A Whistleblower First

For the first time the Securities and Exchange Commission (“SEC”) made an award ($300,000) to a whistleblower performing a compliance and audit function within a public company after the company failed to take action on the individual’s internal report to the company within 120 days. Information on the award is scant because, by law, the SEC must protect the confidentiality of whistleblowers and cannot disclose any information that might directly or indirectly reveal a whistleblower’s identity.

The SEC is authorized by Congress under the “Dodd-Frank” legislation (Sec. 922 of PL111-203, Section 21F of the Securities Exchange Act of 1934) to provide monetary awards to eligible individuals who come forward with high-quality original information that leads to a successful SEC enforcement action in which over $1,000,000 in sanctions is ordered. The range for awards is between 10% and 30% of the money collected. (SEC Release 34-64545).

Here are some brief tips on the SEC’s whistleblower program:

  • For “non-anonymous” tips Form TCR is required for participation in the program.
  • Individuals with anonymous tips must be represented by counsel.
  • The SEC reviews the submission:
    • Tips that pertain to matters already in the Enforcement Division are forwarded to staff handling the matter.
    • Tips are often forwarded to other divisions of the SEC.
    • All information is retained for possible use.
    • The SEC will contact the individual directly or through their counsel if follow up is required.

The SEC reminds whistleblowers:

  • Provide specific, timely, and credible information.  A general allegation that “so and so is committing securities fraud” does not help an investigation, even if the allegation might be true.
  • When in doubt, submit information and update it, if there is an update.  That might be the final piece of information to complete the investigation.
  • Investigations are lengthy and cases are litigated and appealed so it may take years for the matter to be concluded and an award made to a whistleblower.
  • A whistleblower eligible for an award from the SEC might be notified directly by it of a successful case’s conclusion.  Also, the SEC will post a Notice of Covered Action on its website for each eligible whistleblower case.  Whistleblowers may sign up to receive an email each time a new one is posted.

SEC whistleblower awards are not automatic.  Whistleblowers must submit a Form WB-APP within 90 days of the posting of the Notice of Covered Action to apply for an award. The SEC will acknowledge receipt of the application and then conduct an analysis required by the SEC’s rules to determine whether to pay an award, and, if so, how much.  Seven factors used to determine whether to increase or decrease the percentage of an award.

The four factors that may increase an award are:

(1) The significance of the information provided by the whistleblower;

(2) The assistance provided by the whistleblower;

(3) Any law enforcement interest that might be advanced by a higher award; and (4) The whistleblower’s participation in internal compliance systems.  Such as the whistleblower’s reporting on a company that he or she currently or used to work for, any report made internally first, and whether the whistleblower participated in any internal investigation.

There are also three factors that can decrease the percentage of an award. These are:

(1) Culpability on the part of the whistleblower;

(2) An unreasonable reporting delay by the whistleblower; and

(3) Interference with internal compliance and reporting systems. 

However, even if all the negative factors apply, a whistleblower may still be entitled to an award higher than the ten percent minimum.

In a somewhat related matter, the SEC announced on September 22, 2014 an award of $30 Million to a whistleblower.  The amount was more than double the largest ever awarded, in 2013.  As stated in this article, the anonymity of the whistleblower in the most recent matter is preserved by the SEC so little detail is available on the case.  In the instant case, the whistleblower was living abroad at the time the matter arose and he or she represents the fourth international resident to receive an award under the SEC’s whistleblower program.

The money paid to whistleblowers comes from an investor protection fund established by Congress at no cost to taxpayers or harmed investors.  The fund is financed through monetary sanctions paid by securities law violators to the SEC.  Money is not taken or withheld from harmed investors to pay whistleblower awards.

More information on the SEC’s whistleblower program may be found at www.sec.gov/whistleblower.

PK Law’s Corporate and Business Services Attorneys urge companies who have an internal report leading to a potential investigation by the SEC to contact a PK Law Attorney immediately.  Ignoring or delaying action an internal report may lead to serious repercussions.