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What's Happening with Whistleblowing?

This summer the SEC and the Wall Street Journal have reported several noteworthy items concerning the SEC’s whistleblower program, one of the most controversial components of the Dodd-Frank Act of 2010.

The SEC’s whistleblower program offers monetary awards to eligible individuals who provide original information about violations of the federal securities laws resulting in a Commission enforcement action involving more than $1 million in sanctions. Awards can range from 10% to 30% of the money collected. The SEC’s Office of the Whistleblower has established an online portal that makes it relatively easy for informers to contact the agency and provide information.

A recent Wall Street Journal article analyzed the whistleblower program based on SEC records. According to the WSJ, the SEC has received confidential information from more than 6,500 people, leading to five cases based on information from eight whistleblowers that resulted in $150 million in restitution and fines. The SEC has doled out more than $15 million to whistleblowers, including one mammoth $14 million award to a single tipster.

These numbers suggest that only a tiny percentage – barely more than 0.1% – of the informers who contact the SEC provide information leading to worthwhile claims. But in the few cases that have led to enforcement actions, the sanctions against the companies and the rewards for the informers have been significant.

Another notable takeaway from the WSJ story, discussed further by our employment law colleagues here, is that retirees have been the largest single source of tips in the whistleblower program. As the Journal noted, retirees have more time to focus on potential claims and less fear of retribution than current employees.

Two cases recently reported by the SEC also highlight the importance of responding to whistleblower complaints appropriately.

In June, the SEC announced a $2.2 million settlement in a case involving allegations that a hedge fund advisory firm had retaliated against a whistleblower who had contacted the SEC. The SEC noted that this was the first time it had exercised its authority to bring an anti-retaliation enforcement action. As Steve Ganis discussed in a prior post on this case, the SEC alleged that the firm and its principal had engaged in transactions involving conflicts of interest without adequate disclosure and consent, in violation of Section 206(3) of the Investment Advisers Act of 1940. The SEC also alleged that the firm had violated Section 21F(h) of the Securities Exchange Act of 1934 by retaliating against its head trader after he disclosed that he had reported the conflicted transactions to the SEC. In support of this charge, the SEC noted that the head trader had been given a different position as a compliance assistant, stripping him of his supervisory responsibilities.

In another case, the SEC announced in July that it was giving a $400,000 award to a whistleblower who reported an alleged fraud to the SEC after his employer failed to address his concerns adequately. Although the whistleblower contacted the agency only after an inquiry by a self-regulatory organization, the SEC nevertheless concluded that an award was appropriate because of the whistleblower’s repeated efforts to raise and resolve the issues internally with his employer.

The lessons from these cases are not surprising, but worth repeating. When employees come forward with allegations of securities law violations, employers must treat them with great care. Responding promptly to such allegations is an opportunity for the company to be proactive and take charge of an issue, which will put the company in a better position if there is an SEC inquiry. The failure to do so is a missed opportunity. Worse still, reactive changes to a whistleblowing employee’s status may lead to charges of retaliation and make the company look defensive.

Meanwhile, there are many questions relating to the SEC’s whistleblower program that remain to be resolved, such as whether the Dodd-Frank Act’s anti-retaliation provisions apply to employees who report securities law violations internally but do not contact the SEC. While one federal appellate court has held that Dodd-Frank does not protect whistleblowers who only report internally, see Asadi v. G.E. Energy United States, LLC, 720 F.3d 620 (5th Cir. 2013), other courts have disagreed. Most notably, the SEC has argued in an amicus brief filed with the U.S. Court of Appeals for the Second Circuit in Liu v. Siemens AG that its regulations under Dodd-Frank protect whistleblowers from retaliation even if they do not contact the SEC. The case was argued in June. If the Second Circuit agrees with the SEC, it would create a circuit split that could set the stage for further review by the Supreme Court.

It is likely that the number of cases brought by the SEC in connection with the whistleblower program will grow significantly in the next few years, as predicted by Sean McKessy, the Chief of the SEC Office of the Whistleblower, in the Wall Street Journal article cited above. Given the prospects for increased scrutiny from their own employees, it will be more important than ever for companies to be vigilant about compliance with the securities laws and careful about responding to related employee complaints.


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Chip Phinney