5 Reasons the SEC Whistleblower Program Is a Success
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In response to the 2008 financial crisis, Congress passed the Dodd-Frank Act in July 2010, which, among other things, created the U.S. Securities and Exchange Commission (SEC) Whistleblower Program. A decade later, the program has proven to be successful in generating high-quality tips that have enabled the SEC to halt fraud schemes and protect investors. Since 2012, the SEC Office of the Whistleblower has issued more than $700 million in awards to whistleblowers. The SEC actions associated with those tips have resulted in orders against wrongdoers totaling more than $2.7 billion.
According to the ACFE’s 2020 Report to the Nations, there has been a notable increase in tips via companies’ hotlines or reporting mechanisms since 2010. While internal reporting can be an effective method of exposing wrongdoing, individuals should consider the SEC Whistleblower Program as another powerful tool in their arsenal. There are five main reasons why the SEC Whistleblower Program is successful in rooting out fraud.
1. Strong financial incentives for whistleblowers (especially when internal compliance systems fail)
The SEC Whistleblower Program provides whistleblowers with a strong financial incentive to expose wrongdoing. Under the program, the SEC issues awards to eligible whistleblowers who provide original information that leads to successful enforcement actions with total monetary sanctions in excess of $1 million. In exchange for the valuable information, the SEC will pay whistleblowers between 10% and 30% of the total monetary sanctions collected as an award. The largest SEC whistleblower awards to date are:
$114 million issued on October 22, 2020
$50 million issued on June 4, 2020
$50 million issued on March 19, 2018
$39 million issued on September 6, 2018
$37 million issued on March 26, 2019
While the financial incentive to report to the SEC is critical, it should be noted that approximately 84% of the award recipients to date raised concerns internally to their supervisors, compliance personnel or through internal reporting mechanisms before reporting violations to the SEC. When internal compliance systems fail, the monetary awards the program offers appropriately incentivize whistleblowers to continue their efforts to expose the wrongdoing by reporting directly to the SEC.
2. Anonymous reporting
The SEC Whistleblower Program permits whistleblowers to submit tips anonymously to the SEC if represented by an attorney. This is a major benefit over other whistleblower reward programs that do not allow anonymous submissions, such as the U.S. Internal Revenue Service’s (IRS) Whistleblower Program. In certain circumstances, a whistleblower may remain anonymous — even to the SEC — until an award determination is made. However, even at the time of an award, a whistleblower’s identity is not made available to the public.
3. Most individuals are eligible to receive awards
Most individuals, regardless of citizenship, are eligible to receive awards under the program. For example, compliance personnel, including internal auditors, external auditors, officers and directors, are eligible for awards if certain exceptions apply. According to the SEC Whistleblower Program’s 2020 Annual Report, nearly 70% of the award recipients to-date are current or former insiders of the entity about which they reported information of wrongdoing to the SEC. The program acknowledges the importance of information from corporate insiders and gatekeepers (among others) and provides exceptions in its rules that permit them to be eligible for awards.
4. SEC rejects “gag clauses”
The SEC has stood firm against so-called “gag clauses” in confidentiality, severance and other employment-related agreements that have the effect of impeding disclosures to regulators and law enforcement. In particular, the SEC has taken several highly publicized enforcement actions against companies for violating the Dodd-Frank anti-gag rule. This includes an action against the perpetrators of a fraudulent securities offering for their attempt to resolve investor allegations of wrongdoing by conditioning the return of investor funds on the investors signing agreements prohibiting them from reporting potential securities law violations to law enforcement.
5. Protections for SEC whistleblowers
Whistleblowers coming forward often fear retaliation and therefore it is critical to provide robust protection against retaliation. The SEC can investigate retaliation against whistleblowers and has taken some enforcement actions to combat whistleblower retaliation. For example, in 2014, the SEC issued a cease-and-desist order against Paradigm Capital Management Inc., a hedge fund advisory firm, for engaging in prohibited transactions and then retaliating against a whistleblower who disclosed the unlawful trading activity to the SEC.
The anti-retaliation provision of the Dodd-Frank primarily protects disclosures of potential violations to the SEC, but other federal and anti-retaliation laws protect internal complaints, such as raising a concern about securities fraud to a supervisor or corporate compliance program. For example, Section 806 of the Sarbanes-Oxley Act (SOX) protects both internal whistleblowing and whistleblowing to the SEC.
Matthew Stock, J.D., CPA, CFE, is the Director of the Whistleblower Rewards Practice at Zuckerman Law. He is an attorney, Certified Public Accountant, Certified Fraud Examiner and former KPMG external auditor. Jason Zuckerman, J.D., and Matthew represent whistleblowers in reward cases before the SEC, CFTC and IRS and in retaliation cases.
