A Primer on the New SEC Whistleblower Program
By Rob Glass
The U.S. Securities and Exchange Commission’s (SEC) Office of the Whistleblower opened for business in August 2011. In light of the devastating securities-fraud cases of the last decade, Congress included a provision in the Dodd-Frank Act that incents private citizens to report suspected securities fraud. A tip, if it leads to a successful enforcement action by the SEC, can lead to a multi-million dollar award.
Under the whistleblower program, a whistleblower who voluntarily provides information to the SEC leading to recovery of monetary sanctions over $1 million is entitled to an award of ten to thirty percent of whatever the government recovers. 15 U.S.C. § 78u-6(b)(1). The amount of the bounty is within the discretion of the SEC, but the Act requires the agency to consider the following:
- The significance of the information provided to the success of the SEC’s suit;
- The degree of assistance provided by the whistleblower; and
- The SEC’s interest in deterring violations.
15 U.S.C. § 78u-6(c)(1)(B)(i).
The SEC may also, in its discretion, consider as follows: a) whether the whistleblower’s assistance was ongoing; b) whether the whistleblower provided the information in a timely manner; c) whether the whistleblower experienced any unique hardships by reporting the information; and d) whether the whistleblower shared in culpability for the illegal acts. 17 C.F.R. § 240.21F-6(a)-(b).
A whistleblower will be disqualified from receiving an award if he or she is criminally convicted for any of the securities law violations giving rise to the recovery or if he or she knowingly provides false information. 15 U.S.C. § 78u-6(c)(2)(B), (i). In the event that the SEC makes awards to multiple whistleblowers, the aggregate amount of the awards cannot exceed thirty percent of the amount recovered. 17 C.F.R. § 240.21F-5(c).
In developing the whistleblower program, a point of contention with the business community was the amount of emphasis to place on compliance with a corporation’s own internal compliance systems. The agency considered, but ultimately rejected, a proposal from the business community requiring tipsters to report violations internally before going to the SEC. Securities Whistleblower Incentives and Protections, Final Rule, 76 Fed. Reg. 34300-34384 (June 13, 2011). Instead, the final regulations encourage use of internal compliance procedures by tying the amount of the award to an individual’s cooperation with corporate investigations.
If a whistleblower reports the possible violations to his or her company prior to or at the same time as he or she reports the suspicious acts to the SEC, the award may be increased. 17 C.F.R. § 240.21F-6(a)(4). Conversely, if the whistleblower “undermine[s] the integrity” of a corporate internal compliance system or interferes with a company investigation, the amount of the award may be reduced. 17 C.F.R. § 240.21F-6(b)(3). A whistleblower has 120 days from the date of providing his or her company with the information to provide the same information to the SEC. The whistleblower will receive credit for the tip if the company later reports the same information (or the results of an investigation initiated as a result of the information) to the SEC. 17 C.F.R. § 240.21F-4(c)(3).
The information provided must be “original,” as in not known from any other source, and the whistleblower must have “independent knowledge” of the suspected securities law violation. Knowledge gained through an attorney-client relationship, an internal audit or investigation, or a violation of a state or federal law will not qualify an individual for an award. 17 C.F.R. § 240.21F-4(b).
Submissions may be made online at the Office of the Whistleblower’s website or by mail. Tips may be sent to the Office of the Whistleblower anonymously, but anonymous whistleblowers must be represented by an attorney. 15 U.S.C. § 78u-6(d)(2)(A). Each submission must be sworn under penalty of perjury; otherwise, the reporting individual will be disqualified from recovering an award. (In the event the tip is submitted anonymously, the attorney must keep the sworn statement.) 17 C.F.R. § 240.21F-9.
The Dodd-Frank Act also protects whistleblowers from retaliation by employers. The Act specifies that an employer may not “discharge, demote, suspend, threaten, harass . . . or in any other manner discriminate” against a whistleblower for providing information to the SEC and creates a private cause of action against employers for retaliation.
In sum, proponents of the program are hopeful that the system will snare more fraudsters before they can do substantial damage, though the system works only if private citizens and the SEC remain vigilant.
Rob Glass is an associate at McCabe Rabin, P.A. He practices in business, securities and whistleblower litigation. He previously worked as a law clerk to U.S. District Judge Kenneth Marra and Fourth District Court of Appeal Judge Spencer Levine.