The SEC’s Whistleblower Program: 2013 Results and What to Expect in 2014

by Goodwin
Contact

Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) in July 2010 as part of a massive overhaul of the nation’s financial regulatory system. Among other things, Dodd-Frank revamped the U.S. Securities & Exchange Commission (“SEC”) whistleblower program, providing a direct mechanism for whistleblower complaints to the SEC, enhanced protections for eligible whistleblowers who come forward and cooperate in SEC investigations and proceedings involving the corporation that employs them, and potentially significant financial incentives for eligible whistleblowers. Dodd-Frank also requires the SEC’s Office of the Whistleblower to provide Congress with an annual update on its activities, whistleblower complaints and the response to complaints.

The 2013 Annual Report to Congress on the Dodd-Frank Whistleblower Program (the “2013 Report”) revealed a steady increase in the successful use of the program in its second full year, with an 8% rise in tips and whistleblower awards over 2012. Following the release of the 2013 Report, the SEC also publicized details about a case that yielded a massive $14 million award in October 2013, and announced that it had made additional payment of $150,000 (bringing the total to $200,000) to the first person to receive an award, in August 2012, under the program.

These results, as well as recent statements by representatives of the SEC, suggest that in the coming year the SEC will continue to rely heavily on its whistleblower program to generate leads that might ultimately lead to enforcement actions, and that there will continue to be substantial financial incentives for potential whistleblowers to bring their claims directly to the SEC. In light of this, it is critical that companies take concrete steps to ensure that their policies and procedures both encourage internal reporting and provide a clear mechanism for the prompt consideration and analysis of complaints.

2013 SEC Annual Whistleblower Report

In the 2013 Report, the SEC reported that the number of tips received increased 8% from 3,001 in 2012 to 3,238 in 2013. As in 2012, last year the top three categories for complaints were corporate disclosures (17.2%), offering fraud (17.1%) and manipulation (16.2%).[i] The whistleblower tips were not limited geographically – tips originated from all 50 states and from 55 other nations. Of the 2,250 whistleblower tips originating from within the United States and its territories, the states with the most tips were California (375), New York (215), Florida (187) and Texas (135).[ii] Of the 404 non-U.S. tips, the countries with the highest number of complaints were the United Kingdom (66), Canada (62) and China (52).[iii]

Whistleblower awards are the key incentive for potential whistleblowers under the program. A whistleblower may recover double back pay and up to 30% of monetary sanctions obtained by the government in excess of $1 million. To be eligible, a whistleblower must voluntarily provide original information to the SEC that leads to the successful enforcement by the SEC of a federal court administrative action, or a related action in which the SEC obtains monetary sanctions totaling more than $1 million. In fiscal year 2013, the SEC paid out $14,831,965 in awards to unidentified whistleblowers and announced another award that has not yet been quantified or distributed:

  • During 2013, the SEC made three additional payments to the recipient, in August 2012, of the first-ever whistleblower award – an individual who provided information that helped the SEC detect and stop a multi-million dollar fraud. As noted above, that individual recently received an additional $150,000, after more funds were collected in the underlying case. That individual has now received a total of $200,000 in award payments.
  • On June 12, 2013, the SEC announced its second-ever whistleblower award to three whistleblowers who helped in the investigation and subsequent closure of a hedge fund – the first installment of these award payments made in August 2013. 
  • On October 1, 2013, the SEC announced the largest whistleblower award to date – an award of $14 million to a whistleblower who provided information that enabled the SEC to bring an enforcement action and recover investor funds in less than six months.
  • On October 30, 2013, the SEC announced that it made a $150,000 award – representing 30% of the money collected by the SEC in the successful enforcement action, the maximum permitted under the law; however, the actual payment of the award occurred after the end of the fiscal year and thus the amount is not captured in the 2013 payout amount above.

Following the release of the 2013 Report, the SEC disclosed that the $14 million dollar award payment relates to a case in which Anshoo R. Sethi and his two Chicago-based companies secured more than $155 million in investment funds from 250 foreign investors in connection with a fictitious plan to build a hotel and conference center. In April, a federal court ordered the return to these investors of $147 million which was being held on their behalf in U.S. bank accounts. The SEC decided that the whistleblower deserved 10% of the $147 million returned to the investors.

While the SEC has made substantial awards, it has also denied some whistleblower awards. In fact, at least two would-be whistleblowers have been denied whistleblower awards in connection with cases from 2008 and 2009 on grounds that the individuals did not provide the SEC with “original information.”[iv]

One thing is certain: the SEC has indicated that it views these monetary awards as a valuable tool in the generation of tips that lead to enforcement actions. In connection with the $14 million award, SEC Enforcement Chief Andrew Ceresney stated that the Staff is “confident there will be more frequent and numerous payouts as the program continues to gain momentum.” SEC Chair Mary Jo White has also acknowledged that the program “has rapidly become a tremendously effective force-multiplier, generating high quality tips and, in some cases, virtual blueprints laying out an entire enterprise, directing us to the heart of an alleged fraud.”[v] She noted that whistleblower awards “persuade people to step forward” and “put fraudulent conduct on [the SEC’s] radar that [the Staff] may not have found ourselves, or as quickly.”[vi] Likewise, the head of the SEC’s new Financial Reporting and Audit Task Force,[vii] David Woodcock, noted that “whistleblowers are hugely important” in uncovering financial reporting and accounting fraud, and that the SEC is currently investigating cases that it could not have uncovered through use of the SEC’s analytics, screening or proactive efforts.[viii]

Finally, on a related point, Sean McKessy, Chief of the SEC’s Office of the Whistleblower, recently warned companies not to try to steer potential whistleblowers away from the whistleblower program by conditioning certain terms or benefits of employment on an agreement not to report suspected violations to the SEC. McKessy noted that the SEC is “actively looking for examples of confidentiality agreements, separat[ion] agreements, employee agreements that ... in substance say ‘as a prerequisite to get this benefit you agree you’re not going to come to the commission or you’re not going to report anything to a regulator.’”[ix]

Key Takeaways

The rise in whistleblower complaints, the increase in number and dollar value of whistleblower awards, and the statements of SEC representatives reinforcing the importance of the whistleblower program suggest that the SEC will continue to make efforts to increase the number of whistleblower tips received, analyze these tips carefully (especially in connection with financial reporting and accounting allegations), and use them to drive enforcement actions.

In this environment, companies should take appropriate steps to:

  • Be Prepared. Conduct appropriate risk assessments and establish policies and procedures that make it easy and safe for whistleblowers to submit internal complaints; otherwise, they may go directly to regulators. However, employers need to be careful that their efforts not be perceived as an attempt to condition employee rights or benefits on an agreement (express or implied) not to report problems to the SEC.
  • Be Alert and Responsive. Monitor internal complaints and react swiftly as they come in; get the right people involved and develop a game plan.
  • Be Disciplined. Adhere to your investigative protocols and do not lose sight of issues related to business implications, privilege and potential self-reporting obligations.
  • Be Committed. It is not enough to implement the framework of a system; companies must devote appropriate resources to compliance programs and obtain buy-in of key stakeholders.

[i]         U.S. Securities and Exchange Commission, Annual Report to Congress on the Dodd-Frank Whistleblower Program Fiscal Year 2013 (Nov. 2013) (“2013 Report”), at Appendix B.

[ii]        Id. at Appendix C.

[iii]        Id. at Appendix D. The SEC also notes that there were an additional 779 participants in its whistleblower program (approximately 22.69% of the total number for fiscal year 2013) who submitted tips without any foreign or domestic geographical categorization or who submitted tips anonymously through counsel. See id. at Appendix C.

[iv]         “SEC Has Denied 2 Whistleblower Claims in 2014,” Law360 (Apr. 2, 2014).

[v]         SEC Chair Mary Jo White, Remarks at the Securities Enforcement Forum (Oct. 9, 2013).

[vi]        Id.

[vii]       As noted in a July 2, 2013 SEC press release announcing the creation of the Financial Reporting and Audit Task Force, the SEC created this unit to “concentrate on expanding and strengthening the Division’s efforts to identify securities-law violations relating to the preparation of financial statements, issuer reporting and disclosure, and audit failures.”

[viii]       “SEC’s New Accounting Fraud Task Force To Actively Seek Whistle-Blowers, Chief Says,” Bloomberg BNA Daily Exec. Rep. No. 183, G-5 (Sept. 20, 2013).

[ix]        “SEC Warns In-House Attys Against Whistleblower Contracts,” Law360 (Mar. 14, 2014).

IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this informational piece (including any attachments) is not intended or written to be used, and may not be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Goodwin | Attorney Advertising

Written by:

Goodwin
Contact
more
less

Goodwin on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.
Feedback? Tell us what you think of the new jdsupra.com!