Recent Trends at the SEC Regarding Whistleblower Risk
May 4, 2015
By Daniel N. Marx, Foley Hoag LLP
Whistleblower risk is—and should be—a high priority for public companies as well as their officers and directors. In recent years, since the enactment of the Dodd-Frank Act, the SEC has strongly encouraged and financially incentivized whistleblowers to report potential wrongdoing by their own companies and colleagues. In a recent speech, Chairwoman Mary Jo White championed whistleblowers as providing “an invaluable public service,” called the whistleblower program at the SEC “a game changer” and referred to the SEC itself as “the whistleblowers advocate.” Meanwhile, the legal pendulum continues to swing toward ever more whistleblowing, as reflected by three recent trends: compliance officials and senior executives are blowing whistles; the financial rewards or “bounties” as the SEC calls them for whistleblowers are growing; and common corporate responses, such as using confidentiality agreements to limit exposure, are coming under more intense scrutiny.
Compliance officers and senior executives
In April 2015, the SEC made an award of approximately $1,500,000 to a “compliance professional” who provided information that assisted the SEC in its enforcement action against the whistleblower’s company. Announcing the award, Enforcement Division Director Andrew Ceresney emphasized that the whistleblower had reported misconduct only “after responsible management at the entity became aware of potentially impending harm to investors and failed to take steps to prevent it.” About a year earlier, in August 2014, the SEC made a similar, but smaller, award of about $300,000 to another employee who “performed audit and compliance functions.” There, too, the whistleblower first made an internal report but, after the company failed to take appropriate action, notified the SEC of the suspected wrongdoing. In addition to the payouts to these compliance personnel, in March 2015, the SEC also awarded approximately $500,000 to a former “company officer” who reported potential securities fraud. According to Ceresney, senior executives have “front-row seats overseeing the activities of their companies” and “should be commended for stepping up to report” possible violations of securities laws to the SEC. Anyone who dismisses whistleblower risk as an issue limited to disgruntled, low-level employees is clearly mistaken and proceeds at his or her own peril. Although there are some limitations, insiders can generally serve as whistleblowers and reap financial rewards when internal compliance systems have proven inadequate or imminent misconduct risks harm to the company or investors.
Multimillion dollar “bounties”
The financial incentives for would-be whistleblowers are also getting significantly bigger. In September 2013, the SEC announced what was then its largest award to a whistleblower: approximately $14,000,000. According to the SEC, that figure appropriately recognized “the significance of the information” from the whistleblower, the assistance to the SEC, and the law enforcement interest in whistleblowing as a means to deter legal and regulatory violations. As intended, the payment got considerable attention in the financial press. Then, in September 2014, the SEC broke its own record, making a much larger award to a foreign whistleblower: more than $30,000,000. Under the Dodd-Frank Act, these potential “bounties” reflect percentages of the amounts that the SEC has collected, or expects to collect, as a result of the related enforcement actions. There is every reason to believe that these awards will increase to even more sizeable sums, and there are ample precedents in other areas of law (such as the False Claims Act) for whistleblower recoveries in the hundreds of millions. In fact, White has indicated that the trend more multimillion dollar awards from the SEC is “expected to accelerate.”
Confidentiality agreements and retaliation
When it comes to addressing and mitigating whistleblower risk, the SEC is closely scrutinizing how companies handle these difficult situations. On the front end, the law prohibits any effort to “impede” whistleblowers. In April 2015, the SEC announced a settlement with KBR, which agreed to pay a civil monetary penalty and to change the confidentiality statements that the company had used in its internal investigations. Whistleblower Office Director Sean McKessy explained that Rule 21F-17 prohibits employers from taking measures through confidentiality, employment, severance, or other type of agreements that may silence potential whistleblowers,” and he warned that the SEC “will vigorously enforce this provision.” At the other end of the process, the SEC has also taken legal action against employers who have retaliated against whistleblowers. In June 2014, the SEC announced a settlement with Paradigm Capital Management, which agreed to pay more than $2,000,000, for unlawful retaliation against the firm’s head trader, who had blown the whistle on substantive violations of securities law. Recently, the SEC awarded $600,000, which represented 30 percent of the recovery from Paradigm, to the whistleblower in that enforcement action, who had not only reported the violations but also “suffered unique hardships.” Ceresney made clear that “punishing whistleblowers” with “retaliation, in any form, is unacceptable,” and White has identified retaliation cases as “a high priority” for the SEC. Thus, companies must walk two fine lines: encouraging internal reporting without impeding whistleblowing, and responding to complaints (including by conducting internal investigations) while avoiding any improper retaliation.
These related issues—who is blowing whistles, how much they are rewarded, and how companies cope with such risk—merit careful attention. Rather than bemoan the legal situation, and wait until damaging complaints have already been made to the SEC or other authorities, companies and their senior management should seize this opportunity to improve their internal compliance programs, including by putting plans in place to respond appropriately to whistleblowers.
About the Author
Daniel Marx is a Partner at Foley Hoag, LLP. Marx’s litigation practice focuses on white-collar criminal matters, related regulatory enforcement actions, and complex civil litigation. He can be reached at [email protected] or +1 617 832 1202.