when appropriate to do so.” In connection with this statement, the SEC states that it will consider increasing the size of an award if the whistleblower first reported to his or her company’s internal compliance program.