Important Things To Know About The SEC’s Whistleblower Program
SEC Whistleblower Awards & The SEC’s Whistleblower Program
Since issuing its first award in 2012, the SEC has awarded approximately $1.2 billion to 256 individuals whose information and cooperation assisted the SEC in bringing successful enforcement actions.
The Securities and Exchange Commission’s Whistleblower Program was created by Congress to provide monetary incentives for individuals to come forward and report possible violations of the federal securities laws to the SEC. The Office of the Whistleblower was established to administer the Whistleblower Program.
Whistleblowers may be eligible for an award when they voluntarily provide the SEC with original, timely, and credible information that leads to a successful enforcement action which results in an order of more than $1 million in sanctions. Whistleblower awards can range from 10% to 30% of the money collected when the monetary sanctions exceed $1,000,000.
Do Whistleblowers Really Make a Difference?
The plain and simple answer is: Yes!! A strong whistleblower program helps the SEC identify and halt securities fraud early and quickly to minimize investor losses. Whistleblowers have provided tremendous value to the SEC’s enforcement efforts and significant help to investors, as well as furthered the SEC’s efforts to uncover and stop fraudulent investment schemes.
According to the SEC, the value of the Whistleblower Program is exhibited most directly and importantly by the hundreds of millions of dollars returned to investors as a result of actionable information that whistleblowers have brought to the SEC. Since the beginning of the SEC’s Whistleblower Program, the SEC has ordered wrongdoers in enforcement matters involving whistleblower information to pay over $975 million in total monetary sanctions, including more than $671 million in disgorgement of ill-gotten gains and interest, the majority of which has been, or is scheduled to be, returned to harmed investors.
Who is an “Eligible” Whistleblower?
An “eligible” whistleblower is a person who voluntarily provides the SEC with original information about a possible violation of the federal securities laws that has occurred, is ongoing, or is about to occur. The information provided MUST lead to a successful SEC action resulting in an order of monetary sanctions exceeding $1 million.
One or more people are allowed to act as a whistleblower, but companies or organizations cannot qualify as whistleblowers. You are not required to be an employee of the company to submit information about that company.
What is “Voluntarily” Provided Information?
It is important to note that information is “voluntarily” provided, if it is furnished to the SEC or another regulatory or law enforcement authority before a) the SEC requests it from you or your lawyer or b) Congress, another regulatory or enforcement agency or self-regulatory organization asks you to provide the information in connection with an investigation or certain examinations or inspections.
What is “Original” Information?
“Original information” is information derived from your independent knowledge (i.e., not facts derived from publicly-available sources) or independent analysis not already known to the SEC (i.e., evaluation of information that may be publicly-available, but which reveals information that is not generally known). Thus, if the SEC previously received your information from another person, that information will not be original information, unless you were the original source of the information that the other person submitted.
What Does “Leading” to a Successful SEC Action Mean?
Information is deemed to have “led to a successful action,” if your information causes the SEC to open a new investigation, reopen a previously closed investigation or pursue a new line of inquiry in connection with an ongoing investigation, and the SEC brings a successful enforcement action based, at least in part, on the information you provided. You may still be eligible for an award if your information relates to an ongoing examination or investigation, if the information you provide significantly contributes to the success of our resulting enforcement action. You may also be eligible if you report your information internally first to your company, and the company later reports your information to the SEC or reports the results of an internal investigation that was prompted by your information, as long as you also report directly to the SEC within 120 days.
Whistleblower Program Overview
Whistleblower awards can range from 10% to 30% of the money collected when the monetary sanctions exceed $1 million. Whistleblowers can report jointly under the program and share an award.
All payments are made out of an investor protection fund established by Congress that is financed entirely through monetary sanctions paid to the SEC by securities law violators. No money has been taken or withheld from harmed investors to pay whistleblower awards.
By law, the SEC protects the confidentiality of whistleblowers and does not disclose information that might directly or indirectly reveal a whistleblower’s identity.
The more specific, credible, and timely a whistleblower tip, the more likely it is that the tip will be forwarded to SEC investigative staff for further follow-up or investigation. For example, if the tip identifies individuals involved in a scheme, provides examples of particular fraudulent transactions, or points to non-public evidence of the fraud, the tip is more likely to be assigned to SEC Enforcement staff for investigation.
Tips that make blanket assertions or general inferences based on market events, or which do not relate to the federal securities laws, are less likely to be forwarded to or investigated by SEC Enforcement staff. A whistleblower also should ensure that there is a nexus between a whistleblower tip that is provided to the SEC and, ultimately, what was charged in the enforcement matter.
In addition to establishing an awards program to encourage the submission of high-quality information, the Dodd-Frank Act and the SEC’s implementing regulations (Securities Whistleblower Incentives and Protections, 17 C.F.R.§ 240.21F-1 through 21F-17) prohibit retaliation by employers against employees who report possible wrongdoing based on a reasonable belief that a possible securities violation has occurred, is in progress, or is about to occur.
Protecting whistleblower confidentiality is an integral component of the SEC Whistleblower Program. The Dodd-Frank Act prohibits the SEC and its staff from disclosing any information that reasonably could be expected to reveal the identity of a whistleblower, subject to certain exceptions. Consequently, information that may tend to reveal a whistleblower’s identity is redacted from SEC orders granting or denying awards before they are issued publicly. This may include redacting the name of the enforcement action upon which the award is based.
Factors that may increase a monetary award percentage include the significance of the information provided by the whistleblower; the level of assistance provided by the whistleblower; the law enforcement interests at stake; and whether the whistleblower reported the violation internally through his or her firm’s internal reporting channels or mechanisms.
Factors that may decrease a monetary award percentage include whether the whistleblower was culpable or involved in the underlying misconduct; whether the whistleblower interfered with internal compliance systems or unreasonably delayed in reporting the violation to the SEC.
The time between the submission of a whistleblower tip and when an individual may receive an award payment can be several years, particularly where the underlying investigation is especially complex, where there are multiple, competing award claims, or where there are claims for related actions.
Characteristics of Successful Whistleblowers
The information, tips, and complaints provided by each award recipient was specific. For example, the whistleblower identified particular individuals involved in the misconduct, or provided specific documents that substantiated their allegations or explained where such documents could be located. In some instances, the whistleblower identified specific financial transactions that evidenced fraud, or provided detailed assessment of the wrongdoing.
The misconduct reported by award recipients was often relatively current or ongoing at the time it was reported to the SEC. Additionally, the vast majority of award recipients provided SEC staff with additional assistance and/or information (e.g., answered staff questions or provided testimony) after they submitted their initial tips.
An individual may be eligible to receive an award where her or his information leads to a successful enforcement action—meaning generally that the original information either caused an examination or investigation to open, or the original information significantly contributed to a successful enforcement action where the matter was already under examination or investigation.
The majority of the whistleblowers who have received awards under the program provided original information that caused SEC Enforcement staff to open an investigation, and a significant percentage received awards because their original information assisted with an already-existing investigation. In assessing whether information assisted with an already-existing enforcement action, the SEC will consider factors such as whether the information allowed the agency to bring the action in significantly less time or with fewer resources, and whether it supported additional successful charges, or successful claims against additional individuals or entities.
When the SEC has found claimants to be ineligible for awards on non-procedural grounds, it is often because the claimants’ information did not open an investigation or exam, open a new line of inquiry in an existing investigation, or significantly contribute to an existing investigation.
There is no requirement under the Whistleblower Rules that an individual be an employee or company insider to be eligible for an award.
Whistleblowers may obtain information of possible wrongdoing by a subject company or individual that is not their employer. Although the majority were employees or former employees of the company involved in the wrongdoing, the remaining award recipients obtained their information because they were either investors who had been victims of the fraud, professionals working in the same or a related industry, or other types of outsiders, such as individuals who had a personal relationship with the wrongdoer.
Whistleblowers seeking an award are not required to be represented by counsel, unless they choose to file their tips with the SEC anonymously. About 46% of the award recipients did not have counsel when they initially submitted their tips to the agency. The other 54% were represented by counsel, 19% of which filed anonymously. Some of the individuals who were not represented by counsel at the time they submitted their tips subsequently retained counsel during the course of the investigation or during the whistleblower award application process (although retaining counsel is not required to file for a whistleblower award).
Whistleblowers have assisted the SEC in bringing enforcement cases involving an array of securities violations A number of the award recipients reported information to the SEC concerning offering frauds, such as Ponzi or Ponzi-like schemes. Other award recipients provided tips to the SEC relating to false or misleading statements in a company’s offering memoranda or marketing materials, false pricing information, accounting, and internal controls violations, among other types of misconduct.
The Right to Report Information to the SEC and Be Protected from Retaliation
Section 21F(h)(1) of the Dodd-Frank Act expanded protections for whistleblowers and broadened prohibitions against retaliation. Following the passage of Dodd-Frank, the SEC implemented rules that enabled the SEC to take legal action against employers who have retaliated against whistleblowers. This generally means that employers may not discharge, demote, suspend, harass, or in any way discriminate against an employee in the terms and conditions of employment because the employee reported conduct that the employee reasonably believed violated the federal securities laws.
Dodd-Frank also created a private right of action that gives whistleblowers the right to file a retaliation complaint in federal court.
Exchange Act Rule 21F-17(a) prohibits any person from taking any action to prevent an individual from contacting the SEC directly to report a possible securities law violation. The Rule states that “[n]o person may take any action to impede an individual from communicating directly with the SEC staff about a possible securities law violation, including enforcing, or threatening to enforce, a confidentiality agreement . . . with respect to such communications.”
Do You Qualify as An SEC Whistleblower?
If you voluntarily provide original, high-quality information (i.e., information derived from your independent knowledge, NOT facts derived from publicly-available information) about the possible violation of the federal securities laws that has occurred, is ongoing or is about to occur AND which leads to a successful SEC enforcement action, resulting in an order of monetary sanctions exceeding $1 million, then you MAY be eligible for an SEC whistleblower award of between 10% and 30% of the monetary sanctions collected in actions brought by the SEC and related actions brought by certain other regulatory and law enforcement authorities.
Remember, information is voluntarily provided if you provide information to the SEC or another regulatory or law enforcement authority before a) the SEC requests it from you or your lawyer or b) Congress, another regulatory or enforcement agency or self-regulatory organization asks you to provide the information in connection with an investigation or certain examinations or inspections.
Can You Submit Information Anonymously to the SEC?
Yes, however, if you wish to submit information to the SEC anonymously, you MUST be represented by an attorney in connection with the anonymous information submission to be eligible for an award.
What Kind of Wrongful Conduct Is of Interest to the SEC?
Examples of the kind of conduct about which the SEC is interested include:
- Ponzi scheme, Pyramid Scheme, or a High-Yield Investment Program
- Theft or misappropriation of funds or securities
- Manipulation of a security’s price or volume
- Insider trading
- Fraudulent or unregistered securities offering
- False or misleading statements about a company (including false or misleading SEC reports or financial statements)
- Abusive naked short selling
- Bribery of, or improper payments to, foreign officials
- Fraudulent conduct associated with municipal securities transactions or public pension plans
- Other fraudulent conduct involving securities
SEC Investigations and The Federal Securities Laws
The SEC conducts investigations into possible violations of the federal securities laws. Again, the more specific, credible, and timely a whistleblower tip, the more likely it is that the tip will be forwarded to SEC investigative staff for further follow-up or investigation. For example, if the tip identifies individuals involved in the scheme, provides examples of particular fraudulent transactions, or points to non-public materials evidencing the fraud, the tip is more likely to be assigned to SEC Enforcement staff for investigation.
It is important to keep in mind that the SEC does not have jurisdiction to take action on information that is outside the scope or coverage of the federal securities laws. The SEC may, in appropriate circumstances, refer your matter to another regulatory or law enforcement agency.
Attorney Involvement in SEC Whistleblower Matters
As one former Director of the SEC’s Division of Enforcement has stated:
One thing I get asked about a lot is how [the SEC] view[s] whistleblower counsel. It will come as no surprise . . . that we welcome the involvement of counsel in whistleblower tips. While whistleblowers can engage with [the SEC] without the assistance of counsel, counsel experienced in whistleblower representations can help with up-front triage of tips to identify those that have a nexus with the federal securities laws and that may have merit. And [attorneys] can work with whistleblowers going forward to identify information that will be important to us and that will allow us to advance [SEC] investigations.
The same SEC Enforcement official also highlighted that attorneys for whistleblowers can help manage client expectations regarding the length of SEC investigations and the awards process; help determine whether the whistleblower can furnish corroborating information to support a securities fraud tip; and, if necessary, segregate information and engage in discussions with SEC officials to prevent unnecessary disclosure of information protected by the attorney-client privilege or work product doctrine and, thereby, help minimize any negative impact on, or substantial delay of, an SEC investigation. Additionally, whistleblowers and their attorneys can assist the SEC maintain the confidentiality of whistleblowers by identifying any facts or documents that they are furnishing that, potentially, could identify the whistleblower.
Do You Have Questions or Concerns About Providing Information to the SEC About Securities Fraud?
If so, please know that Kehoe Law Firm’s legal team understands the issues associated with making the difficult decision to voluntarily come forward with information about securities fraud or other wrongdoing. Moreover, the Firm’s legal staff has extensive experience investigating and prosecuting fraud, as well as interacting with sources of information, especially brave, honest individuals who are willing to expose fraud committed against the United States government.
If you have questions or concerns about voluntarily providing information as a whistleblower to the SEC about violations of the federal securities laws, including questions about whistleblower award eligibility or the form and manner in which the information is required to be provided to the SEC, please contact Kehoe Law Firm, P.C. by completing the form above on the right or sending an e-mail to [email protected]. If you prefer to speak privately with an attorney, please contact either Michael Yarnoff, Esq., [email protected], (215) 792-6676, Ext. 804, or John Kehoe, Esq., [email protected], (215) 792-6676, Ext. 801.
Please see Frequently Asked Questions, Submit a Tip, Claim an Award, Final Orders, and Section 21F of the Securities Exchange Act of 1934 (Securities Whistleblower Incentives and Protection) for additional Whistleblower Program information.
Source: SEC.gov; SEC 2017 Annual Report to Congress: Whistleblower Program.