01 June 2016 - Post by:Kurt Wolfe
The US Securities and Exchange Commission’s (SEC) whistleblower program continues to gather steam.
In recent weeks, the SEC’s Whistleblower Office announced the third and fourth highest whistleblower awards in the program’s history:[i]
- On May 17, the SEC announced an award “between $5 million and $6 million”—its third largest award—to a former company insider whose tip helped the SEC uncover securities violations that the agency would not have detected without the whistleblower’s information.
- On May 13, the SEC announced a $3.5 million award—its fourth highest award—to a whistleblower whose tip ‘bolstered an ongoing investigation with additional evidence of wrongdoing that strengthened the SEC’s case’.
The $3.5 million award is particularly noteworthy because it involves a whistleblower being rewarded for making a ‘substantial and important contribution’ to the resolution of an ongoing investigation.
The award highlights an infrequently relied upon feature of the SEC whistleblower program: a whistleblower who provides information relating to an ongoing examination or investigation may be eligible for an award if his tip ‘significantly contributes’ to the success of a resulting enforcement action.[i]
Tips must ‘lead to’ a successful enforcement action
Broadly, a whistleblower may be eligible for an award if he/she provides a tip that leads to a successful SEC enforcement action in which more than $1 million in sanctions are ordered. According to the SEC, information ‘leads to’ a successful action:
‘if your information causes us to  open a new investigation,  re-open a previously closed investigation or  pursue a new line of inquiry in connection with an ongoing investigation, and we bring a successful enforcement action based at least in part on the information you provided. Additionally,  you may still be eligible if your information relates to an ongoing examination or investigation, if the information you provide significantly contributes to the success of our resulting enforcement action’.
In this case, the whistleblower relied on the fourth standard to stake a successful claim for a bounty payment. Details are sparse in the order deciding the whistleblower’s claim, but it appears that the whistleblower learned of an SEC investigation into potential misconduct at his/her company through news reports. Based on media speculation regarding the scope of the potential misconduct and related SEC investigation, the whistleblower compiled and submitted relevant documents and information that ‘meaningfully increase[ed] Enforcement staff’s leverage during the settlement negotiations’.
Whistleblower awards in these circumstances are rare. But because multimillion dollar awards always attract attention, the SEC is using the award to plug this less travelled avenue to becoming a successful SEC whistleblower. Andrew Ceresney, the SEC’s Director of Enforcement, explained, ‘Whistleblowers can receive an award not only when their tip initiates an investigation, but also when they provide new information or documentation that advances an existing inquiry’.
And in its press release, the SEC openly ‘encouraged [whistleblowers] to come forward and report allegations of potential securities laws violations even if they think the SEC may already be looking into it’.
Proactive steps to avoid reactive whistleblowing
This case flags the risk that public disclosure, media reports, or market speculation may draw out related whistleblower reports. Armed with information relating to the potential misconduct, a reactive whistleblower will be better positioned to cherry-pick information that is potentially helpful to the SEC.
There is, of course, nothing an organization can do to prevent employees from reporting to the SEC. But, as we have counseled in the past, there are things your organization should be doing to encourage, triage, and promptly address internal reports. Among other things, consider providing employee training or educational materials relating to internal reporting options (e.g., telephone hotlines or email reporting systems) and offer meaningful incentives to employees to report internally (e.g., by counting appropriate reports as positive factors in employee performance evaluations).
Avoiding surprises late in the game is undoubtedly in organizations’ best interests. We encourage clients to take proactive steps to mitigate the risk of reactive whistleblowing.