Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) in July 2010 as part of a massive overhaul of the nation’s financial regulatory system. Among other things, Dodd-Frank revamped the U.S. Securities & Exchange Commission (“SEC”) whistleblower program, providing a direct mechanism for whistleblower complaints to the SEC, enhanced protections for eligible whistleblowers who come forward and cooperate in SEC investigations and proceedings involving the corporation that employs them, and potentially significant financial incentives for eligible whistleblowers. Dodd-Frank also requires the SEC’s Office of the Whistleblower to provide Congress with an annual update on its activities, whistleblower complaints and the response to complaints.
The 2013 Annual Report to Congress on the Dodd-Frank Whistleblower Program (the “2013 Report”) revealed a steady increase in the successful use of the program in its second full year, with an 8% rise in tips and whistleblower awards over 2012. Following the release of the 2013 Report, the SEC also publicized details about a case that yielded a massive $14 million award in October 2013, and announced that it had made additional payment of $150,000 (bringing the total to $200,000) to the first person to receive an award, in August 2012, under the program.
These results, as well as recent statements by representatives of the SEC, suggest that in the coming year the SEC will continue to rely heavily on its whistleblower program to generate leads that might ultimately lead to enforcement actions, and that there will continue to be substantial financial incentives for potential whistleblowers to bring their claims directly to the SEC. In light of this, it is critical that companies take concrete steps to ensure that their policies and procedures both encourage internal reporting and provide a clear mechanism for the prompt consideration and analysis of complaints.
2013 SEC Annual Whistleblower Report
In the 2013 Report, the SEC reported that the number of tips received increased 8% from 3,001 in 2012 to 3,238 in 2013. As in 2012, last year the top three categories for complaints were corporate disclosures (17.2%), offering fraud (17.1%) and manipulation (16.2%).[i] The whistleblower tips were not limited geographically – tips originated from all 50 states and from 55 other nations. Of the 2,250 whistleblower tips originating from within the United States and its territories, the states with the most tips were California (375), New York (215), Florida (187) and Texas (135).[ii] Of the 404 non-U.S. tips, the countries with the highest number of complaints were the United Kingdom (66), Canada (62) and China (52).[iii]
Whistleblower awards are the key incentive for potential whistleblowers under the program. A whistleblower may recover double back pay and up to 30% of monetary sanctions obtained by the government in excess of $1 million. To be eligible, a whistleblower must voluntarily provide original information to the SEC that leads to the successful enforcement by the SEC of a federal court administrative action, or a related action in which the SEC obtains monetary sanctions totaling more than $1 million. In fiscal year 2013, the SEC paid out $14,831,965 in awards to unidentified whistleblowers and announced another award that has not yet been quantified or distributed:
- During 2013, the SEC made three additional payments to the recipient, in August 2012, of the first-ever whistleblower award – an individual who provided information that helped the SEC detect and stop a multi-million dollar fraud. As noted above, that individual recently received an additional $150,000, after more funds were collected in the underlying case. That individual has now received a total of $200,000 in award payments.
- On June 12, 2013, the SEC announced its second-ever whistleblower award to three whistleblowers who helped in the investigation and subsequent closure of a hedge fund – the first installment of these award payments made in August 2013.
- On October 1, 2013, the SEC announced the largest whistleblower award to date – an award of $14 million to a whistleblower who provided information that enabled the SEC to bring an enforcement action and recover investor funds in less than six months.
- On October 30, 2013, the SEC announced that it made a $150,000 award – representing 30% of the money collected by the SEC in the successful enforcement action, the maximum permitted under the law; however, the actual payment of the award occurred after the end of the fiscal year and thus the amount is not captured in the 2013 payout amount above.
Following the release of the 2013 Report, the SEC disclosed that the $14 million dollar award payment relates to a case in which Anshoo R. Sethi and his two Chicago-based companies secured more than $155 million in investment funds from 250 foreign investors in connection with a fictitious plan to build a hotel and conference center. In April, a federal court ordered the return to these investors of $147 million which was being held on their behalf in U.S. bank accounts. The SEC decided that the whistleblower deserved 10% of the $147 million returned to the investors.
While the SEC has made substantial awards, it has also denied some whistleblower awards. In fact, at least two would-be whistleblowers have been denied whistleblower awards in connection with cases from 2008 and 2009 on grounds that the individuals did not provide the SEC with “original information.”[iv]
One thing is certain: the SEC has indicated that it views these monetary awards as a valuable tool in the generation of tips that lead to enforcement actions. In connection with the $14 million award, SEC Enforcement Chief Andrew Ceresney stated that the Staff is “confident there will be more frequent and numerous payouts as the program continues to gain momentum.” SEC Chair Mary Jo White has also acknowledged that the program “has rapidly become a tremendously effective force-multiplier, generating high quality tips and, in some cases, virtual blueprints laying out an entire enterprise, directing us to the heart of an alleged fraud.”[v] She noted that whistleblower awards “persuade people to step forward” and “put fraudulent conduct on [the SEC’s] radar that [the Staff] may not have found ourselves, or as quickly.”[vi] Likewise, the head of the SEC’s new Financial Reporting and Audit Task Force,[vii] David Woodcock, noted that “whistleblowers are hugely important” in uncovering financial reporting and accounting fraud, and that the SEC is currently investigating cases that it could not have uncovered through use of the SEC’s analytics, screening or proactive efforts.[viii]
Finally, on a related point, Sean McKessy, Chief of the SEC’s Office of the Whistleblower, recently warned companies not to try to steer potential whistleblowers away from the whistleblower program by conditioning certain terms or benefits of employment on an agreement not to report suspected violations to the SEC. McKessy noted that the SEC is “actively looking for examples of confidentiality agreements, separat[ion] agreements, employee agreements that ... in substance say ‘as a prerequisite to get this benefit you agree you’re not going to come to the commission or you’re not going to report anything to a regulator.’”[ix]
The rise in whistleblower complaints, the increase in number and dollar value of whistleblower awards, and the statements of SEC representatives reinforcing the importance of the whistleblower program suggest that the SEC will continue to make efforts to increase the number of whistleblower tips received, analyze these tips carefully (especially in connection with financial reporting and accounting allegations), and use them to drive enforcement actions.
In this environment, companies should take appropriate steps to:
- Be Prepared. Conduct appropriate risk assessments and establish policies and procedures that make it easy and safe for whistleblowers to submit internal complaints; otherwise, they may go directly to regulators. However, employers need to be careful that their efforts not be perceived as an attempt to condition employee rights or benefits on an agreement (express or implied) not to report problems to the SEC.
- Be Alert and Responsive. Monitor internal complaints and react swiftly as they come in; get the right people involved and develop a game plan.
- Be Disciplined. Adhere to your investigative protocols and do not lose sight of issues related to business implications, privilege and potential self-reporting obligations.
- Be Committed. It is not enough to implement the framework of a system; companies must devote appropriate resources to compliance programs and obtain buy-in of key stakeholders.
[i] U.S. Securities and Exchange Commission, Annual Report to Congress on the Dodd-Frank Whistleblower Program Fiscal Year 2013 (Nov. 2013) (“2013 Report”), at Appendix B.
[ii] Id. at Appendix C.
[iii] Id. at Appendix D. The SEC also notes that there were an additional 779 participants in its whistleblower program (approximately 22.69% of the total number for fiscal year 2013) who submitted tips without any foreign or domestic geographical categorization or who submitted tips anonymously through counsel. See id. at Appendix C.
[vii] As noted in a July 2, 2013 SEC press release announcing the creation of the Financial Reporting and Audit Task Force, the SEC created this unit to “concentrate on expanding and strengthening the Division’s efforts to identify securities-law violations relating to the preparation of financial statements, issuer reporting and disclosure, and audit failures.”
[viii] “SEC’s New Accounting Fraud Task Force To Actively Seek Whistle-Blowers, Chief Says,” Bloomberg BNA Daily Exec. Rep. No. 183, G-5 (Sept. 20, 2013).
[ix] “SEC Warns In-House Attys Against Whistleblower Contracts,” Law360 (Mar. 14, 2014).