The SEC’s most recent whistleblower awards highlight the importance of internal reporting to a company’s compliance program and especially how a company investigates and responds to such reports. On May 24, 2019, the SEC awarded $4.5 million to a whistleblower who reported the information to the company first and then, within 120 days, reported it to the SEC. On June 3, 2019, the SEC awarded $3 million to two whistleblowers who reported the alleged violations to their company as well as reporting it to the SEC. By making these awards, the SEC encouraged whistleblowers to report internally and companies to respond to such reports quickly and appropriately.
The SEC noted that the May award was “the first time a claimant is being awarded under [the] provision of the whistleblower rules [that] was designed to incentivize internal reporting by whistleblowers who also report to the SEC within 120 days.” In particular, this whistleblower provided an anonymous tip to the company and the company conducted an internal investigation and self-reported to the SEC. Within 120 days of the anonymous tip, the whistleblower also contacted the SEC with the allegations. The SEC conducted a full investigation and settled with the company. The SEC also noted that “the whistleblower was credited with the results of the company’s internal investigation.”
The SEC Order quoted the particular rule that allows recovery for the whistleblower:
You reported original information through an entity’s internal whistleblower, legal, or compliance procedures for reporting allegations of possible violations of law before or at the same time you reported them to the Commission; the entity later provided your information to the Commission, or provided results of an audit or investigation initiated in whole or in part in response to information you reported to the entity; and the information the entity provided to the Commission satisfies either paragraph (c)(1) or (c)(2) of this section. Under this paragraph (c)(3), you must also submit the same information to the Commission in accordance with the procedures set forth in §240.21F-9 within 120 days of providing it to the entity.
Rule 21F-4(c)(3). The Order noted that this provision was adopted to “incentivize whistleblowers to utilize internal compliance and reporting systems where appropriate.” This is a reminder to companies not to ignore whistleblower tips.
Finally, the May Order noted that “law enforcement interest was high here” at least in part “because of the difficulty in discovering violations occurring outside the United States . . . .” The whistleblower’s lawyers publicly announced that the underlying conduct involved here were violations of the Foreign Corrupt Practices Act (FCPA) and that the whistleblower resided outside the U.S. This highlights that the SEC whistleblower awards are being taken seriously not only in the U.S, but outside the U.S. as well. The last annual report noted that the SEC had received tips from 72 countries and that 202 tips involved violations of the FCPA.
The June award is remarkable because SEC chose to reward the whistleblowers even though it found that they did not act voluntarily because a different authority had already subjected the company to an information request that would involve responses from these two employees. The SEC decided to waive the voluntary requirement because neither whistleblower was informed of the request, neither knew about the other authority’s investigation until after they reported to the SEC, the employees’ earlier actions may have helped kick off the other investigation, and they would experience hardships without the waiver.
In calculating the June award, the SEC noted the whistleblowers’ “significant and timely steps to have the firm remediate the harm caused by the violations, including advocating for full disclosure of the violation and for compensation of harmed investors.” In addition to the level of cooperation and information the whistleblowers gave, as well as the hardships they experienced, the SEC increased the award based on the whistleblowers’ prompt participation in the company’s internal compliance system. In announcing the award, the SEC stated that “[t]hese whistleblowers showed great tenacity by repeatedly reporting internally and advocating for the firm to disclose the violative conduct and remedy the attendant investor harm.”
The SEC’s whistleblower award program is active and expanding. Accordingly, companies should monitor and audit their compliance programs to ensure that their whistleblower policies and procedures encourage and incentivize internal reporting and effective screening and investigation.