In December, we wrote about the Commodity Futures Trading Commission’s (CFTC) 2019 annual report for its whistleblower program and described in some detail how the program works. This month we will look at the U.S. Security and Exchange Commission’s (SEC) whistleblower program and its results for 2019. The SEC’s 2019 annual report on its whistleblower program noted that the SEC paid awards totaling $60 million to eight individuals who provided key information for enforcement actions. Included in that total was a $37 million award to a single individual. Since 2011, the SEC has awarded more than $387 million to whistleblowers who helped the SEC recover funds in fraud actions.
Both the CFTC and SEC programs were created by the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010, so they share a lot in common. Like the CFTC’s program, Dodd-Frank directed the SEC to make monetary awards to eligible individuals who provide information about fraud.
To qualify for an award, the whistleblower must voluntarily provide original information (i.e. information not already known to the SEC) about violations of federal securities laws. The information must lead to a successful enforcement action by the SEC or certain other “related actions” resulting in the collection of monetary sanctions over $1,000,000.
The related actions that qualify for award are those brought by other federal or state agencies, a self-regulatory organization like the Financial Industry Regulatory Authority (FINRA), and even actions brought by foreign securities and law enforcement authorities. However, in order to qualify for the whistleblower award, the information must still be given to the SEC, and then shared by the SEC with those other entities in their discretion.
Also like the CFTC program, a commonly unknown aspect of the SEC’s program is that the person giving the information does not have to be an “insider” to qualify for an award. Persons who have never worked with or for the subject of the eventual SEC action can provide information that exposes fraud and still be eligible for an award. The 2019 annual report notes recipients who have been victim investors, professionals working in the industry, individuals with a personal relationship with the wrongdoer, and persons with special expertise in the market who provide analysis.
Finally, like all whistleblower laws, Dodd-Frank provides protections for SEC whistleblowers. If a whistleblower is fired, harassed, demoted, or discriminated against because of the information or help he or she provides, he or she can file an action seeking reinstatement, double back pay, and all costs of litigation, including attorneys’ fees. As an added protection, the program permits whistleblowers to make anonymous claims. Whistleblowers are also permitted to be represented by counsel through the process to protect their rights, however, if a whistleblower is making an anonymous claim, they are required to be represented by counsel.
If all qualifications are met, the whistleblower is entitled to a minimum of 10% of the recovery obtained by the SEC, and can receive up to 30% in the discretion of the SEC, which will consider the significance of the information, the degree of assistance provided by the whistleblower, the SEC’s deterrence interest in violations of the law involved, and other factors.
But the SEC whistleblower program as it has always been known is facing a potential rule change, proposed by the SEC, that could limit awards in certain cases. While Dodd-Frank mandates that the award must be between 10-30%, as noted above, the SEC has discretion where to place the award within that range.
The proposed rule would permit the SEC to consider the overall size of the recovery as a factor in deciding how much to award. Further, in cases where the SEC recovery is greater than $100 million, the award would be limited to $30 million, unless that would be below the 10% minimum set by Dodd-Frank.
Counterintuitively, the rule will reduce the percentage of award in larger cases: paying less to the whistleblower and permitting the SEC to keep more. Not a single public company, investor advocacy group, public interest group, expert or whistleblower has come out in support of such a change.
It’s significant that Senator Charles Grassley (R-Iowa), Chair of the Senate Finance Committee and Chairman of the Senate Whistleblower Caucus, wrote a letter to SEC Chairman Jay Clayton opposing the measure and stating the SEC “has not pointed to any compelling reason to veer from award levels that are working and that are comparable to other federal award programs.”
As Senator Grassley notes, “there would be no recovery at all…were it not for the whistleblower,” so they should be awarded over other priorities of the SEC. The main support of the rule change has come from the Center for Market Competitiveness of the U.S. Chamber of Commerce.
Like all other whistleblower and qui tam programs, the SEC framework is complicated and must be followed to entitle an individual to an award. Competent representation is invaluable in these cases and, as noted above, mandatory if an individual wishes to report misconduct anonymously. If you are aware of fraud in the securities industry or in a publicly traded company, you could be rewarded for reporting the fraud to the SEC.
If you have any questions about whether you qualify as a whistleblower, contact one of the lawyers on our firm’s Whistleblower Litigation Team for a free and confidential evaluation of your claim. Beasley Allen lawyers Larry Golston, Lance Gould, Paul Evans, Leslie Pescia, Leon Hampton, Tyner Helms and Lauren Miles are working in this area of law known as “qui tam” cases. A lawyer on the team will be glad to discuss the potential claim with you either in person or by phone.
This story appears in the February 2020 issue of The Jere Beasley Report. For more like this, visit the Report online and subscribe.