25 August 2017 - Post by:Kurt Wolfe
The SEC recently approved a $2.5 million whistleblower award to “an employee of a domestic government agency whose whistleblower tip helped launch an SEC investigation and whose continued assistance enabled the SEC to address a company’s misconduct.” The award is noteworthy because of the source of the tip—a government employee—and because it is a first-of-its-kind whistleblower award at the SEC.
According to an SEC press release, an employee at an unidentified U.S. government agency learned of improper conduct by a company in the course of his/her work for the agency and reported the potential misconduct to the SEC’s Whistleblower Office. The SEC enforcement staff opened an investigation as a result of the tip, and with the whistleblower’s help—including “specific, timely, and credible information, helpful documents, significant ongoing assistance, and relevant testimony”—the SEC brought a successful enforcement action to address the company’s misconduct.
The award is noteworthy because the SEC has never before granted a whistleblower award to a government employee. The SEC’s Order Determining Whistleblower Award Claim explains, however, that an employee of a federal, state or local government agency will not be automatically prohibited from receiving a whistleblower award. Rather, a government employee who meets the criteria for an SEC whistleblower award will only be prohibited from receiving an award in two circumstances.
First, employees of “appropriate regulatory agencies” are not eligible to receive an SEC whistleblower award. Generally, “appropriate regulatory agencies” include the SEC and various banking regulatory agencies, such as the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, and the Federal Deposit Insurance Corporation.
Second, employees of “law enforcement agencies” are not eligible to receive an SEC whistleblower award. “Law enforcement agencies” are generally understood to include agencies that engage in “the detection, investigation, or prosecution of potential violations of law.”
In this case, neither circumstance applied and the SEC approved the whistleblower award to a government employee.
In determining that the government employee was eligible for an award, the SEC was required to answer an “interpretive question” about the meaning of “law enforcement agency.” To answer that question, the SEC asked whether “the exclusion for employees of a ‘law enforcement organization’ applies to an entire governmental agency that may contain components with law enforcement responsibilities, or only to those divisible sub-agency components that perform the law enforcement responsibilities?” On the facts in this case, the Commission determined that “the arguments for distinguishing the sub-agency that possesses the law enforcement responsibilities from the broader governmental agency are sufficiently strong to allow us to make an award to Claimant.”
The Order Determining Whistleblower Award Claim suggests that the SEC will determine on a case-by-case basis whether and how to apply the prohibition against awards to employees of government law enforcement agencies. In this case, the SEC took a permissive approach, and it will be interesting to see whether this lucrative award tempts other government employees to come forward with tips about potential violations of the federal securities laws. It will be interesting, too, to see how the Commission applies the “law enforcement agency” exception in future cases involving whistleblowers who are employees of government agencies.