On Monday, March 2, the Securities and Exchange Commission (SEC) announced that it will award between $475,000 and $575,000 to a corporate officer who reported “high quality, original information” about a securities fraud.
The SEC’s whistleblower program was adopted under the Dodd-Frank Act of 2010 and rewards high quality, original information that results in enforcement actions exceeding $1 million. Awards are paid through an investor protection fund financed through enforcement actions. The SEC has awarded nearly $50 million to 15 whistleblowers since the program was enacted.
Typically, officers, directors, trustees and partners who learn about a fraud from another employee are not eligible for an award under the program. However, there are three exceptions:
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if the officer has a reasonable basis to believe that disclosure to the SEC is necessary to prevent the entity from taking action that’s likely to cause substantial harm to the entity or investors;
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if the officer has a reasonable basis to believe the entity in question is engaging in conduct that would hamper an investigation (such as shredding documents); or
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if, as in this instance, 120 days have passed since the responsible compliance personnel had the information and they failed to adequately address the issue.
The SEC stated that this is the first whistleblower award given to an officer under the third exception.
Because the SEC is required to protect the anonymity of whistleblowers, we do not know the nature of the enforcement action or the identity of the whistleblower. The SEC has not disclosed the extent to which the officer attempted to resolve the problem internally before providing information to the agency.
This award is a reminder that anyone, even the most trusted officers of a company, may report problematic conduct to the government. A company should take prompt action to address misconduct, even when only a few people know of the conduct. It is important that companies have thorough internal compliance programs that adequately address potential violations reported by any employee or other individual.
