A recently publicized April 2017 research study has concluded that whistleblower involvement in enforcement actions related to financial misrepresentations results in higher monetary penalties for the U.S. as well as longer prison sentences in criminal actions.
The study examined financial misrepresentation enforcement actions brought by the Securities and Exchange Commission (SEC) and the Department of Justice (DOJ). The researchers looked for empirical evidence of connections between whistleblowers and penalties, prison sentences and the duration of the enforcement actions. In justifying the study, the paper noted several reasons that whistleblower complaints might not aid regulators, including their subpoena power, ability to interview employees, and past academic research on frivolous tips.
The study identified 934 allegations of financial misconduct filed with OSHA between 2002 and 2010. OSHA is the government agency that collects filings of claims of whistleblower retaliation and investigates them. This dataset was obtained via the Freedom of Information Act (FOIA). Because a whistleblower can provide a tip to a regulator without filing a retaliation claim with OSHA, the researchers also looked for direct evidence of whistleblowers in enforcement actions, including False Claims Act lawsuits.
The research identified 148 enforcement actions with at least one whistleblower complaint out of the 658 enforcement actions since Congress passed the Sarbanes Oxley Act (SOX). After controlling for various factors that could increase or decrease the monetary penalties without regard to the involvement of a whistleblower, the researchers concluded that whistleblowers were associated with an 8.58% increased likelihood that the SEC imposes monetary sanctions on the firm, and a 6.64% increased likelihood of criminal sanctions against the targeted employees.
Based on this and other data, the study determined that whistleblowers are a valuable source of information for regulators investigating and prosecuting financial misrepresentations. Although the data was weaker, Whistleblowers were also associated with larger monetary penalties against targeted employees and monetary penalties imposed on third-party defendants, such as company auditors.
The study also investigated whether whistleblowers helped shorten the length of the government investigation and enforcement. Ultimately, the researchers found a shorter discovery period with whistleblowers but no significant difference in the length of regulatory proceedings.
The authors provided several caveats to their research, including that it was not possible to determine whether the SEC or DOJ actually used the whistleblower information that was suggested by OSHA filings. Overall though, the 54 page paper is an important one in furthering the study of the importance of whistleblowers to government enforcement efforts.