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SEC Gives $300,000 Whistleblower Award to Audit and Compliance Employee

Last week the SEC announced that, for the first time, it had made a whistleblower award to an employee who performs audit and compliance functions at a company.  As the SEC noted in its order in the case, although its regulations generally preclude whistleblower awards to employees whose principal duties involve compliance or internal audit responsibilities, there is an exception to this rule where the employee first reports the alleged violation internally and then waits at least 120 days before contacting the SEC. See 17 CFR § 240.21F-4(b)(iii)(B); 17 CFR § 240.21F-4(b)(v)(C). That is what happened in this case. According to the SEC, the whistleblowing employee reported concerns about wrongdoing to appropriate personnel within the company, including a supervisor. But when the company took no action within 120 days, the employee reported the same information to the SEC. The SEC awarded the employee $300,000, 20% of the $1.5 million monetary sanctions it collected from the employer.

As we discussed in a previous post, the SEC’s whistleblower program offers monetary awards to eligible individuals who come forward with original information that leads to a Commission enforcement action in which over $1 million in sanctions is ordered. The whistleblower awards range between 10% and 30% of the money collected. The program provides a powerful incentive for company employees to give tips to the SEC about potential violations of the federal securities laws.

Since audit and compliance employees are responsible for ferreting out information about corporate wrongdoing, they are particularly well-positioned to profit from the whistleblower program. Companies confronted with allegations of wrongdoing from an audit and compliance employee should act promptly to investigate and take any necessary follow-up action. The SEC has commented that the 120-day period between the employee’s internal report and the report to the SEC is not intended to be a “grace period” during which a company may determine its response to any violations, and a company’s promptness in self-reporting misconduct is an important factor for the SEC in considering whether and to what extent it will grant leniency. See SEC Release No. 34-64545, Implementation of the Whistleblower Provisions of Section 21F of the Securities Exchange Act of 1934 (Aug. 12, 2011), at 76. Moreover, an audit and compliance employee need not always wait 120 days after an internal report to qualify for a whistleblower award. The employee can go directly to the SEC if he or she has a reasonable basis to believe that disclosure of the information to the Commission is necessary to prevent a company from engaging in conduct likely to cause substantial financial injury or conduct that will impede an investigation. See 17 CFR § 240.21F-4(b)(v)(A) & (B). Similar provisions apply to other persons who are responsible for monitoring and/or investigating corporate compliance, including officers, directors, and auditors in certain circumstances. See 17 CFR § 240.21F-4(b)(iii) & (v).  The SEC's whistleblower program is a powerful enforcement tool that makes it more important than ever for corporate personnel to be proactive in responding to internal allegations of wrongdoing.

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Chip Phinney