[authors: Mike Delikat and Rachel Coe]
On November 15, 2012, the Securities and Exchange Commission released its Fiscal Year 2012 Annual Report on the Dodd-Frank Whistleblower Program (the “Report”), the first full-year report issued since the enactment of Dodd-Frank. The Report analyzes the 3,001 tips received over the last twelve months by the Commission’s Office of the Whistleblower (“OWB”), which is responsible for the implementation and execution of the Commission’s whistleblower program. The Report also provides additional information on the whistleblower award evaluation process that resulted in its first (and only) award issuance in August 2012.
Activities of the Commission’s OWB
The OWB was created pursuant to Section 924(d) of the Dodd-Frank Act. OWB reviews and processes whistleblower tips through the Commission’s Tips, Complaints, and Referrals (“TCR”) System, leveraging resources of the Commission’s Office of Market Intelligence to evaluate tips and assign them to the appropriate division. OWB works closely with the Enforcement Division throughout the investigative process, serving as a liaison between the whistleblowers or their counsel and Enforcement staff. OWB arranges meetings between whistleblowers and investigators or subject matter experts within Enforcement to advance investigations. OWB also communicates with other agencies’ whistleblower offices, including the IRS, Department of Justice, Commodity Futures Trading Commission, and the Department of Labor’s OSHA.
Breakdown of Tips Received in FY 2012
In order to be eligible for a whistleblower award, individuals must submit a “Form-TCR” through the Commission’s TCR System by mail, fax, or through the online TCR questionnaire portal. During FY 2012, the SEC received 3,001 whistleblower tips through its TCR System and issued 143 enforcement judgments and orders that potentially qualify as eligible for a whistleblower award.
Type of Allegation
The most common type of allegations were: Corporate Disclosure and Financials (18.2%); Offering Fraud (15.5%); and Manipulation (15.2%). Interestingly, 23.4% of individuals selected “Other” as the allegation type, indicating that their tip did not fit into one of the nine categories provided on the TCR. The OWB did not indicate whether it intended to modify the allegation categories.
The number of tips received remained consistent throughout the year, with an average of 250 tips received per month. The most tips received in one month was 313 in May 2012, and the fewest was 166 in November 2011.
The Commission received tips from all 50 states, the District of Columbia, Puerto Rico, and from 49 countries outside of the U.S. Of the whistleblower tips received, 2,507 (83.5%) originated in the United States, and 324 (10.8%) originated from abroad (5.7% of tipsters did not specify a geographic location). Domestically, the largest number of TCRs were submitted from California (17.4%) followed by New York (9.8%) and Florida (8.1%).
Of the 324 tips received from abroad, 74 originated from the United Kingdom, 46 from in Canada, 33 from India, 27 from China, and 21 from Australia. The remainder of countries submitted ten or fewer TCRs.
Whistleblower Incentive Awards
The Report provides details regarding the process through which it evaluates and issues whistleblower award claims. OWB posts a “Notice of Covered Action” for each Commission enforcement action resulting in a final judgment or order resulting in monetary sanctions exceeding $1 million. Individuals have 90 days from the time a Notice of Covered Action is posted to apply for a whistleblower incentive award by submitting a completed “FORM WB-APP”. OWB posted 143 Notices of Covered Actions in FY 2012, a drop from 170 Notices in FY 2011.
OWB processes all award applications and submits applications to the Claims Review Staff, a team designated by the Director of Enforcement. The Claims Review Staff makes a “Preliminary Determination” as to whether the incentive award claim should be allowed or denied. If allowed, the Claims Review Staff proposes a percentage amount. If the Claims Review Staff issues an award, the Preliminary Determination is forwarded to the Commission for review.
If a claim is denied, an applicant can ask for reconsideration of the Preliminary determination, in which case the Claims Review Staff reevaluates its decision before issuing a Proposed Final Determination for Commission review. If the applicant does not object, the denial becomes the Final Order of the Commission.
Within 30 days of receiving a Proposed Final Determination, any Commissioner may request a full Commission review. If no request is made, the Proposed Final Determination becomes the Final Order of the Commission.
First Whistleblower Award Issued in August 2012
The Commission issued its first whistleblower award in August 2012, paying the maximum 30 percent payout allowed by law. The award recipient submitted a tip concerning a multi-million dollar fraud and provided documents and other “significant information” that allowed investigators to issue an emergency action in federal court before further investment funds were dissolved. The court ordered more than $1 million in sanctions, over $150,000 of which had been collected by the end of the fiscal year. The award recipient initially received nearly $50,000, and was recently awarded an additional $500 in September 2012. Motions for additional judgments are pending in court; any additional collections, or an increase in sanctions ordered, will result in further payments to the whistleblower.
The Report does not state how many award claims have been reviewed by the Claims Review Staff, nor does it provide statistics regarding the number of Preliminary or Proposed Final Determinations made in FY 2012. Although the Commission has finally shed light on the process by which it evaluates whistleblower award claims, it remains unclear whether there has been any correlation between whistleblower tips received and award claims made through OWB. While it was anticipated that it would take time to make awards given the process described above, the fact that only one cash award has been made 14 months after the program began and that the one award was relatively modest (less that $50,000) cannot be particularly encouraging for tipsters hoping to quickly cash in on original information. There likely is also disappointment with the slow pace of the process among and the expanding cadre of whistleblower lawyers that have aggressively pursued clients in this area.
Additionally, while the SEC’s regulations under Dodd-Frank indicate that the OWB would also be involved in investigation of complaints of retaliation for whistleblowing under Dodd-Frank, the Report also does not indicate what if any proceedings the OWB has initiated to investigate complaints of retaliation. It is clear, however, in light of the Report and the comments of SEC Chairman Mary Schapiro who stated that insiders are providing the SEC “with high-quality roadmaps of fraudulent wrongdoing”, that the 3,001 tips filed in FY 2012 constitutes a significant increase in employees and others going directly to the SEC.
The Report also leads to the conclusion that companies that have developed robust internal compliance programs should continue to encourage employees to report internally. From a policy standpoint, the lengthy delay between tips being filed and enforcement actions by the SEC is not the most effective way to expeditiously uncover and remedy corporate wrongdoing when it exists.
 The Report only includes data from whistleblower award-eligible TCRs and excludes data from individuals who are ineligible for an award or who elected not to submit the mandatory whistleblower declaration.