Vedder Thinking | Articles SEC Announces First Award in Dodd-Frank Whistleblower Program
On August 21, 2012, the Securities and Exchange Commission announced the first payout from its whistleblower program that was instituted last year under the Dodd-Frank Act. The SEC awarded the whistleblower approximately $50,000 for providing documents and other significant information that allowed the SEC’s investigation to move quickly and prevent the fraud from ensnaring additional victims.
The award represents 30% of the $150,000 collected to date by the SEC out of the total court-ordered sanctions of more than $1 million. The whistleblower is entitled to up to $300,000 once the total amount of the sanctions has been collected and may receive more should the SEC seek further claims in connection with this matter.
Whistleblower Program Requirements
The whistleblower rules prescribed under new Section 21F of the Securities Exchange Act of 1934 require the SEC to pay awards to whistleblowers— those individuals who voluntarily provide original information to the SEC relating to securities law violations leading to the successful enforcement of a judicial, administrative or related action involving sanctions exceeding $1 million.1 A whistleblower must voluntarily submit the information to the SEC before a request or demand is made from the federal government, state attorney general or securities regulator, the Public Company Accounting Oversight Board or any self-regulatory organization. The SEC has the discretion to determine the amount of the award paid to the whistleblower, but the amount will be at least 10%, but no more than 30%, of the monetary sanctions that the SEC or other authorities are able to collect. Certain information, including information subject to attorney-client privilege, and individuals, including employees of the SEC, Department of Justice and other regulatory agencies, are not eligible for consideration.
Details of the Circumstances Leading to the Award Are Limited
Few details about the claim, such as whether the individual was an employee or the type of information this individual provided to the SEC, are publicly available. The SEC merely noted that the claim helped stop a multi-million-dollar fraud, which could imply that the case involved a Ponzi scheme or other investment fraud as compared to a situation involving a corporate issuer.
The limited release of information is likely due to the program’s mandate to protect the identity of the whistleblower and to prevent retaliation. The SEC noted in its press release that the “law specifies that the SEC cannot disclose any information, including information the whistleblower provided to the SEC, which could reasonably be expected to directly or indirectly reveal a whistleblower’s identity.”2 The law also includes a provision that prohibits any employer from retaliating against the whistleblower. For the purposes of this antiretaliation provision, a whistleblower includes a person who reasonably believes that the information he or she is providing relates to a possible securities law violation, whether or not the conditions, requirements or procedures are satisfied to qualify for any award.
Information Provided to the SEC Must Be Original and Voluntarily Provided
We do know that a second claim in connection with this case was rejected because the information provided did not rise to the level necessary to qualify for the award. A whistleblower must voluntarily provide original information that leads to a successful judicial or administrative action. In order for a whistleblower submission to be considered original information, it must be
- derived from the whistleblower’s independent knowledge;
- not already known to the SEC; and
- not exclusively derived from an allegation made in a judicial or administrative hearing, in a government report, audit or investigation, or from the news media.
Increased Focus on Corporate Compliance
The scarcity of details from the SEC regarding this case does not necessarily provide corporate compliance managers with new guidance on improving a company’s internal compliance procedures or provide whistleblowers with help navigating the requirements of the program or assessing the level of information required to receive an award. However, companies should continue to augment their securities law compliance and financial-related ethics programs with information about the bounty program. Whistleblowers may still receive an award even if they report to the company before going to the SEC. In some cases, if a person first reports the information internally before disclosing it to the SEC’s Office of the Whistleblower, and the company conducts an investigation and reports the results to the SEC, the person will benefit from all the information the company’s investigation turns up when the SEC is considering issuing an award.
Moreover, companies should consider establishing a predetermined response team for handling claims and managing risks associated with such claims. Current employee training programs should remind managers about the prohibitions on retaliation towards SEC whistleblowers. Employees should be further educated on their confidentiality obligations and the risks of false reporting. In advance, companies should determine what role the internal audit group and the Audit Committee of the Board of Directors will have in responding to complaints.
1 SEC Release No. 34-64545 (Implementation of the Whistleblower Provisions of Section 21F of the Securities Exchange Act of 1934).
2 SEC Press Release dated August 21, 2012 (SEC Issues First Whistleblower Program Award).
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