SEC whistleblowers are often outside the company… and the SEC wants more of them – key points for business

Securities Litigation Alert


The SEC has announced its latest whistleblower award: more than $700,000. There are three points of note arising from the SEC's January 15 announcement and this award.

First: This is the first time that the SEC has announced that an award had been granted to a "company outsider" whose information led to an SEC enforcement action against an unidentified company. Andrew Ceresney, Director of the SEC's Enforcement Division, noted, "The voluntary submission of high-quality analysis by industry experts can be every bit as valuable as first-hand knowledge of wrongdoing by company insiders." 

According to the order determining the whistleblower's award, the whistleblower provided the SEC with information and analysis on at least two separate occasions,  including (1) a "detailed analysis" that the whistleblower supplied to the SEC before the whistleblower program had even been established; and (2) additional analysis that "significantly contributed to the successful" enforcement action.

In announcing the award and highlighting the whistleblower's "outsider" status, the SEC is essentially extending an invitation to industry experts who learn of or suspect potential wrongdoing by any entity in their industry to report their suspicions to the SEC: "We welcome analytical information from those with in-depth market knowledge and experience that may provide the springboard for an investigation." 

Second: While at least one press report portrayed this award as the first whistleblower award to a "company outsider," that is not the case (although you would not be able to determine that from the SEC's past orders regarding whistleblower award claims). It has happened before, at least once.

More than two years ago, the SEC granted an award to a whistleblower who provided information regarding a competitor in his industry.  In October 2013, the SEC announced that it had awarded more than $14 million to an unidentified whistleblower. Neither the press release announcing that award nor the order granting it made any reference to the whistleblower's relationship to the company that was the subject of an enforcement action.

Several months later, however, the identity of the whistleblower and the company that the SEC sued were both made public due to subsequent litigation: another individual who claimed he partnered with the whistleblower who actually filed the claim with the SEC sued the filing whistleblower, claiming he was entitled to a portion of the award. The plaintiff's complaint alleged that the plaintiff and the whistleblower had come to suspect, and subsequently investigate and report to the Commission, an entity the SEC later sued for conducting an EB-5 related offering fraud.

For whatever reason, at the time the SEC announced the award, it chose not to highlight that the tip had come from a competitor (likely because it wanted to emphasize the amount of the award, which was – at that time – the largest award the Office of the Whistleblower had made).

In addition, while it cannot be determined precisely how many awards have been granted to "outsider" whistleblowers, the SEC recently reported (in the Office of the Whistleblower's FY 2015 Annual Report) that less than 50% of the awards granted under the program through the end of October 2015 were made to whistleblowers who were current or former employees of the company named in the SEC's successful enforcement action. In other words, more than half of the SEC's awards to date have been made to "outsiders": investors who allege they were victims of a fraud, "professionals working in a related industry," or individuals who "had a personal relationship with the alleged wrongdoer."

Thus, for more than two years, the SEC has had extensive practical experience regarding the possible benefits of outside whistleblower's "industry expertise" but has only publicized that fact now. Any company that is only now waking up to the risk that outside whistleblowers may pose is, therefore, two years behind the SEC.

Third: The SEC's decision to announce that this award was given to an outsider serves as a reminder that the Office of the Whistleblower is continuing to use its award grants to market its program. The Office's last four press releases each had a clear message.

To recap these messages:

  • January 15, 2016: Good tips from outsiders are much appreciated.
  • November 4, 2015: The faster you provide us with information, the higher the award you will receive.
  • July 17, 2015: We pay big awards (the announced award was over $3 million).
  • April 28, 2015: We will not tolerate retaliation (while announcing that a whistleblower would receive the "maximum" award).
To find out more about the implications of these developments for your company, please contact the author.