The Bank Is Open - SEC’s Investor Protection Fund Is Poised to Pay Whistleblower Bounties

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The Dodd-Frank Wall Street Reform and Consumer Protection Act directs the U.S. Securities and Exchange Commission (SEC) to make monetary awards, or “bounties,” to individuals who voluntarily provide original information that leads to successful SEC enforcement actions resulting in monetary sanctions of more than $1 million. With awards in the range of 10 percent to 30 percent of the monetary sanction, the bounty for the employee can be significant, especially in light of recent SEC enforcement actions netting penalties well into the tens of millions of dollars. For example, the first round of the SEC’s Notices of Covered Actions (the mechanism by which the SEC notifies whistleblowers when to submit their claim for a bounty) references the judgment that led to the subsequent monetary penalty against hedge fund manager Raj Rajaratnam in the amount of $92.8 million. An original source in a case such as Rajaratnam has the potential to receive up to 30 percent of the SEC’s penalty.

Dodd-Frank’s whistleblower bounty provision caused quite a stir. Many predicted an onslaught of SEC enforcement activity and internal corporate investigations. To get ready, plaintiffs’ law firms established whistleblower practice groups and hired former SEC enforcement officials. Corporate firms published client alerts and held seminars. But since the promulgation of the SEC’s final rule, which was itself controversial for not requiring a whistleblower to report internally before going to the SEC, things have seemed relatively quiet on the whistleblower front. The quiet, however, is likely just the calm before the storm.

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