Whistleblower reports to the SEC continued to rise during the latest fiscal year, according to the agency’s annual Dodd-Frank Whistleblower Program report to Congress. According to the November 15, 2013 report, a copy of which can be found here, there were 3,238 whistleblower reports to the SEC during the 2013 fiscal year, brining the total number of whistleblower reports to the agency since the program’s August 2011 inception to 6,573.
The whistleblower program Dodd-Frank Act provides for the payment of a whistleblower bounty to individuals who voluntarily provide original information that leads a successful enforcement action resulting in monetary sanctions over $ 1 million. The eligible whistleblowers may receive a n award of ten to thirty percent of the amounts the agency collects. To ensure that bounty awards would not decrease the amount of recovery for the victims of securities law violations, Congress established a separate fund, called the Investor Protection Fund out of which the bounty payments are to be made.
In 2012, the first full fiscal year in which the program was in place, the agency received 3,001 whistleblower tips. The number of whistleblower reports increased in fiscal 2013 to 3,228, an increase of about 7.5%, bringing the total number of whistleblower reports since the program’s inception to 6,573.
The most common complaint categories reported by whistleblowers during the 2013 fiscal year were Corporate Disclosures and Financials (17.2%); Offering Fraud (17.1%) and Manipulation (16.2%). Other significant categories include insider trading (with 6% of tips during fiscal 2013)and FCPA violations (4.6%). The distribution of reports by complaint category during fiscal 2013 was roughly comparable to the distribution of whistleblower reports during the 2012 fiscal year.
During the 2013 fiscal year, the Commission received whistleblower submissions from individuals in all fifty states, as well as from the District of Columbia, Puerto Rico, Guam, and the U.S. Virgin Islands. The states with the highest numbers of whistleblowers in fiscal 2013 were California (375 tips, or 11.6% of all tips during the fiscal year), New York (215), Florida (187) and Texas (135).
The SEC also received whistleblower reports from individuals in fifty-five countries during fiscal 2013, bringing the total number of countries from which the agency has received whistleblower reports since the program’s inception to sixty-eight. The countries with the highest numbers of whistleblower reports during fiscal 2013 were the United Kingdom (66), Canada (62) and China (52).
Though the agency has now received over 6,500 whistleblower reports, so far the agency has made only a total of six whistleblower bounty awards, including four during fiscal 2013. The 2013 awards included the largest award to date, an award of over $14 million at the very end of the 2013 fiscal year. The agency awarded a total amount of about $14.8 million during fiscal 2013. The balance remaining in the Investor Protection Fund (out of which the awards are made) was $439 million at the end of the fiscal year – so the SEC has plenty of funds out of which to make further awards.
Though the program has so far made only a few awards relative to the number of whistleblower reports, it seems likely that the number of awards will accelerate in the future. The very painstaking process the agency follow in making awards (described in the report to Congress) shows that the agency is being very careful and very deliberate in making awards. As the agency makes more awards, it seems likely that the program will attract more whistleblower reports, particularly to the extent that the agency makes more large awards (the recent $14 million award came only at the very end of the fiscal year and so had no impact in connection with the figures presented in the most recent report to Congress). The lengths to which the agency has gone to protect the anonymity of the whistleblower is also likely to encourage others to come forward.
The significant numbers of whistleblowers from outside the United States is very interesting. The agency reports that during fiscal 2013, the agency received 404 whistleblower reports from individuals located outside the United States, representing 11.77% of all whistleblower reports during the fiscal year. This is up slightly from the prior fiscal year, both in absolute numbers and in percentages; there were 324 whistleblower reports from outside the Unites States, representing 10.8% of all fiscal 2012 tips.
It will be interesting to see how these non-U.S. reports play out over time, and whether and to what extent the agency makes bounty awards to whistleblowers from outside the U.S. It will also be interesting to see if reports from outside the U.S. continue at the current levels in light of the fact that courts have held that the Dodd-Frank provisions protecting whistleblowers from retaliation do not apply outside the U.S. (about which refer here). Many prospective whistleblowers learning that they would not have the benefit of the anti-retaliation provisions might now be less willing to come forward. In the absence of these protections, the volume of whistleblower reports from outside the U.S. might well decline.
Another question that will be interesting to follow is whether or not there will be further follow -on civil lawsuits following in the wake of whistleblower reports (of the kind discussed here). My concern is that increased whistleblowing activity, encouraged by the availability of whistleblower bounties, could lead to an increase not only in SEC enforcement activity but also to an increase in follow-on civil litigation, including in particular securities class action litigation activity.
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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