The Securities Exchange Commission’s Annual Report on the Dodd-Frank Whistleblower Program for Fiscal Year 2012 (the “Report”), released yesterday, reveals a number of things. The SEC has received a lot of tips, complaints, and referrals: A total of 3,001 in fiscal year 2012 with the lowest number (166) in November 2011 and the highest number (313) in May 2012. Those tips, complaints, and referrals came from all 50 states, theDistrict of Columbia, Puerto Rico and 49 countries, primarily from tipsters located in states with proximity to major markets including,California (17.4%),Florida (8.1%),Illinois (4.0%),New Jersey (4.1%),New York (9.8%),Pennsylvania (3.6%), andTexas (6.3%). Just over 10% of the tips were received from individuals outside of theUnited States. And, the 3,001 tips primarily were concentrated in three areas: Corporate Disclosure and Financials (18.20%); Offering Fraud (15.50%); and Manipulation (15.20%).
What the Report does not tell us, except in the most general terms, is what the SEC is doing with the tips. For example, how many of the 3,001 tips actually identified fraud or wrongdoing? How many were duplicative? How many were referred to the Division of Enforcement? How many resulted in the initiation of investigations by the Division of Enforcement? How many related to investigations that already were ongoing? On a more basic level, how long does it take the SEC to process a tip?
The Report does describe the first, and only, award under the program made in August 2012 to a whistleblower who reportedly helped the SEC stop an ongoing multi-million dollar fraud. And, according to the SEC, judgments and orders issued during fiscal year 2012 have exceeded the statutory threshold of $1 million in 143 cases, for which Notices of Covered Action have been posted so that individuals may apply for whistleblower awards. The Report notes, however, that the posting of such notices does not indicate that a whistleblower tip, complaint, or referral led to the SEC initiating an investigation or filing an action or that an award to a whistleblower will be paid in connection with the case. Thus, the Report does not reveal whether the SEC utilized a whistleblower’s assistance in any of the 143 cases; nor, does it disclose whether whistleblowers have brought compelling cases to the SEC that have resulted in judgments and orders below the statutory threshold.
One telling bit of information revealed in the Annual Report is that there are fourteen total employees working for the Office of the Whistleblower. Although the Report suggests that these employees are receiving assistance from the Division of Enforcement’s Office of Market Intelligence, it is unclear how the Whistleblower Office or the SEC as a whole can effectively administer a program that generated 3,001 tips and, according to the Report, required the staff to return over 3,050 phone calls from members of the public in its first full year. The Annual Report does not answer this question, nor reveal the average length of time between the filing of a tip and review of the information of purported wrongdoing. Congress included an enhanced whistleblower program in Dodd-Frank not only to help the government root out fraud but also to encourage corporations to better police themselves and address illegal conduct head on. In my opinion, therefore, the real issue that remains unanswered by the SEC’s one year review, is not whether the law is encouraging an increase in valid tips and referrals – the sheer number of tips received in the first year suggests that certainly is the case – but, rather, whether the amount of resources devoted thus far to evaluating these tips may allow ongoing fraud to continue unchecked for a significant period of time even while allegations of illegal conduct are within the hands of the SEC.
To read more from Catherine M. Foti, please visit www.maglaw.com