SEC Awards More Than $14 Million to Whistleblower

On October 1, 2013, the Securities and Exchange Commission (SEC) awarded more than $14 million to a whistleblower who provided information that led to an SEC enforcement action. [1] The SEC did not disclose the name of the whistleblower, the subject of the tip, or the action that resulted from the tip.  This is the SEC’s third and by far the most significant payment to a whistleblower under the Dodd-Frank Act’s bounty program.  In August 2012, the SEC made its first payment of approximately $50,000 and this past month made payments of $25,000 to three whistleblowers who helped halt a sham hedge fund.  This award is likely to raise the profile of the SEC’s whistleblower program and lead to an increase in the number of tips submitted to the SEC.

The bounty program provides a monetary incentive ranging from 10%-30% of the sanctions collected to whistleblowers who voluntarily provide the SEC with original information that leads to a successful SEC action with sanctions exceeding $1 million.  To administer and enforce the bounty program, the SEC created the Office of the Whistleblower in 2011.

Before this staggering award, companies were already concerned that employees would bypass internal compliance systems as a result of the bounty program.  Through its implementing regulations, the SEC attempted to encourage internal reporting.  If an employee makes an internal report and the company decides to disclose a potential securities law violation to the SEC, the employee will receive credit for any additional information uncovered by the company’s investigation.  Additionally, if a whistleblower reports to the SEC within 120 days of making an internal report, the tip will be deemed made to the SEC on the date of the internal report.  The SEC also considers whether an internal report was made in determining the amount of a whistleblower award. 

Some companies have been hesitant to inform employees of these internal reporting incentives because it would increase awareness of the whistleblower program and therefore have the unintended consequence of increasing the number of tips, whether they were first reported internally or not.  Now that a $14 million award has been made, it is likely that employees will become more familiar with the bounty program whether or not they hear about it from their employer.  Accordingly, companies may want to take care to evaluate their policies and procedures for handling internal reports of wrongdoing and make efforts to create an environment that encourages employees to bring any potential wrongdoing to management’s attention.  

Not only does the SEC protect the identity of whistleblowers, the investigative staff will not disclose during the course of an investigation that the investigation was prompted by a whistleblower complaint.  This makes it difficult for companies to evaluate the effectiveness of employee education and internal reporting systems. 

Companies should also be familiar with the Dodd-Frank Act’s anti-retaliatory provisions.  It provides employees a private right of action if they suffered an adverse employment action as a result of protected activity and entitles a successful litigant to reinstatement with the same seniority status, two times the amount of back pay otherwise owed to the individual with interest and litigation costs, expert witness fees and reasonable attorneys’ fees.  While the U.S. Court of Appeals for the Fifth Circuit recently interpreted these provisions to only afford protections to a whistleblower that made a report directly to the SEC, [2] other courts and the SEC have interpreted these protections to apply more broadly to employees who make only an internal report. [3] The Chief of the SEC’s Office of the Whistleblower recently stated in an interview with the Wall Street Journal that the Office is “actively looking” for the appropriate case to pursue a retaliation claim and is specifically looking for a case in which an employee was retaliated against for making a report in good faith that turns out to be wrong. [4]

Drinker Biddle can help companies to determine whether they want to educate employees about the incentives for internal reporting and to formulate effective internal compliance strategies to deal with this potential new wave of whistleblowers.  If you have any questions about the SEC’s whistleblower program, please contact one of the authors listed above, or any other member of the White Collar Criminal Defense and Corporate Investigations Practice Group.

[1] The SEC’s Press Release is available at http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370539854258.

[2] See Asadi v. G.E. Energy (USA), LLC, No. 12-20522 (5th Cir. July 17, 2013).

[3] See, e.g., 17 C.F.R. § 240.12F-12(b)(1); Kramer v. Trans-Lux Corp., No. 11-1424, 2012 U.S. Dist. LEXIS 136939, at *10 (D. Conn. Sept. 25, 2012); Egan v. TradingScreen, Inc., No. 10 Civ. 8202 (LBS), 2011 WL 1672066, at *4-5 (S.D.N.Y. May 4, 2011).

[4] Rachel Louise Ensign, Wall Street Journal, Sep. 24 2013, “Q&A:  Sean McKessy, Chief, SEC’s Office of the Whistleblower,” available at http://blogs.wsj.com/riskandcompliance/2013/09/24/q-a-sean-mckessy-chief-of-the-secs-office-of-the-whistleblower