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

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

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.

© Stinson Leonard Street - Dodd-Frank and the Jobs Act | Attorney Advertising

Written by:

Stinson Leonard Street - Dodd-Frank and the Jobs Act
Contact
more
less

Stinson Leonard Street - Dodd-Frank and the Jobs Act 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.
Custom Email Digest
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.