Has the Whistleblower Moment Arrived? SEC Awards Whistleblower More Than $14 Million

Has the Whistleblower Moment Arrived? SEC Awards Whistleblower More Than $14 Million

 It is not the first whistleblower award under the Dodd Frank Act’s whistleblower bounty program but the “more than $14 million” award to an anonymous whistleblower that the SEC announced on October 1, 2013 is by far the largest so far. The size of the award raises the question of what the award may mean for future awards – as well as the question whether the possibility of awards of this size may encourage whistleblowing and drive enforcement activity.

The SEC’s October 1, 2013 press release describing the award can be found here. The October 1, 2013 Order Determining Whistleblower Award Claim can be found here.

Section 922 of the Dodd-Frank Act created certain new whistleblower incentives and protections. The section directs the SEC to pay awards to whistleblowers that provide the Commission with original information about a securities law violation that lead to the successful SEC enforcement action resulting in monetary sanctions over $1 million.  The size of the award may range from 10 % to 30% of the amount recovered in the enforcement action. The section also prohibits retaliation against whistleblowers.

The SEC released its rules implementing the whistleblower program in May 2011 (about which refer here), but until this most recent award, the agency had made only two prior awards as the program ramped up. The first award made in August 2012 totaled approximately $50,000. In August and September 2012, the agency made awards of more than $25,000 to three whistleblowers.

In its press release describing the most recent award, the agency said that the award was made to a whistleblower “whose information led to an SEC enforcement action that recovered substantial investor funds. The press release also states that the whistleblower does not wish to be identified. According to the agency, the whistleblower “provided original information and assistance that allowed the SEC to investigate an enforcement matter more quickly than otherwise would have been the case. Less than six months after receiving the tip, the SEC was able to bring an enforcement action against the perpetrators and secure investor funds.”

The SEC has not identified the name of the enforcement action defendants, the nature of the whistleblower information provided, the nature of the violation, or that amount recovered from the defendant.

In the whistleblower order, the Commission stated that a claims staff review determined that the amount of the award will exceed $14 million in light of the monetary sanctions already collected and “appropriately recognizes the significance of the information that the Claimant provided to the Commission, the assistance the Claimant provided in the Commission action and the law enforcement interest in deterring violations by granting awards.”

The press release quotes SEC Chair Mary Jo While as saying that the whistleblower program has “already had a big impact on our investigations” by “providing us with high quality, meaningful tips.”

If you were to stop for a moment an imagine what a difference a cash award of more than $14 million might make for your lifestyle, you will realize that this award is going to capture the imagination of many prospective whistleblowers. Indeed, that is the point. Mary Jo White is quoted in the press release as stating that “we hope an award like this encourages more individuals with information to come forward.”

It is probably worth noting that prospective whistleblowers will not only notice the size of the award, but they may also be encouraged by the lengths to which the SEC went to protect the whistleblower’s anonymity.

This latest award is huge – but the agency could just be getting started. I am going to go out on a limb here. I think that we about to see many more whistleblower awards and we could see a number of awards even larger that the one just awarded. As stated by a former SEC official quoted in an October 1, 2013 Law 360 article about the award entitled "14M SEC Award is Just the Beginning"  (here, subscription required), "This is just the first of what is likely to be many significant awards coming down the pike."

It could turn out that there are not many awards approaching this size of this one, but that may not matter. With even just this one award out there, would be tipsters are going to start flooding the SEC. (Of course, as reflected in SEC whistleblower office’s latest annual report, the tips are already pouring in. This award will reinforce the phenomenon.).

The phenomenon of more whistleblowers providing more tips seems likely to result in more enforcement actions – which is of course consistent with the views of the agency’s senior leadership, who are eager to show that the agency is tough. And as this particular case shows, the involvement of whistleblowers can help accelerate the enforcement actoins, as well.

And the possibility of increased enforcement activity also implies the possibility of follow on civil litigation, as investor claimants pursue private civil actions to recover from companies and their senior management for violating the securities laws or allowing the violations to take place.

The Dodd Frank Act was enacted over three years ago but the impact of many of its provisions is only now just starting to be felt. Indeed some provisions, such as the pay ratio disclosure requirements and the conflict mineral disclosure requirements, have not yet taken effect. And the kinetic potential of the Act’s whistleblower provisions are only now being realized. Before all is said and done, the Act’s many provisions – including in particular the whistleblower provisions, could have a significant impact on the level of enforcement activity and on amount of civil litigation.

Read other items of interest from the world of directors & officers liability, with occasional commentary, at the D&O Diary, a blog by Kevin LaCroix.

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