SEC Whistleblower Case Illustrates the Potential for Monetary Award Reductions

May 23, 2017
Mehreen Rasheed

On February 28, 2017, the U.S. Securities and Exchange Commission (SEC) awarded a whistleblower 20 percent of any sanctions paid in connection with an SEC enforcement action brought as a result of the whistleblower’s tip.  Importantly, the SEC made clear that the whistleblower’s culpability in the underlying securities violations resulted in a lower award than the whistleblower might have otherwise received.

The SEC’s order issued pursuant to the SEC Whistleblower Program, created by Congress under the Dodd-Frank Act.  The SEC Whistleblower Program offers financial incentives for individuals who report securities violations to the SEC.  A person who submits a tip leading to an SEC enforcement action may receive a monetary award, where the individual provides original information leading to an enforcement action resulting in over $1 million in sanctions.  The whistleblower is eligible to receive an award in the amount of 10 to 30 percent of the sanction amount, in the discretion of the SEC.

Although the SEC’s February 28 order provides little detail, the order makes clear that the SEC had reduced the whistleblower’s award from “what it might otherwise have been” to 20 percent of monetary sanctions.  To justify this lowered award, the SEC cited both the whistleblower’s culpability in the underlying securities violation and the whistleblower’s delay in reporting in the wrongdoing.

Culpability and Delayed Reporting

Generally, a whistleblower who has been convicted of a crime that is similar to the misconduct at issue is not eligible to recover an award under the Whistleblower Program.  But the SEC in its discretion may nevertheless issue awards to whistleblowers who were involved in the misconduct, though never criminally charged, and/or even provide an award to whistleblowers who were charged with a civil violation.

Culpability and delayed reporting are factors that the SEC considers in determining the size of a monetary award.  Pursuant to SEC regulation 17 C.F.R. § 240.21F-6 (or “Rule 21F-6”), considerations of culpability, unreasonable delay in reporting, and/or interference with internal compliance and reporting systems may decrease the whistleblower award amount. In contrast, factors that may increase the amount include:

  • the significance of the information provided by the whistleblower;
  • the assistance provided by the whistleblower;
  • the law enforcement interest in the matter reported; and
  • and the whistleblower’s participation in internal compliance systems.

Potential whistleblowers should consult legal counsel in considering the best path forward to maximize their potential award.  Depending on the circumstances, a potential tipster may decide to first report internally (as it constitutes one factor in increasing the size of potential awards), but would also need to weigh the risk of retaliation in doing so.

Proposed Whistleblower Program Changes

Although a whistleblower’s involvement in the reported securities violations may not currently result in a complete bar to an award, it is conceivable that Congress could change this rule in the near future.  On February 6, 2017, House of Representatives Financial Services Committee Chairman Jeb Hensarling (R-TX) circulated a memorandum among the Committee leadership with proposed changes to the Financial CHOICE Act. Among the other legislative limitations on the SEC’s enforcement power, Representative Hensarling’s memorandum indicated that the CHOICE Act would prohibit a “co-conspirator” from receiving an award under the Whistleblower Program.  Whistleblowers and their counsel should remain mindful of any legislative efforts that might undermine the effectiveness of the SEC’s Whistleblower Program.

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