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SEC Whistleblower Rules to Maximize an Award

The SEC Whistleblower Program has awarded more than $250 million to whistleblowers since 2011. Under the rules of the program, the SEC is required to pay awards to eligible whistleblowers who voluntarily provide the Commission with original information about violations of the federal securities laws that lead to successful enforcement actions that result in monetary sanctions of more than $1 million. Importantly, the SEC whistleblower rules allow individuals to submit information anonymously if represented by an attorney.

In exchange for specific and credible tips, the SEC is required to pay monetary awards of 10% to 30% of the total monetary sanctions collected. The largest award to date is $83 million, which was issued to three whistleblowers who disclosed information that led to a $415 million enforcement action (thus, the whistleblowers’ award was 20% of the total monetary sanctions).

Prior to submitting a tip, whistleblowers should understand the SEC Whistleblower Program’s rules that govern the percentage of a potential whistleblower award. The SEC’s rules include both positive and negative factors that the Commission considers when determining the appropriate award percentage ranging from 10% to 30% of the monetary sanctions recovered in an enforcement action. Leveraging these rules effectively can potentially increase an award by millions of dollars.

SEC Whistleblower Rules – Positive Factors

The SEC may increase a whistleblower’s payout based on several factors. Whistleblowers and their counsel can take concrete steps to leverage these factors, both before and after filing a tip with the SEC, to maximize an SEC whistleblower award. The following four positive factors can significantly increase a whistleblower’s award share.

(1) Participation in Internal Compliance Programs

When the SEC promulgated rules implementing the SEC Whistleblower Program, many companies cautioned that the program would undermine internal compliance programs by offering monetary awards to employees who reported externally to the SEC. In response to these concerns, the SEC included in the final rules an incentive to report internally. In particular, a whistleblower can recover a higher award if they report a violation internally (e.g., to a corporate ethics or compliance program) prior to reporting the violation to the SEC.

If a whistleblower initially reports internally, the whistleblower should  submit the information to the SEC Office of the Whistleblower within 120 days to ensure that the date of the original internal report is deemed tantamount to simultaneously submitting the information to the SEC. Note, however, that whistleblowers who are integral to a company’s compliance (for example officers, directors and internal auditors) must wait 120 days after reporting internally before they can report to the SEC and be eligible for an award under the program.

Many whistleblowers are reluctant to report internally due to fear of retaliation or a concern that the company might destroy or cover-up evidence of the fraud. And due to a recent Supreme Court decision limiting protections for internal whistleblowing, a whistleblower will have greater protection by first reporting to the SEC. An experienced SEC whistleblower lawyer can help you assess whether to report internally before reporting to the SEC and can advise you on Sarbanes-Oxley whistleblower protections.

(2) Assistance Provided by the Whistleblower and Their Attorney

The SEC can increase the percentage of an award based on the degree of assistance provided by the whistleblower and if represented by counsel, the assistance provided by their attorney. The SEC will assess whether the whistleblower and their attorney provided ongoing, extensive and timely cooperation in the enforcement action. An experienced SEC whistleblower attorney who knows how to effectively assist an SEC investigation or enforcement action and navigate the award application process can increase the likelihood of recovering a substantial award.

(3) Law Enforcement Interest

The SEC is more likely to pursue a whistleblower submission where the whistleblower has identified a violation that would promote the SEC’s enforcement priorities. Since the inception of the SEC Whistleblower Program, most of the tips have concerned corporate disclosures and financials, offering fraud, and market manipulation. If a whistleblower’s tip furthers an enforcement priority and results in a successful enforcement action, the SEC can increase the size of the whistleblower’s award.

(4) Significance of the Information Provided by the Whistleblower

According to the SEC Whistleblower Office’s 2017 Annual Report to Congress, the office received more than 4,400 tips in FY 2017. Since 2011, the whistleblower office has received over 22,000 whistleblower tips. In order to grab the SEC’s attention as it reviews thousands of tips, whistleblowers should provide specific, credible and complete information regarding the alleged violation. For example, evidence that corporate officers precipitated the fraud will encourage the SEC to open an investigation. In addition, whistleblowers should provide the SEC with a clear roadmap for a successful enforcement action. A whistleblower who comes to the SEC with a solid case supported by strong evidence and a persuasive legal theory is likely to secure a substantial award percentage.

Providing documentary evidence to corroborate a violation will strengthen a whistleblower submission and increase the likelihood that the SEC will open a formal investigation. But whistleblowers should exercise caution and seek advice before gathering evidence. For example, disclosing privileged material can undermine an SEC investigation by forcing the recusal of SEC attorneys or investigators that saw the privileged material.

SEC Whistleblower Rules – Negative Factors

The SEC Whistleblower Program’s rules also authorizes the Commission to decrease the percentage of a whistleblower’s award based on negative factors. Whistleblowers and their attorneys should take steps to avoid the SEC significantly reducing a future payout.

(1) Unreasonable Reporting Delay

The largest SEC whistleblower award to date of $83 million could have been even larger. As noted in the SEC’s order determining the award claims, the SEC reduced the total award percentage because two of the whistleblowers “unreasonably delayed reporting the relevant facts to the Commission for an extended period of time.” The order explains that the SEC’s “rules seeks to incentivize individuals who are ‘aware of the relevant facts’ to promptly report ‘possible violation[s] of the federal securities laws.”

Based on a review of SEC orders determining award claims, unreasonable delay is a common factor that has reduced many whistleblowers’ awards. This fact underscores why most whistleblowers should report misconduct to the SEC as soon as possible.

(2) Culpability in the Misconduct

The SEC may reduce an award if the whistleblower was culpable or involved in the underlying misconduct, especially where the whistleblower substantially directed, planned or initiated the misconduct. But the SEC also understands that employees with first-hand knowledge of a fraud scheme can offer critical assistance in enabling the SEC to identify the perpetrators and halt the scheme. As such, the SEC Whistleblower Program’s rules allow participants in misconduct to be eligible for an award in certain circumstances. The former Director of the SEC’s Division of Enforcement highlighted this rule in a recent speech.

(3) Interference With Internal Compliance and Reporting Systems

While the SEC may increase a whistleblower’s award percentage for reporting internally, the Commission can also decrease an award percentage if the whistleblower interferes with the company’s internal compliance or reporting system. For example, the SEC can decrease a whistleblower’s awards if the whistleblower makes false statements or representations that hinder the company’s efforts to investigate the violation. As company management or the company’s Audit Committee may disclose the findings of an investigation to the SEC or other regulators, a whistleblower should get advice and come prepared to an interview conducted by corporate counsel.

SEC Whistleblower Program Is a Success

Since its inception in 2011, the SEC Whistleblower Program has proven a very effective tool to protect investors and root out fraud. In its short history, the program has enabled the SEC to recover more than $1 billion in penalties and disgorgement from wrongdoers. Based on the improved statistics each year, it is safe to say that the program is just getting started.

© 2018 Zuckerman Law

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About this Author

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

Jason Zuckerman is Principal of Zuckerman Law and litigates whistleblower retaliation, wrongful discharge, non-compete, and other employment-related claims.  Zuckerman serves as Plaintiff Co-Chair of the Whistleblower Subcommittee of the ABA Labor and Employment Section’s Employee Rights and Responsibilities Committee, and in 2012, the Secretary of Labor appointed Zuckerman to serve on the Whistleblower Protection Advisory Committee. 

Prior to founding Zuckerman Law, Zuckerman served as Senior Legal Advisor to the Special Counsel at the U.S...

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

Matthew Stock is an associate at Zuckerman Law, where his practice focuses on representing whistleblowers in whistleblower rewards and whistleblower retaliation cases. He is also a Certified Public Accountant, Certified Fraud Examiner, and former KPMG external auditor.

As an auditor, Mr. Stock developed an expertise in financial statement analysis, internal controls testing, and fraud recognition. At Zuckerman Law, Mr. Stock uses his auditing experience to help whistleblowers investigate and disclose to the government complex financial frauds. In addition, Mr. Stock routinely assists whistleblowers in Sarbanes-Oxley whistleblower retaliation cases analyze a wide range of accounting issues, including revenue recognition, earnings management, and financial statement fraud.

202-930-5901