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Volume XI, Number 56

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SEC Whistleblower Program Firing on all Cylinders

The FY 2020 report of the SEC Office of the Whistleblower reveals that the SEC whistleblower program is firing on all cylinders.  Enforcement actions from whistleblower tips have resulted in orders for more than $2.7 billion in monetary sanctions, including more than $1.5 billion in disgorgement of which almost $850 million has been, or is scheduled to be, returned to harmed investors. In FY 2020, the SEC issued awards totaling approximately $175 million, the highest amount of any year in the program’s history, and received the highest number of whistleblower tips in a fiscal year. As of November 13, 2020, the SEC has paid a total of approximately $720 million to 113 whistleblowers since issuing its first award in 2012.

Under the Dodd-Frank Act’s whistleblower reward program, an individual may be eligible to receive an award between 10 percent to 30 percent of collected monetary sanctions where the whistleblower’s disclosure to the SEC leads to a successful enforcement action—meaning generally that the original information either caused the staff to open an examination or investigation, or the original information significantly contributed to a successful enforcement action where the matter was already under examination or investigation. An individual may submit a tip anonymously to the SEC if represented by an attorney in connection with their claim.

Record SEC Whistleblower Awards Paid in FY 2020

The $175 million in awards made in FY 2020 represent 31% of the total dollars awarded to all whistleblowers and 37% of the individual award recipients since the inception of the SEC whistleblower program. The awards made in FY 2020 include an award of $50 million to a whistleblower who provided detailed, firsthand observations of misconduct by a company, which resulted in a successful enforcement action that returned a significant amount of money to harmed investors.

In FY 2020, the SEC made significant progress addressing a backlog of applications for whistleblower awards, issuing Final Orders for 197 individual award claims, the largest number of Final Orders resolving whistleblower award claims, including both award and denial orders, in a fiscal year. The SEC anticipates that the recent SEC whistleblower rule amendments will enable the SEC’s Office of the Whistleblower to process award applications more efficiently.

First, new subparagraph (e) to Exchange Act Rule 21F-8 codifies the SEC’s practice of barring applicants who submit materially false, fictitious, or fraudulent statements in their whistleblower submission, in their other dealings with the SEC, or in related actions, and provides an important new tool for the SEC in processing frivolous award applications. Prior to this amendment, the SEC was forced to assess frivolous applications for awards, which was a drain on the SEC’s resources and delayed the timely assessment of potentially meritorious whistleblowers’ applications. Second, new Rule 21F-18 affords the SEC with a summary disposition procedure for certain types of common denials, such as untimely award applications, applications that involve a tip that was not provided to the SEC in the form and manner that the rules require, and applications where the claimant’s information was never provided to or used by staff responsible for the investigation. Like the above-mentioned amendment, this will allow the SEC to bypass obvious denials and utilize its limited resources to timely assess potentially meritorious whistleblowers’ applications.

Fortunately, FY 2021 is off to a strong start. On October 22, 2020, the SEC issued an order awarding $114 million to a whistleblower who alerted the SEC and another agency of wrongdoing and provided substantial, ongoing assistance that proved critical to the success of the actions. Since the inception of the program, the largest SEC whistleblower awards are $114 million, $50 million and $50 million. The payments to whistleblowers are made out of an investor protection fund that is financed entirely through monetary sanctions paid to the SEC by securities law violators. No money is taken or withheld from harmed investors to pay whistleblower awards.

Record Number of SEC Whistleblower Tips in FY 2020

In FY 2020, the SEC received over 6,900 whistleblower tips—a 31% increase from FY 2018, the second-highest tip year, and a 130% increase since the beginning of the program. The SEC received tips from individuals in 78 foreign countries, as well as from every state in the United States.

The report reveals critical data about successful whistleblower tips:

  • Approximately 81% of corporate insiders who received awards in FY 2020 raised their concerns internally to their supervisors, compliance personnel, or through internal reporting mechanisms before reporting to the SEC.

  • Approximately 40% of the whistleblowers who received awards during FY 2020 were outsiders not affiliated with the entity on which they were reporting.

  • Since the inception of the program, approximately 68% of the award recipients were current or former insiders of the entity about which they reported a violation to the SEC, and 84% raised their concerns internally before reporting to the SEC.

  • Approximately 71% of whistleblower award recipients provided original information that caused the SEC to open an investigation or examination, and approximately 29% received awards because their original information significantly contributed to an already-existing investigation or examination.

The high percentage of whistleblowers reporting internally prior to reporting to the SEC underscores the importance of protecting whistleblowers against retaliation and barring registrants from adopting or enforcing policies or agreements that impede whistleblowing to the SEC. For information about the scope of Sarbanes-Oxley and Dodd-Frank protections for SEC whistleblowers, see Dodd-Frank SEC Whistleblower Protection Post-Digital Realty.

Types of Violations Whistleblowers Are Reporting to the SEC

In FY 2020, a majority of whistleblower tips related to Corporate Disclosures and Financials (25%), Offering Fraud (16%) and Manipulation (14%). Other notable complaint categories reported by whistleblowers included Insider Trading, Initial Coin Offerings (ICOs) and Cryptocurrencies and the Foreign Corrupt Practices Act (FCPA).

Since the inception of the program in August 2011, the SEC has received over 40,200 whistleblower tips. While much has changed in the program over the past decade, the types of securities violations reported by whistleblower have remained generally consistent—Corporate Disclosures and Financials, Offering Fraud, and Manipulation have regularly ranked as the three highest allegation types reported by whistleblowers.

Future of SEC Whistleblower Program

As Senator Brown noted during an SEC oversight hearing today, “applying additional resources to the whistleblower program delivers results . . .  [b]y reallocating staff to review whistleblower tips, [the SEC] managed record results.” Fortunately, there is bipartisan support for the SEC whistleblower program. We anticipate that a Biden Administration will strengthen the program and that whistleblower disclosures will be a significant driver of SEC enforcement activity. 

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© 2020 Zuckerman LawNational Law Review, Volume X, Number 322
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About this Author

Jason Zuckerman, Whistleblower Litigation Attorney, Washington DC  Law Firm
Principal

Described by the National Law Journal as a “leading whistleblower attorney,” Jason Zuckerman litigates whistleblowe r retaliation, whistleblower rewards, wrongful discharge, and other employment-related claims. His practice focuses on representing senior executives and senior professionals in high-...

(202) 262-8959
Matthew Stock, CPA, Auditor, Zuckerman Law Firm
Certified Public Accountant

Matthew Stock is the Director of the Whistleblower Rewards Practice at Zuckerman Law. He is an attorney, Certified Public Accountant, Certified Fraud Examiner and former KPMG external auditor. Mr. Stock has audited a broad range of industries, both domestically and internationally, including large public companies and financial institutions. As an auditor, Mr. Stock developed an expertise in financial statement analysis and fraud recognition.

At Zuckerman Law, Mr. Stock leverages his experience as an attorney, CPA, CFE and external auditor to...

202-930-5901
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