Just in time for the holiday season, the U.S. Securities and Exchange Commission (“SEC” or “Commission”) has brought joyful news to three whistleblowers who will receive substantial awards of over $8 million each to two whistleblowers, and over $4 million to another.  The awards announced in late November and early December 2017 follow the release by the Office of the Whistleblower (“OWB”) of the 2017 Annual Report to Congress (the “Report”). That Report notes that the SEC had, until the time of the Report, “ordered wrongdoers in enforcement matters involving whistleblower information to pay over $975 million in total monetary sanctions, including more than $671 million in disgorgement of ill-gotten gains and interest.”  This is a substantial record of recovery.

As for the whistleblowers, prior to the announcement of the most recent awards in late November and December, the Report noted that in the past fiscal year (October 2016 to October 2017), “the SEC ordered whistleblower awards totaling nearly $50 million to 12 individuals,” while in the years since the first award issued in 2012, the SEC had awarded $160 million to 46 individuals.  In FY 2017, awards were the result of a total of over 4,400 tips. 

As Jane Norberg, Chief of the OWB has noted, “the promise of monetary awards,” along with “provisions to safeguard whistleblower confidentiality, and enhanced anti-retaliation protections,” are strong drivers of whistleblower interest and will likely continue to incentivize the reporting of tips for years to come.

Background to the Dodd-Frank Whistleblower Program

The Dodd-Frank Act of 2010 included Section 21F (“Securities Whistleblower Incentives and Protections”), which directs the SEC to issue monetary awards to individuals who voluntarily provide original information leading to successful enforcement of monetary sanctions of over $1 million. The awards are between 10 and 30 percent of collected monetary sanctions, and are paid out of the Investor Protection Fund, which is funded by the payment of monetary sanctions by securities law violators so as not to diminish the financial recoveries of victims.

Whistleblowers may contact the SEC via a hotline, online portal, fax number, or  mailing address.  The OWB is currently tracking over 700 matters from tips received.

Significantly, tips have poured in to the SEC from all over the world, including from as many as 72 foreign countries in FY 2017 alone, and from 114 foreign countries during the lifetime of the program.  Indeed, nine prior award recipients were foreign nationals or residents at the time they made their tips.  The implications of this broad reach are particularly significant for any company with foreign exposure, including interface with foreign government officials, given the potential for liability under the Foreign Corrupt Practices Act.

The SEC adopted rules to implement Section 21F.  Among other things, the rules recognize the appropriateness of internal reporting by whistleblowers to their employers’ compliance function.  (A pending U.S. Supreme Court case, Digital Realty Trust, Inc., v. Somers, which we have covered here, considers whether internal whistleblowers who do not also report to the SEC are entitled to the Dodd-Frank Act’s anti-retaliation protections.)

Recent Awards Among the Highest

FY 2017 included three of the top ten awards granted whistleblowers to date – i.e., awards of $20 million (November 2016), $7 million (January 2017), and $5.5 million (January 2017).  This makes the most recent awards at the start of FY 2018 even more notable.  Indeed, the awards of over $8 million to each of two whistleblowers on November 30, 2017 increase the median and mean amounts that the SEC has awarded.  And, if those awards are counted separately (rather than as a single award of $16 million) the award of $4.1 million on December 5, 2017 is no longer among the top ten.

The Orders awarding these sums – although heavily redacted – offer some insight into the SEC’s reasoning in granting awards.

The Award Order of November 30, 2017, announcing the two largest awards of the 2017 calendar year ($8 million each)

Whether viewed as two separate awards of approximately $8 million each, or as a combined award of approximately $16 million, the award announced in the Award Order of November 30, 2017 is the largest awarded during the 2017 calendar year and among the highest since the program began in 2012.  See SEC Release No. 82181, Whistleblower Award Order, File No. 2018-2 (Nov. 30, 2017).

As notable as the justification offered for granting the award to two claimants however, is the explanation the SEC provided for denying awards to several others.  This is discussed below.

Justification for two awards of over $8 million each in November 2017

According to the Award Order, Claimant 1 voluntarily provided original information to another government agency before the SEC learned of the information, which the SEC deemed to be the voluntary provision of original information to the SEC.  Although the precise nature of the allegations are redacted from the Order, the Order does credit Claimant 1 with providing the “allegation [that] would become the focus of staff’s Investigation and the cornerstone of the Commission’s subsequent action against the Company.”  Furthermore, Claimant 1 “communicated with Enforcement staff approximately 5-6 times during the Investigation, and provided additional, critical information that advanced the Investigation, including the identification of potentially relevant documents and witnesses.”

Notably, between July 21, 2010 (the effective date of the Dodd-Frank Act) but prior to August 12, 2011 (the effective date of the whistleblower rules) Claimant 1 informed the SEC of misconduct, but did not provide the information in writing.  While reports during this period are ordinarily required to be in writing, the SEC exercised its discretion to waive the requirement in this case, citing “unusual circumstances,” namely, the facts that:  (1) Claimant 1 was already cooperating with the SEC prior to July 21, 2010; (2) the SEC itself had requested that Claimant 1 provide the information orally; and (3) the information was deemed reliable.

The second awardee, Claimant 2, provided the SEC with original information through the SEC’s on-line Tips, Complaints, and Referrals (“TCR”) system.  Evidently due to Claimant 2’s own “extensive experience” in a particular area that is redacted from the Order, the SEC concluded that an award was appropriate because Claimant 2’s “submissions and assistance enabled the Enforcement staff to more fully and quickly understand the misconduct and to assess the legal consequences.”  In addition, Claimant 2 retained an expert from an unidentified firm who supplemented Claimant 2’s tip with an expert report.  In sum, given the significance of the information that Claimant 2 provided, and the fact that Claimant 2 directly (and indirectly through the retained expert) “provided continuing and helpful assistance to the Enforcement staff during the Investigation that saved a substantial amount of time and resources in the Investigation,” Claimant 2 also received an award.

Justification for denying awards to expert consultants

Of those claimants denied an award – Claimants 3, 4, 5, 6, and 7 – the SEC addressed at length the submissions of Claimants 3 and 4, who were experts that Claimant 2 had retained to assist in writing the expert report provided to the SEC.  The SEC concluded that the award applications of Claimants 3 and 4 were “inextricably intertwined with” Claimant 2’s application.

The SEC determined that Claimants 3 and 4 did not provide information to the SEC in the form and manner required under the rules.  In addition, since only individuals are entitled to awards, Claimants 3 and 4, in their role as firm representatives, were not considered “individuals.”  Furthermore, the SEC concluded that the information provided was neither original, nor led to the success of the Covered Action.  The SEC noted that experts “retained by and working on behalf of a whistleblower” cannot be sources of original information developed in “the context of that contractual relationship.”  The SEC further concluded that experts retained by whistleblowers “should be deemed to have forfeited and waived any subsequent claim to being the original source of that information if such information was previously provided to the Commission by or on behalf of the whistleblower who retained the expert.”

Finally, the SEC noted that experts cannot “piggyback off of the contributions” of the original source, in this case Claimant 2.  Instead, “they must demonstrate that something unique about their submission of information made an additional significant contribution to the success of the Covered Action,” which in this case Claimants 3 and 4 could not do.

The Award Order of December 5, 2017, announcing a $4.1 million award

On December 5, 2017, the SEC issued a Final Order awarding the Claimant approximately $4.1 million. While the SEC valued the information coming from “a former company insider who both alerted the Commission to a widespread, multi-year securities-law violation, and continued to provide important information and assistance throughout the Commission’s investigation,” the SEC noted that “these positive award considerations are somewhat offset by the Claimant’s unreasonable delay in reporting the misconduct to the Commission.”  See SEC Release No. 82214, Whistleblower Award Order, File No. 2018-3 (Dec. 5, 2017) at 2.  Nonetheless, the SEC found mitigating the facts that the delay occurred prior to establishment of the whistleblower program, and that the whistleblower was a foreign national who may not have been afforded the anti-retaliation protections of the Act, which the U.S. Court of Appeals for the Second Circuit has said have no extraterritorial application.  See Liu v. Siemens AG, 763 F.3d 175 (2d Cir. 2014).

Conclusion

Whatever 2018 holds in store, it is clear that the size of whistleblower awards, and the public notice that comes from them, will continue to strongly incentivize individual whistleblowers both in the United States and abroad.  The implications for companies are no less significant, and may well counsel in favor of more proactive self-disclosures.

Given the U.S. Department of Justice’s formalization of the “FCPA Pilot Program” in the new FCPA Corporate Enforcement Policy that is now a part of the U.S. Attorney’s Manual, the incentives for companies to voluntarily disclose FCPA problems has increased.  Under that recently announced policy, voluntary self-disclosure, full cooperation, and remediation, will generally entitle a company who blows the whistle on itself to a presumptive declination in a FCPA prosecution, barring aggravating factors.