SEC’s First Whistleblower Award An Encouraging Sign for Whistleblowers

A securities fraud whistleblower will receive nearly $50,000 from the U.S. Securities and Exchange Commission (“SEC”), the agency announced on Tuesday, August 21, 2012.  This represents the first payout under the new bounty provisions of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”).  The SEC announced that the award recipient had provided documents and other significant information that allowed the SEC’s investigation to move at an accelerated pace and prevent the fraud from ensnaring additional victims. The whistleblower’s assistance led to a court order of more than $1 million in sanctions, of which approximately $150,000 has been collected thus far.

As part of a comprehensive program to ensure corporate accountability and compliance, the Dodd-Frank Act created incentive programs to reward and protect individuals who report violations of the laws that govern financial markets and the activities of U.S. companies doing business abroad.  Section 922 of the law awards whistleblowers 10 to 30 percent of any monetary recovery of over $1 million that the SEC obtains from an offending party through enforcement actions.  The $50,000 the whistleblower has received thus far represents 30% of the amount the SEC has collected from the perpetrators of the fraud thus far.

David J. Marshall, a whistleblower attorney at the D.C. law firm of Katz Banks Kumin who represents whistleblowers before the SEC, described the SEC’s announcement as a good sign for whistleblowers who are submitting tips to the Commission.  Marshall noted that while the $50,000 award initially attracted some attention for its relatively small size, the amount is significant in two regards:  first, the statute requires the SEC to pay the whistleblower only an amount equal to 10% of sanctions but the SEC set the first award at 30%, and,
second, that the SEC has paid the whistleblower the first installment long before the Commission will collect the $1 million threshold that triggers entitlement to an award.

“This means that the SEC is taking seriously the Congressional mandate to incentivize whistleblowers to come forward with information about securities violations,” Marshall said.  “The Whistleblower Office is sending a message that it will treat whistleblowers fairly, both in the amount of awards and in paying a partial award even before collecting the full amount of
sanctions.”

In addition, Marshall noted that the SEC appeared to have gone to great lengths to protect the whistleblower’s identity.  The Commission’s press release does not identify the whistleblower, the company or the action that resulted in sanctions, and makes it a lot more likely that the person who stepped forward will be able to look for a job without of being recognized as a whistleblower when he fills out a job application.  According to Marshall, “this respect for the whistleblower’s anonymity sends a strong signal to would-be whistleblowers who may be afraid to come forward for fear of the effect that could have on their careers.