The Securities and Exchange Commission (SEC) recently awarded $3 million to joint whistleblowers despite concluding that the whistleblowers did not satisfy the technical eligibility requirements for receiving an award. See SEC Exchange Act Release No. 86010. The SEC Whistleblower Program has ramped up significantly the past few years, with record numbers of complaints being filed and awards being granted. In 2018, the SEC made two of its largest whistleblower awards: an $83 million award to three individuals; and an award of almost $54 million to two individuals. And the number of SEC whistleblower complaints filed has increased every year, culminating in over 5,200 complaints in fiscal year 2018 (ending September 30). To date, the SEC has awarded more than $284 million to 64 whistleblowers. While the amount of the recent $3 million whistleblower award may not be major news, the SEC’s determination to grant the award to ineligible whistleblowers warrants review.
SEC Whistleblower Program
The SEC Whistleblower Program is a byproduct of the Dodd-Frank Act, which Congress enacted in response to the infamous 2018 financial crisis. Dodd-Frank added Section 21F to the Securities Exchange Act of 1934. Section 21F directed the SEC to award money to individuals who provide information that leads to SEC enforcement actions resulting in monetary sanctions over $1 million. Awards must equal 10 to 30 percent of the monetary sanctions collected. The SEC implemented rules governing the program and established the Office of the Whistleblower to administer it.
In general, to be eligible for an SEC whistleblower award, a person must “voluntarily” provide the SEC with “original” information about a possible violation of the federal securities laws. For whistleblower information to qualify as “original” it must be derived from the whistleblower’s independent knowledge or independent analysis and not already be known by the SEC. See SEC Whistleblower Rule 21F-3(a). A whistleblower will not be deemed to have submitted information “voluntarily” to the SEC if the information was submitted after a request, inquiry or demand relating to the submission’s subject matter was “directed to” the whistleblower (or his/her representative) by the SEC or certain other designated government/regulatory authorities. See SEC Whistleblower Rule 21F-4(a).
SEC Rationale for Waiving the Eligibility Requirements
The $3 million award (announced on June 3, 2019) stemmed from a joint claim submitted by two individuals (the “claimants”). The SEC concluded that the claimants satisfied the requirement to have provided the SEC with “original” information that led to a successful enforcement action. However, the SEC further concluded that the claimants did not provide such information “voluntarily,” as prescribed in Section 21 F-4(a). The SEC reached this conclusion because the claimants submitted their information to the SEC after “a related information request” had been sent from another government authority to their employer requesting a response from the claimants. The SEC acknowledged that it had previously taken the position that a governmental request to an employer was not considered (for purposes of Rule 21 F-4(a)) to have been “directed to” all employees whose documents or information fall within the scope of the request. Nonetheless, here, even though the government sent the information request to the claimants’ employer, the SEC deemed the request “directed to” the claimants because the request instructed the employer to collect information from the claimants. Accordingly, the SEC concluded that the claimants had not submitted the information voluntarily.
Ordinarily, an SEC determination that information was not submitted voluntarily would disqualify a claimant from eligibility for a whistleblower award. The SEC decided nevertheless to use its discretionary authority to waive the voluntary requirement due to the “unique facts and circumstances” involved with the claimants’ case. Specifically, the SEC noted that the claimants:
- Were unaware of the request from the other government authority.
- Were unaware of the government authority’s investigation until several months after they submitted information to the SEC.
- Proactively engaged in remedial efforts that ultimately prompted the investigation that led the government authority to issue the relevant information request.
- Would suffer undue hardship and unfairness as a result of their efforts if they did not receive an award.
Future Whistleblower Program Waivers?
The anonymity afforded whistleblowers under SEC rules results in the SEC releasing sparse and cryptic details about the circumstance underlying whistleblower awards. It is therefore difficult to predict whether the waiver granted to the claimants is the beginning of a trend or a one-off event. One likelihood is that the SEC’s willingness to grant waivers to whistleblowers otherwise ineligible to receive an award will further fuel the tidal wave of whistleblower complaints already crashing down upon the SEC incited by the large and escalating awards issued by the SEC.