"Show Me the Money" or 14 Million Reasons to Upgrade Your Compliance Program

by BakerHostetler
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Although delivered 15 years before the Securities and Exchange Commission even established its whistleblower program, Jerry Maguire's iconic lesson "Show Me The Money!" found new meaning last Tuesday. On October 1, 2013, the SEC announced the award of more than $14 million to an unnamed whistleblower whose information led to an SEC enforcement action. This massive payout represents the largest ever made under the SEC's recently established whistleblower program and dwarfs, by orders of magnitude, previous payouts. It also represents another critical turning point in a program first established in 2011, pursuant to the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act.

The SEC remains mum on both the identity of the whistleblower and the enforcement action itself but revealed that he or she provided "original information and assistance that allowed the SEC to investigate an enforcement matter more quickly than otherwise would have been possible." According to the SEC release, it took the Commission fewer than six months after receiving the whistleblower's tip to bring an enforcement action and recover what are described as "substantial" investor funds. As whistleblower awards are required to be an amount between 10 percent and 30 percent of monetary sanctions collected, it is only speculation how many tens of millions were collected by the SEC.

PRIOR WHISTLEBLOWER AWARDS

Tuesday's $14 million award is not only colossal in absolute terms, it also goes far beyond awards previously seen under the still-blossoming program. For instance, the SEC's inaugural whistleblower payment was a mere $50,000 paid in August 2012. That payment represented 30 percent of the amount collected by the Commission in that case but also left open the possibility of additional future payments.

In June of this year, as BakerHostetler previously reported here, the SEC issued an order awarding three tipsters who helped with an enforcement action against Locust Offshore Management and its CEO, Andrey C. Hicks. The first payments in the Locust action were made in August and September of this year and are likely to continue as the SEC increases its collections on a $7.5 million default judgment.

A CONTINUING TREND

The SEC reports that in fiscal year 2012, it received 3,001 whistleblower tips with submissions from individuals in all 50 states, the District of Columbia, Puerto Rico and 49 foreign countries. The disparity between tips received and actual awards, as well as the relatively low value of those awards, led some to criticize the program as ineffectual. This recent announcement should work to quell some of that criticism and prove true SEC Division of Enforcement Associate Director Stephen Cohen's June announcement of pending "incredibly impactful cases" and "some extremely significant whistleblower awards." In that same discussion, Cohen predicted a "likely change in the discussion about the magnitude of some of these awards over the next six to 12 months." Only four months later, that discussion has arrived.

Nearly 50 cases for 2013 alone are eligible for whistleblower awards, and, at last report, the program has more than $450 million in funding. Both are signs of more frequent and larger payouts yet to come. While it remains to be seen whether awards in the near future will approach or even top Tuesday's high-water mark, it is clear that the program has been a useful incentive for encouraging individuals with information to disclose it to the SEC.

PROACTIVE COMPLIANCE

Given the lottery-like nature of the $14 million dollar bounty, employers should expect more employees to disclose potential misconduct to the SEC rather than reporting internally. As the number and value of whistleblower awards increases, it further underscores the need for corporations to be as proactive as possible in ensuring that compliance programs and training are robust and up to date. Companies must also encourage employees to report misconduct internally by countering two of the forces likely to push employees towards external reporting -- fear of retaliation if they report internally and a belief that internal reporting is ineffectual and unlikely to generate change. It is only through this type of robust compliance that companies can effectively ensure that would-be whistleblowers report internally rather than to the government.

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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