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The High Cost of Whistleblowing

In a number of recent posts (for example, here and here), we have highlighted the SEC’s whistleblower program, which offers awards of 10%-30% of the money collected where a whistleblower provides high-quality, original information that results in an SEC enforcement action with sanctions exceeding $1 million.

It should come as no surprise that cases involving whistleblowers on average cost companies far more than those where no whistleblowers are involved. In a recent academic study, “The Impact of Whistleblowers on Financial Misrepresentation Enforcement Actions,” the authors reviewed SEC and Department of Justice enforcement actions associated with financial misrepresentation between 1978 and 2012. They concluded that enforcement actions associated with a whistleblower lasted 10 months longer and resulted in penalties that, on average, were approximately $90 million higher against companies and over $50 million higher against executives and employees than in those cases where whistleblowers were not involved. Whistleblower cases also led to prison sentences against executives and employees that were approximately two years longer than in non-whistleblower cases. This study demonstrates in concrete terms why compliance and prevention programs are cost-effective.

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Chip Phinney