SEC Says there are (Almost) No Excuses for Late Whistleblowers

by Stinson Leonard Street - Dodd-Frank and the Jobs Act

The SEC announced a whistleblower award totaling more than $325,000 for a former investment firm employee who tipped the agency with specific information that enabled enforcement staff to open an investigation and uncover the extent of the fraudulent activity.

In making the award the SEC considered the whistleblower’s delay in reporting the violations, which, under the circumstances, was found to be unreasonable. Although the whistleblower’s delay was limited in duration, it occurred entirely after the creation of the Commission’s whistleblower program under the Dodd-Frank Wall Street Reform and Consumer Protection Act. Furthermore, during the period of delay, the violations continued and the respondents in the underlying action obtained additional ill-gotten gains, with a resulting increase in the monetary sanctions upon which the whistleblower’s award was based.

The whistleblower asked that the award be reconsidered and argued that the personal and professional risks faced by whistleblowers in reporting to the Commission had not been adequately considered, that early and prompt reporting may lead to poor quality tips, and that the Claims Review Staff had improperly assessed the whistleblower’s failure to report the misconduct internally in determining the award percentage.

The SEC responded by saying it had given due consideration to the personal and professional risks faced by whistleblowers in reporting their information to the Commission, and found it significant that the delay in this case occurred entirely after implementation of the whistleblower program under the Dodd-Frank Act. In considering two prior whistleblower award claims where the period of delay straddled the Dodd-Frank Act, the SEC determined, in its discretion, to give less weight to the unreasonable reporting delay than it “otherwise might have done had the delay occurred entirely after the [whistleblower] program’s creation.”

The SEC said the distinction reflects its understanding that the Dodd-Frank Act changed the landscape for whistleblowers. Before the enactment of Section 21F, individuals faced strong disincentives to report violations while still employed at the entity where misconduct was occurring. Congress’s establishment of the whistleblower program in the Dodd-Frank Act, however, provided new whistleblower incentives and protections to overcome those powerful disincentives to reporting. Thus, the SEC considered this award, involving a post-Section 21F reporting delay, against the backdrop of Congress’s principal purpose “to motivate those with insider knowledge [of securities violations] to come forward” and “take the enormous risk of blowing the whistle in calling attention to fraud.”

The SEC has also emphasized that the whistleblower rules “should incentivize the prompt and early submission of high-quality, credible tips.” Section 21F provided whistleblowers with confidentiality protections, including the right of whistleblowers to report to the Commission anonymously and to remain anonymous until the time that an award is to be paid.

The SEC was not persuaded by the whistleblower’s general policy contention that, by encouraging prompt reporting, the SEC may be encouraging the submission of lower-quality tips and complaints. First, this particular case is not one where a whistleblower either took, or reasonably needed to take, additional time to gather more information in order to understand that violations had occurred or to appreciate the scope of the misconduct. More generally the SEC notes that whistleblowers are free to, and often do, supplement their initial tips with additional information or materials after making their first submission to the Commission. Additionally, the SEC believes it would undermine our objective of leveraging whistleblower tips to help detect fraud early and thereby prevent investor harm if whistleblowers could unreasonably delay reporting and receive greater awards due to the continued accrual of wrongful profits.

The SEC did not give negative weight to the fact that the whistleblower declined to report the violations internally. In assessing the reasonableness of the whistleblower’s delay, the SEC considered the fact that the whistleblower failed promptly to report the wrongdoing to the Commission, to any other regulator, or through internal reporting mechanisms, and instead waited until after leaving the employer to contact the Commission. The SEC did not decrease the whistleblower’s award percentage because the whistleblower declined to report internally, but because after becoming aware of the wrongdoing, the whistleblower did nothing to report the information and did nothing to try to stop the violations from continuing to occur, which under the facts and circumstances, the SEC found was unreasonable.

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.

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