SEC Says You Don’t Have to Be an Insider to Be a Whistleblower

February 9, 2016
Michael A. Filoromo, III

In an apparent first for the Securities and Exchange Commission (“SEC” or “Commission”) whistleblower program, on Jan. 15, the SEC issued an award to an individual who was neither an employee nor a contractor of the company against whom the Commission leveled sanctions. The SEC stated in a press release that the $700,000 award was based on a detailed, independent analysis that led to the successful enforcement action. Andrew Ceresney, Director of the SEC Enforcement Division, noted that “[t]he voluntary submission of high-quality analysis by industry experts can be every bit as valuable as first-hand knowledge of wrongdoing by company insiders.”

What Is the SEC Whistleblower Award Program?

The SEC award program was created by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank Act”). The program provides incentives to individuals to report to the SEC violations of securities laws and regulations. If the Commission brings an enforcement action resulting in monetary sanctions or settlement greater than $1 million, the tipster may receive between 10 percent and 30 percent of the total recovery. The amount of the recovery is based on a variety of factors, including the quality of the information submitted, the SEC resources that the individual saved, the likelihood that the SEC would have discovered the violation independently, and the individual’s cooperation in the investigation and enforcement action. If you want to learn more about the SEC Whistleblower program, check out Katz Banks Kumin founding partner David Marshall’s helpful SEC Whistleblower Practice Guide that summarizes the program and the rules for submitting, claiming and determining awards.

Since August 2011, when the final rules implementing the SEC whistleblower program were enacted, the Office of the Whistleblower has received more than 14,000 tips. The program has issued 23 awards totaling more than $55 million, with one foreign whistleblower receiving more than $30 million. The most current statistics on the program are available in the SEC’s Annual Report on the Whistleblower Program.

How an Outside Whistleblower Scored a Big Win

There are few substantive details in the SEC’s press release or the order issuing the $700,000 award to the company outsider. The SEC is committed to preserving the confidentiality of whistleblowers to the greatest extent possible. Therefore, the order was heavily redacted to remove the name of the company that was sanctioned, the name of the claimant receiving the award, and the names of three other individuals who were denied awards. The Commission also withheld the total amount of the monetary sanctions against the company and the percentage the individual received, since these would have allowed an interested party to check the SEC’s list of covered actions, determine the company involved and possibly infer the identity of the claimant.

These redactions show the care the SEC takes in protecting whistleblowers from unwanted and possibly career-damaging publicity.

The SEC’s order did reveal some information with respect to the timing of the claimant’s submissions to the Commission. The order stated that the claimant provided a detailed analysis to the SEC prior to the establishment of the award program under Dodd-Frank, and thus that submission did not make the claimant eligible for an award. The claimant submitted a subsequent detailed analysis following the passage of Dodd-Frank, and the SEC determined that “the additional analysis constituted original information, that [the claimant] voluntarily provided it to the SEC, and that this information significantly contributed to the successful enforcement of the Covered Action.”

What Does This Mean for SEC Whistleblowers?

Company insiders, or those who contract with or work closely with a company engaged in securities law violations, will usually be in the best position to provide to the SEC the information and evidence essential to a successful SEC enforcement action. Sometimes, however, violations may be hiding in plain sight. An individual with a keen understanding of a particular industry or familiarity with a common fraudulent practice may be able to detect through publicly available information violations that regulators do not see. As Sean McKessy – chief of the SEC Office of the Whistleblower – put it, the Commission “welcome[s] analytical information from those with in-depth market knowledge and experience that may provide the springboard for an investigation.”

The inability of company outsiders to point to documents or the identities of the company officers who orchestrate the violation will be factored into the SEC’s determination of an appropriate whistleblower award. This lack of evidence may reduce the percentage award that the individual can receive. Inevitably, the SEC will have to do a broader independent investigation through subpoenas and interviews than it would if a company insider could direct the Commission to smoking-gun evidence. Nevertheless, this award – one of the two dozen issued by the Commission – confirms that the SEC values any and all information that aids the Commission in its efforts to enforce the nation’s securities laws and protect investors.

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