SEC to whistleblowers: speak now, or get a smaller piece – 3 takeaways

Securities Litigation Alert

By:

The SEC has announced its twenty-second whistleblower award: at least $325,000 to a former employee of an “investment firm” who provided the SEC with information that allowed it to bring a successful enforcement action.

Three key takeaways arise from this award and the November 4 press release announcing it. 

First, the SEC is putting a premium on speed (and wants potential whistleblowers to know it).  In the press release announcing the award, the SEC’s staff pointedly noted that the whistleblower’s award would have been “higher had this whistleblower not hesitated.”  Specifically, the whistleblower “waited until after leaving the firm to come forward to the SEC.” 

While it is not clear exactly how long the whistleblower waited before coming forward, the Order granting the award says that the delay was “relatively limited.”  Nevertheless, the SEC concluded this “limited” delay was “unreasonable” and therefore cause to decrease the award.  As Sean X. McKessy, Chief of the SEC’s Office of the Whistleblower, noted, “This award [underscores] the need for whistleblowers to report information to the agency expeditiously.”

Second, the SEC is telling potential whistleblowers that it is completely confident in its ability to protect their confidentiality.  Prior to the final determination of the award, this particular whistleblower had argued that the SEC’s preliminary award determination had not appropriately considered “the personal and professional risks faced by whistleblowers in reporting to the Commission.”  The SEC, however, concluded that it had given “due consideration” to those risks, largely because “Dodd-Frank changed the landscape,” including by providing “whistleblowers with confidentiality protections, including the right of whistleblowers to report to the Commission anonymously and to remain anonymous until the time that an award is to be paid.”  Thus, according to Andrew Ceresney, Director of the SEC’s Division of Enforcement, “Whistleblowers …can feel secure about doing the right thing and immediately reporting an ongoing fraud rather than letting time pass.”

Third, the SEC’s most recent whistleblower award is designed to incentivize a whistleblower to come forward faster, but it is not designed to encourage that whistleblower to report internally  faster (or at all).   Prior to the determination of the final award amount, the whistleblower claimed that the SEC was inappropriately decreasing the amount of the award based on the whistleblower’s failure to report the misconduct internally.  The SEC denied that claim.  Rather, the SEC said, the decision to decrease the award was based on the whistleblower’s failure to report to anyone (the Commission, another regulator, or internally).  The SEC’s position is agnostic as to how a whistleblower reports; they did not penalize this whistleblower because they did not report internally, but they did penalize this whistleblower because they “did nothing to report the information” to anyone, internally or externally.

Thus, if the SEC’s most recent award is successful in its aims − incentivizing whistleblowers to report potential misconduct earlier for fear that if they do not they may be essentially penalized for delaying – those reports could be made internally, or they could be largely aimed at the government agency that says “trust me.” 

Find out more about this development and its implications for your company by contacting the authors.