In the wake of a number of highly publicized corporate scandals, many of which involved both SEC enforcement and criminal prosecution (WorldCom, Adelphia, Tyco and Enron, among others), Congress enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010. Dodd-Frank's amendments to the Sarbanes-Oxley Act, particularly its whistleblower provisions — which established a program to pay financial awards to individuals who provide information about possible securities violations to the SEC — are now familiar to the public company community. Less familiar are the results to date of the SEC whistleblower program. Two years in, there are data and a growing track record that bear on public company governance and, in particular, on corporate compliance programs.
In connection with Dodd-Frank, in August 2011, the SEC established and funded an SEC Office of the Whistleblower to administer the whistleblower program. As noted on the office's website, the SEC "is authorized by Congress to provide monetary awards to eligible individuals who come forward with high-quality original information that leads to a Commission enforcement action in which over $1,000,000 in sanctions is ordered." The range for whistleblower financial awards is between 10 percent and 30 percent of the amounts collected. As of September 30, 2012, the SEC's Investor Protection Fund (established to provide funding for the whistleblower award program) had a balance of more than $453 million.1
The SEC reports that it is getting multiple whistleblower tips every day, and that some of the tips are of "very high quality." The SEC has also reported a "significant uptick" in high-quality tips. While it is hard to divine the meaning of SEC's pronouncements on tip quality, there is also now data on the number of types of whistleblower complaints received by the SEC in fiscal year 2012. In that year, the SEC received 3,001 whistleblower submissions, meaning fully compliant written submissions. This does not include more than 3,000 hotline phone calls received by the SEC. Of the 3,001 formal whistleblower tips, every state, the District of Columbia and Puerto Rico were represented (as were a number of foreign countries). Most of the tips came from California (435; 17.4 percent), New York (246; 9.8 percent) and Florida (202; 8.1 percent). There were 70 tips from Massachusetts (2.8 percent). The nature of the whistleblower complaints included corporate disclosure fraud, offering fraud, stock manipulation, insider trading and Foreign Corrupt Practices Act violations.2
Activity on Two Fronts
As a result of the level of activity and apparent quality of the tips, activity is occurring on two somewhat related fronts:
The SEC has begun to make cases based on the whistleblower tips. On August 21, 2012, the SEC announced the first award (nearly $50,000). Then SEC Chairman Mary Schapiro drew attention to the Commission's successes, stating: "We're seeing high-quality tips that are saving our investigators substantial time and resources." Just last month, the SEC issued an order awarding three whistleblowers 15 percent of the money the SEC ultimately collects from its enforcement action against a hedge fund and its CEO.3 This is the second award made under the SEC whistleblower program. Based on public comments by SEC personnel, it is apparent that a number of other cases spurred by whistleblowers are in the investigatory stage, and undoubtedly additional and larger whistleblower awards will be forthcoming.
Related to the SEC starting to make financial awards to whistleblowers, the plaintiff/whistleblower bar is devoting resources to this area. It is aggressively pushing for clients and, in turn, whistleblower complaints.
Years ago, the sophisticated end of the whistleblower bar moved quickly and deeply into the qui tam/False Claims Act space (with a particular focus on the healthcare industry), and has been responsible for billions of dollars in government recoveries and many significant whistleblower awards. Those same lawyers are preparing for a similar approach with respect to the public company community, but instead of using the False Claims Act statute, they will be using the SEC whistleblower program's provisions.
Civil Enforcement Could Lead to Criminal Investigation
Given that some of the largest whistleblower awards under the qui tam provisions of the False Claims Act came in joint civil and criminal cases, the referral provisions of the Dodd-Frank whistleblower amendments should be of particular concern. In general, the amendments (which are codified at 15 U.S.C. §78u-6), provide for whistleblower confidentiality. However, the statute provides that the SEC, in its discretion, when determined "to be necessary to accomplish the purposes of this chapter and to protect investors" may make the whistleblower's complaint available to a variety of law enforcement and regulatory agencies, including the Attorney General of the United States. 15 U.S.C. §78u-6(h)(2)(D). A referral to the Attorney General, who oversees the United States Attorneys, raises the potential for the use of investigative techniques that criminal prosecutors have access to but which the SEC does not. These include the use of grand juries and undercover investigations, among other options, as well as the specter of a criminal investigation of the company or its employees. Thus, while the SEC only has civil enforcement authority, a whistleblower complaint to the SEC could, upon SEC referral, implicate a federal criminal investigation.
What This Means for Public Companies
To avoid or minimize SEC whistleblower risks, public companies must ensure that their compliance programs encourage internal reporting of potential wrongdoing, appropriately responding to such reports and credibly responding to any government inquiry on the topic. The adage that an ounce of prevention is worth a pound of cure rings particularly true in this area. The risk of whistleblower complaints can best be managed up front by encouraging internal reporting in a clearly defined way, including alternative means of reporting, and communicating to company employees the specifics about the manner in which the company will handle such reports.
1 U.S. Securities and Exchange Commission, Annual Report on the Dodd-Frank Whistleblower Program, Fiscal Year 2011.
2 U.S. Securities and Exchange Commission, Annual Report on the Dodd-Frank Whistleblower Program, Fiscal Year 2012.