SEC Not Sympathetic to Delays in Reporting Dodd-Frank Violations

November 19, 2015

In a November 4, 2015 release from the U.S. Securities and Exchange Commission (“SEC”), the Claims Review Staff publicly announced its decision that an undisclosed Claimant’s delay in reporting fraudulent activity to the SEC was unreasonable because the entirety of the delay took place after the implementation of the anti-retaliation provision of the Dodd-Frank Act.

On July 13, 2015, the SEC issued a Preliminary Determination in which the undisclosed Claimant should receive payment of over $325,000.  In considering the amount of the award, the Claims Review Staff gave negative weight to the fact that the Claimant did not report the wrongdoing, either internally or externally, until the Claimant had left the employer.  While only a limited delay, the SEC found it to be unreasonable because, during that period, the violations continued allowing the respondents to obtain further ill-gotten gains.  On September 10, 2015, the Claimant requested an increase in the award percentage, arguing that the award was too low because the Claims Review Staff had weighed the Claimant’s reporting delay too heavily when determining the award amount.  The Claimant argued, inter alia, that the award should be reconsidered because: (1) SEC had not properly considered the Claimant’s personal and professional risks and (2) an insistence on prompt reporting could lead to a decrease in tips.

After considering the Claimant’s appeal, the SEC was not persuaded by the Claimant’s arguments.  It held that the Dodd-Frank Act “changed the landscape for whistleblowers” and takes into account precisely the professional and personal risks Claimant noted whistleblowers are liable to face.  The SEC also noted that, prior to the full implementation of Dodd-Frank, periods of delay were viewed less harshly because whistleblower’s faced strong disincentives to report violations while still employed at the entity where misconduct was occurring.  Since the Act provides protections for whistleblowers, including confidentiality protections and the right to remain anonymous (which the Claimant had availed him or herself of), these disincentives were minimized.  Accordingly, since Claimant’s delay occurred entirely after the creation of the Commission’s whistleblower protection program, the SEC weighed the delay more heavily when assessing the award percentage.

Additionally, the SEC contended that prompt reporting did not and will not affect the quality of the tip, since whistleblowers are able to provide further information after submitting a tip.  Brent J. Fields, Secretary for the Claims Review Staff, noted in the release, “We believe it would undermine our objective of leveraging whistleblower tips to help detect fraud early and thereby prevent investor harm if whistleblowers could unreasonably delay reporting and receive greater awards due to the continued accrual of wrongful profits.”

With this decision, the SEC is sending a strong message to potential whistleblowers: prompt reporting is an important aspect of disclosing suspected securities violations to the SEC.  As evidenced in this case, the SEC will not be sympathetic to reporting delays, particularly if the delay causes investors and the public further harm.

Our Offices

Washington, DC
Katz Banks Kumin LLP

11 Dupont Circle NW, Suite 600
Washington, DC 20036

Phone: 202-299-1140
Philadelphia, PA
Katz Banks Kumin LLP

1845 Walnut St., 25th Floor
Philadelphia, PA 19103

Phone: 215-735-2171
San Francisco, CA
Katz Banks Kumin LLP

150 California St., 16th Floor
San Francisco, CA 94111

Phone: 415-813-3260