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SEC Issues Award To Whistleblower Despite Culpability And Delay

On July 27, 2017, the SEC announced that it was paying a $1.7 million bounty award to a whistleblower, even though the whistleblower: (1) had some culpability in the fraud; (2) unreasonably delayed reporting the fraud; and (3) failed to comply with a Dodd-Frank rule requiring whistleblowers to submit inside information in writing in certain circumstances. The SEC did not provide the identity of the whistleblower or the company at issue.

In its Order, the SEC wrote that in determining an appropriate award percentage, it balanced the fact that the whistleblower alerted it to a serious multi-year fraud that would have otherwise been difficult to detect with the whistleblower’s unreasonable delay and culpability. The SEC noted that the whistleblower’s unreasonable delay was somewhat mitigated because he first alerted the SEC to the fraud before the whistleblower program and the protections that accompany it were established by Dodd-Frank. The SEC also stated that it did not consider at all the whistleblower’s failure to submit his information in writing because he was actively working with the SEC before the enactment of Dodd-Frank and, once the Act was passed, he provided the information in the format the SEC requested.

The SEC also noted that the whistleblower “bears some, albeit limited, culpability.” While Dodd-Frank prevents the SEC from awarding bounties to whistleblowers who are criminally convicted for conduct that is the same as, or related to, the conduct that is the subject of the information they provide, the SEC currently is able to grant awards to whistleblowers who are involved in the wrongdoing but are not criminally charged.

However, change may be around the corner. On June 8, 2017, the U.S. House of Representatives passed the Financial CHOICE Act of 2017. The CHOICE Act would prohibit culpable whistleblowers from receiving any monetary award under Dodd-Frank’s whistleblower bounty program. More specifically, it would prohibit the SEC from issuing an award “to any whistleblower who is responsible for, or complicit in, the violation of the securities laws for which the whistleblower provided information to the Commission.” H.R.10 – Financial CHOICE Act of 2017, 115th Congress (2017–18) § 828. It provides that “a person is responsible for, or complicit in, a violation of the securities laws if, with the intent to promote or assist the violation, the person—(A) procures, induces, or causes another person to commit the offense; (B) aids or abets another person in committing the offense; or (C) having a duty to prevent the violation, fails to make an effort the person is required to make.”  Id.  Thus, while the whistleblower here was handed a $1.7 million award despite his culpability, he would have been denied an award under the CHOICE Act.

Based on the $1.7 million award here, as well as other recent awards, it appears that the SEC’s whistleblower bounty program will remain active under the Trump administration.

© 2017 Proskauer Rose LLP.

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About this Author

Steven J Pearlman, Labor Employment Law Firm, Proskauer Law firm
Partner

Steven Pearlman is a partner in the Labor & Employment Law Department and co-head of the firm's Whistleblowing & Retaliation Group, resident in the Chicago office. Steven’s practice focuses on defending complex employment litigation involving claims of discrimination and harassment, wage-and-hour laws and breaches of restrictive covenants (e.g., non-competition agreements). He has successfully tried cases to verdict before judges and juries in Illinois, Florida and California, and defended what is reported to be the largest Illinois-only class action in the history of the U.S....

312-962-3545
Associate

Jay Cohen is an associate in the Labor & Employment Law Department, assisting clients in a wide range of labor and employment law matters.

Prior to joining Proskauer, Jay served as a law clerk to the Honorable Thomas P. Griesa of the U.S. District Court for the Southern District of New York.

Jay graduated from Harvard Law School in 2015, where he was a member of the winning team in the Ames Moot Court Competition. Jay was also Executive Editor for Submissions for the Harvard Journal of Sports and Entertainment Law, a teaching assistant for a course on contract drafting in sports law, and a member of the Board of Student Advisers.

212-969-3657