SEC WHISTLEBLOWER PROGRAM
The SEC Whistleblower Program allows individuals to blow the whistle on securities law violations and to earn large monetary awards for their efforts. Whistleblowers can even submit tips to the SEC anonymously with the help of an attorney.
Who can earn an award from the SEC Whistleblower Program?
To be eligible for an award, a whistleblower must ‘voluntarily’ provide the Securities and Exchange Commission with ‘original information’ about prior, current, or future violations of federal securities laws.
Information is ‘voluntarily’ provided when it is given to the SEC before the government has asked for the information. Information is ‘original’ when it is based on the whistleblower’s independent knowledge or analysis and not already known to the SEC. The information provided by the whistleblower must also lead to the SEC imposing monetary sanctions greater than $1,000,000.
A whistleblower must be an individual (not a company), but multiple people are allowed to submit a claim seeking an award. A whistleblower does not have to be an employee of the of the offending company to qualify for an award.
Who does not qualify as an SEC whistleblower?
There are some groups of people that do not qualify for an SEC whistleblower award. This includes attorneys who learn of the violations due to their representation of the offending company, company officers who are aware of violations due to internal compliance processes, employees whose main duties concern compliance, and public accountants engaged in work required by federal securities laws.
Whether a potential whistleblower falls into one of these exceptions can be difficult to determine in some cases. For this reason, a potential whistleblower should always consult with an experienced SEC whistleblower attorney to determine if he or she qualifies to receive an award.
Can SEC whistleblowers report violations anonymously?
Yes, an SEC whistleblower can submit tips anonymously but only if they are represented by an attorney. There are advantages and disadvantages to submitting a tip anonymously, and your attorney will discuss the pros and cons with you before submitting a tip.
How does the SEC Whistleblower Program work?
SEC whistleblowers are awarded between 10% and 30% of the total monetary sanctions that the SEC collects. This can be an extremely wide range, especially when many millions of dollars are being awarded. In determining the specific amount to award a whistleblower, the SEC Whistleblower Office looks at several positive factors, which can increase the award, as well as negative factors, which can decrease the award.
The SEC may increase an award based on the following positive factors:
- Value – The value of the information provided is the most important factor. The significance of a tip provided by a whistleblower generally depends on the completeness and credibility of the information. If the tip is thorough and corroborated by other evidence, it allows the SEC and other government agencies to save time and resources in investigating the claim.
- Assistance – The SEC considers the level of assistance provided by a whistleblower and a whistleblower’s attorney during its investigation. Whistleblowers that fully cooperate with the SEC’s investigation (e.g., answering questions, providing additional documentation, or otherwise cooperating with SEC requests) are likely to receive a higher award than those who play a passive role during the investigation.
- Deterring violations – The SEC has a strong law enforcement interest in deterring future securities violations. In calculating an award percentage, the SEC will consider how much it needs to pay out to incentivize future whistleblowers to step forward.
- Internal compliance – The SEC will consider whether the whistleblower participated in the company’s internal compliance systems. In particular, the SEC will look to see if a whistleblower reported the violation internally prior to contacting the SEC.
The SEC may also decrease an award based on the following factors:
- Participation – If the whistleblower participated in the securities law violations that he or she ultimately reported to the SEC, the SEC will likely reduce the award. The SEC obviously favors whistleblowers who are not culpable in the violations; however, whistleblowers who did play a role in the violations have still received significant awards from the SEC.
- Timeliness – A whistleblower that unreasonably delays reporting violations to the SEC can expect to see a reduced award. The SEC will take into account whether a whistleblower failed to take reasonable steps to report the violations and whether the whistleblower only reported the violation after learning of an investigation.
- Interference – If a whistleblower took steps to interfere with the company’s internal compliance systems (e.g., making false statements or falsifying documentation), the SEC may choose to decrease the amount of the award.
It is extremely important to retain an SEC whistleblower attorney in order to collect the greatest award possible. From the beginning of your case until the end, your attorney will work hard to make sure that you are maximizing the positive factors and mitigating any negative factors. Such advocacy early on in a case can increase a whistleblower’s award by millions of dollars.
What types of SEC violations are eligible for a whistleblower award?
The SEC investigates an array of federal securities law violations. Some of the more common types of violations which have produced large whistleblower awards are discussed below.
- Corporate disclosures – About one-fifth of SEC whistleblower tips involve corporate disclosures and financial violations. SEC rules require public companies to make numerous disclosures concerning their financial condition and governance. Violations typically occur when a company makes false statements in its filings with the SEC or to the public. In many cases, an offending company will employ accounting techniques to inflate reported earnings or use manipulative transactions which change the company’s revenues or losses.
- Offering fraud – Offering fraud generally refers to making false statements or misrepresentations to potential investors. This may involve individuals reaching out to potential investors and making claims about the company’s ability to produce unusually high returns. Or it may involve a pyramid scheme whereby an individual recruits investors and promises those investors unusually high returns in exchange for recruiting other investors.
- Insider Trading – Insider trading is the buying or selling of a security on the basis of nonpublic and material information about the security. Information is considered to be ‘material’ if it could have a substantial impact on whether an investor buys or sells a security. While this type of violation is usually committed by corporate insiders, the law also extends to individuals that the insider may have tipped off.
- Trading and Pricing – Trading and pricing violations refer to any type of trading technique outlawed by securities laws. One type is known as ‘Late Trading’ whereby mutual fund trades are recorded after the fund has declared its value for the day. Another is known as ‘Front Running’ where an investor will buy or sell a security knowing that someone else is about to buy or sell the same security which will influence its value. Another common technique is known as ‘Marking the Close’ where an investor will sell a security near the close of trading in an attempt to alter the closing price.
- Foreign Corrupt Practices Act – The FCPA is a federal law which makes it illegal to offer or promise to pay anything of value (i.e., a bribe) to a foreign official in order to obtain business. The FCPA applies to every country in the world and can extend to the actions of company officials and employees as well as stockholders, consultants, and anyone else who participated in the bribery.
How does an SEC whistleblower report a violation?
If you suspect that an individual or company has committed a securities law violation, you can blow the whistle by submitting a tip to the SEC Whistleblower Program. Based on our experience, the following steps are helpful in securing an SEC whistleblower award.
- Identify the violation. You should be able to articulate how a company or individual has violated a securities law. As discussed above, securities violations can take on many forms.
- Be as detailed as possible The SEC Whistleblower Program requires specifics. You should be able to tell the story of how the violations occurred (i.e., who was involved, when the scheme took place, how the scheme was carried out) and be able to identify the specific false statements or transactions at issue.
- Documents and other evidence While detail is important, credibility is just as important. This means that a whistleblower is able to produce documents, recordings, or some other type of evidence to back up the whistleblower’s claims. In many cases, there will be emails, memos, or other communications between the offending parties that can provide details the SEC needs to go after the offenders.
- Hire an experienced SEC whistleblower attorney. The SEC Whistleblower Program is a unique government program. An experienced SEC whistleblower attorney should be hired before submitting a tip to the SEC to ensure that the rules of this program are properly navigated.In addition to following the rules, an attorney serves many other important functions as well. This includes making sure that you have a viable whistleblower claim, that you are not placing yourself in legal jeopardy by submitting a tip to the SEC, that the tip contains adequate information to catch the SEC’s attention, that you are able to properly assist the government agents who will handle the investigation, and that you are protected from employer retaliation. Most importantly, an attorney will work hard to maximize any award issued by the SEC.Hiring an attorney is also important for whistleblowers who wish to remain anonymous. SEC rules allow for whistleblowers to remain anonymous (in most cases) if they are represented by a lawyer.
- Submit the tip to the SEC. The SEC requires whistleblowers to submit tips in one of two ways: 1) a whistleblower can submit the tip electronically through the SEC’s Tips, Complaints and Referrals Portal; or 2) by sending a Form TCR via mail or facsimile to the SEC Officer of the Whistleblower.This may sound like a simple thing to do, but in reality, you need to be able to provide the SEC with a clear, credible, comprehensive, and compelling description of the violations that have taken place. If you fail to do so, you will likely never see an award. You need to keep in mind that more than 40,000 tips have been submitted to the SEC since 2011, but the SEC has only issued awards to 207 whistleblowers. It is therefore critically important that you be able to catch the attention of the SEC by being as persuasive and detailed as possible in the tip that you submit.
- Assist in the SEC’s investigation. Tips are reviewed by the SEC’s Office of Market Intelligence (OMI), and OMI will determine if the tip should be referred to the Division of Enforcement for further investigation. If a tip is referred to the Division of Enforcement, the SEC’s enforcement attorneys will determine if an investigation should be pursued and how the investigation should be conducted. In some cases, the Division of Enforcement may refer the matter to a different government agency such as the IRS or treasury.If an investigation is opened, the SEC enforcement attorneys will likely request an interview with you to clarify information that was provided in the tip, obtain additional information, determine where relevant documents might be located, and identify potential witnesses. The SEC will also likely request that you produce relevant documents that may be in your possession. Having an experienced attorney at this point will ensure that you provide the maximum amount of assistance in order to maximize your award.
- Apply for your award. The SEC Office of the Whistleblower posts Notices of Covered Action on a monthly basis for SEC actions that resulted in monetary sanctions over $1 million. Once the Notice is posted, you have 90 days to apply for an award. This is done by submitting Form WB-APP to the Office of the Whistleblower. The Form WB-APP requires a whistleblower to explain in detail why he or she is entitled to an award. At this juncture, it is critical to have an experienced SEC whistleblower attorney draft a memorandum explaining why you are entitled to the maximum award possible.
- Contesting an award The Office of the Whistleblower will review your claim for an award and make a preliminary award determination. This is not a quick process and can take more than two years in some cases. Once a preliminary award determination has been made, the Office of the Whistleblower will send you a written notification and advise that you have 60 days to contest the award. If you contest the award, the Office of the Whistleblower will consider your position and then issue a proposed final determination, and if no Commissioner requests a review of the award, the determination will become final. A whistleblower who is not happy with the SEC’s final determination may also appeal the case to a federal appellate court within 30 days.
Are SEC whistleblowers protected from retaliation?
Yes, federal law prohibits employers from directly or indirectly retaliating against an SEC whistleblower. Retaliation includes firing, demoting, suspending, threatening, or otherwise discriminating against a whistleblower. If an employer retaliates against you for blowing the whistle, you have the right to file a lawsuit against your employer in federal court and seek reinstatement, double backpay, and attorney fees.
If you need help reporting an SEC violation in the whistleblower program, contact our experienced whistleblower attorneys for help. There is no charge for the initial consultation, and it is completely confidential.
Recent Developments in the SEC Whistleblower Program
The SEC Office of the Whistleblower began paying out awards to whistleblowers in 2012 and has paid whistleblowers more than $1 billion since then. But relatively few whistleblowers – just over 200 – have received an award and many of those took many years to actually see any money. As a result of the low number of awards, critics have accused the Program of being inefficient and, in some cases, unfair to whistleblowers.
Responding to these criticisms, the Office of the Whistleblower issued awards totaling more than $500 million in FY2021. One of the 2021 awards was for $110 million, which was the second-highest award ever issued. The highest award, which was for $114 million, was issued in 2020. To put these numbers into perspective, the Office of the Whistleblower had only paid out $385 million to 65 whistleblowers in mid-2019. Since then, the SEC has more than tripled the number of awards issued to whistleblowers.
Those in the SEC whistleblower community hope that the significant uptick in the number of awards, as well as the amount of the awards issued, will continue in the coming years and that it will incentivize potential whistleblowers to step forward and submit their own tips.
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