iThe SEC announced a Dodd-Frank whistleblower award of more than $3 million to a whistleblower who disclosed a complex fraudulent scheme which otherwise would have been very difficult for investigators to detect.
Since its implementation in August 2011, the SEC’sWhistleblower Reward Program has steadily gained momentum. Under Section 922(a) of Dodd-Frank, a whistleblower that provides original information to the SEC that results in monetary sanctions exceeding $1 million shall be paid an award of ten to thirty percent of the amount recouped. See 78 U.S.C. § 78u-6.
Initially, there was a great deal of skepticism about the SEC whistleblower program, including concerns that it would undermine corporate compliance programs (by causing whistleblowers to go directly to the SEC and bypass internal compliance programs) and would not yield useful tips. Five years later, however, the program is off to a strong start. In a recent speech titled “The SEC as the Whistleblower’s Advocate,” SEC Chair Mary Jo White characterized the program as a “game changer” and reported that the quality of tips has been very high and spans the full spectrum of securities law violations, including market manipulation, offering fraud, and shareholder fraud. As the SEC confronts significant resource challenges in policing the financial markets, high quality tips that enable the SEC to quickly build a case are invaluable in helping the SEC protect investors.
The SEC whistleblower reward program has generated over 10,000 tips and has paid out approximately $50 million in awards to whistleblowers. Some of these tips have enabled the SEC to halt ongoing fraud. Further, incentives for whistleblowers are forcing companies to strengthen their internal compliance programs. More than 80% of whistleblowers disclosed wrongdoing internally prior to blowing the whistle to the SEC. If a company fails to properly investigate and correct a disclosure of fraud or other securities violation, it is taking a significant risk that the whistleblower will disclose the wrongdoing to the SEC, requiring the company to explain why it failed to take corrective action.
In addition to providing strong financial incentives to whistleblowers, the SEC is enforcing Dodd-Frank’s prohibition against whistleblower retaliation and is barring companies from using confidentiality agreements and policies to silence whistleblowers. While the whistleblower reward provisions are a small part of the Dodd-Frank Act, they might be the most effective new tool to protect investors and promote market integrity.
