SEC Whistleblower Program Has Record-Breaking Year
The Securities and Exchange Commission this fiscal year received the largest number of tips from whistleblowers—and paid out the most in rewards—ever.
The agency’s annual report to Congress, published this week, indicates the maturity of the federal whistleblower program.
“This is a reflection of an agency that has gone from adolescence to adulthood,” said Greg Keating, an attorney who leads the whistleblower defense practice group at Choate Hall & Stewart LLP and helps defend companies against retaliation claims brought by whistleblowers.
At the same time, the agency is considering a proposal that would give it more discretion when determining an award amount to those providing tips. Critics of the proposal say it could scale back rewards issued in larger cases, and could stifle potential participation in the program.
The SEC, which established the program in 2011 as part of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, awarded more than $168 million to 13 individuals in the last fiscal year, which ended Sept. 30.
The amount rewarded this past year for tips was more than all of the prior six years combined. Before this past year, the agency had awarded a total of $158 million to 46 individuals who brought in information and cooperated with the regulator.
The Office of the Whistleblower also received 5,282 whistleblower tips during the year—the most in a single year and about 18% more than in 2017. Tips came from individuals in 72 foreign countries and the U.S.
Whistleblowers who provide information that helps the SEC collect at least $1 million in fines can receive between 10% and 30% of the fine, according to current rules. The award percentage depends on several factors, including the significance of the information provided and the level of cooperation by the whistleblower themselves.
The SEC made two of its largest awards in the 2018 fiscal year, including one made to three individuals totaling $83 million and another to two individuals totaling almost $54 million.
The agency in June proposed to alter the whistleblower bounty program, seeking to scale back payouts in the largest cases. Legal experts supporting whistleblowers have said the changes would reduce the number of tips received by the SEC.
Publicity around sizable awards have contributed to an increase in the number in tips, said Sean McKessy, a partner at law firm Phillips & Cohen LLP, which represents whistleblowers.
The increasing volume of awards demonstrates the program’s success and increases awareness, he added. “Success always breeds success,” said Mr. McKessy, who served as chief of the Office of the Whistleblower for the program’s first five years.
The program likely benefited from a recent U.S. Supreme Court decision concerning whistleblower protections, Mr. McKessy said. The court ruled in February that individuals must report alleged corporate wrongdoing to the SEC and not just their company to qualify for anti-retaliation protection provided by the Dodd-Frank Act.
The SEC said it saw an increase in the number of tips it received in the months following the Supreme Court’s ruling. The ruling, which also addressed the definition of who counts as a whistleblower, could push individuals to report the wrongdoings to the SEC, rather than internally, for fear of retaliation, said Mr. McKessy.
“If you worry about retaliation, you have no choice legally if you want to be protected to report to the SEC,” said Mr. McKessy, adding that, as a result of the decision, his firm has also seen a number of people contacting the firm for legal advice on how to report to the regulatory body.
About 69% of award recipients over the years were current or former employees of the businesses that were being reported upon, the report said. Among these insiders, roughly 83% of them had raised their concerns internally before reporting to the Commission.
These findings are another reminder of the importance of internal compliance systems, according to Mr. Keating.
“It’s a natural instinct that people want to go internally, and if you invest in compliance, you can address and resolve the problem and never have a multimillion-dollar whistleblower issue,” he said.