The SEC Whistleblower Program
In 2010, Congress enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act. Part of this reform package provided for the creation of Whistleblower Reward Programs through both the Securities & Exchange Commission (“SEC”) and the Commodities Futures Trading Commission (“CFTC”).
The SEC and CFTC Whistleblower Programs provide monetary incentives for persons who voluntarily provide original information about possible violations of the Federal Securities Laws or Commodity Exchange Act that result in an order of monetary sanctions exceeding $1 million dollars. Original information is information derived from independent knowledge that is not publicly available. Information may be publicly available if it contains independent analysis and is not already known by the SEC or CFTC.
The SEC and CFTC Whistleblower Programs provide financial rewards to whistleblowers who properly report covered fraudulent misconduct, whereby such reports lead to a civil recovery on the part of the respective government agency. A whistleblower who reports ANY securities law violations will receive a reward if the SEC and any other government authorities recover monies. Additionally, a whistleblower will receive 10 percent to 30 percent of the monies the SEC and other government authorities collect based on the whistleblower’s information if more than $1 million is collected. The percentage of the reward is set at the discretion of the SEC taking into consideration the following:
- The significance of the information provided
- The assistance provided by the whistleblower and the whistleblower’s attorney
- The programmatic interest of the Commission in deterring violations of the securities law
- Additional relevant factors the Commission may establish by rule or regulation
Our SEC whistleblower attorneys regularly evaluate whether individuals are eligible for rewards under the program and whether they have sufficient evidence to make a report worth filing. Contact us for a free, confidential consultation if you are considering submitting information.
What types of information will the SEC be interested in?
Every month, the SEC posts a Notice of Covered Action for cases resulting in a monetary recovery of more than $1 million. We examined the postings for the past year to determine what types of cases the SEC has pursued in the past. This is by no means an exclusive list and there are certainly types of information which will produce rewards for whistleblowers that we have not listed here. However, it does cover a wide range of misconduct and serves as an excellent representation of the scope of cases the SEC has pursued recently.
Accounting Fraud & Independent Auditors
Companies manipulating accounting standards and data are perennially a target of SEC enforcement actions. The misstatement of revenues, expenses or asset valuations in order to mislead investors, smooth earnings fluctuations or meet analyst estimates will be carefully examined. This includes improper accounting adjustments in violation of Generally Accepted Accounting Principles. They are also liable for failure to maintain sufficient internal accounting controls to prevent issues in their financial statements.
Misconduct by independent auditors is also on the radar of the SEC. They are interested in learning about auditors that fail to conduct audits in accordance with Public Company Accounting Oversight Board Standards, especially if they result in the dissemination of materially false and misleading information. They are also interested in accounting firms acting as an independent auditor while performing non-audit services for the same client.
The SEC has prosecuted both individuals trading on inside information and individuals tipping others to material, nonpublic information who then trade. Suspicious transactions such as the purchase of call options in close proximity to earnings or merger announcements may garner close scrutiny.
The SEC has also pursued successful enforcement actions against high-level corporate executives or officers who fail to follow or attempt to circumvent rules regarding stock ownership disclosure and trade reporting. Insiders and those with large ownership positions have special reporting requirements when they conduct stock transactions.
Trading Price Manipulation
Market manipulation is a classic violation of securities laws. Unscrupulous individuals may artificially increase the price or volume of a stock in order to attract other investors. These schemes are sometimes combined with a form of microcap stock fraud where a party issues false and misleading press releases and statements to investors to pump and dump the stock.
Market manipulation does not have to involve the actual execution of orders. The transmission of orders that the trader does not intend to have executed in order to influence the market through layering or spoofing is also prohibited. In other cases, traders have used limit orders to influence mark-to-market accounting in order to mask investment losses.
Misrepresentations to Investors: Shareholder Fraud and Investment Solicitation Problems
Material misrepresentations to investors are taken seriously by the SEC. Failure to disclose material information about the company, including revenues, liabilities, assets and corporate management, are all a major problem. This is particularly true in connection with a security offering. Manipulation of financial statements through mark-to-market pricing or improper accounting adjustments are also an area where the SEC tends to protect shareholder investments.
Similarly, misappropriation of investor funds for personal or business expenses is a common area of enforcement. There cannot be misrepresentations regarding the intended use of funds from an offering or the manner in which client accounts will be invested.
The SEC has been especially diligent regarding ponzi schemes following the Bernie Madoff debacle. Typically, they involve promises of extraordinary or guaranteed results while the individuals operating it pay early investors with money obtained from subsequent investors.
There are many other types of fraud against shareholders which the SEC will pursue. Among the worst offenses are corporations and individuals selling fictitious securities or bank instruments to investors.
Private Equity Fees
There’s a widespread investigation of private equity firms concerning the fees and expenses they charge clients. In a 2014 speech, Andrew Bowden indicated that there are disclosure problems regarding the billing of fees and expenses to investors which are separate and distinct from the firm’s management fees.
The disclosure of weaknesses in cyber security and data loss due to hacking is a relatively new area for securities law but we expect that there will be more than a few cyber security whistleblowers in the future as more companies are hacked and faced with the question of disclosure.
Misconduct by Exchanges
The SEC also investigates violations of the rules by exchanges. They have sanctioned exchanges for failure to enforce Commission and exchange rules, inadequate investigation of compliance problems and unauthorized accommodations for member firms. When exchanges implement new businesses practices, or modify existing ones, without putting in place an exchange rule where one is required, they can also be subject to sanction.
The Foreign Corrupt Practices Act prohibits gifts and improper payments to foreign government officials to obtain or retain government contracts. A public company may be found to have violated the FCPA even if the conduct is done by certain third parties or through an intermediary. It also prohibits inaccurate books and records, as well as insufficient internal controls to detect corruption and prevent it from being included in financial statements. This has been the subject of several enforcement actions and SEC representatives believe it will be a fertile ground for whistleblowing.
Frequently Asked Questions
Provided that you meet the eligibility criteria, the SEC pays between 10-30% of the monetary sanctions ordered.
Original information is derived from independent knowledge that is not publicly available. The information may be publicly available if it contains independent analysis and is not already known by the SEC or CFTC.
No. You are not required to be an employee of the company to submit information about that company to the SEC.
You are not required to report internally in order to receive an award, unless you work in compliance. Compliance professionals must report internally and allow the waiting period to elapse before becoming eligible for a reward.
The SEC has provided specific protection against retaliation (discharge, demotion, suspension, harassment, or in any discrimination against you) by employers. Individuals are allowed to bring a private suit against their employer, and if they prevail, are entitled to reinstatement, back pay, litigation costs, expert witness fees, and attorney fees.
You must be represented by an attorney to submit your information anonymously. Although you can submit on your own, we do not recommend it.
We handle all whistleblower matters on a contingency fee basis. You do not pay us an attorney fee unless we recover for you. For our current fee rate, please contact us. We aim to be competitive with other whistleblower law firms handling complex cases.
Our attorneys have represented clients in complex securities cases, from traditional securities litigation to the reporting of complex securities fraud to the U.S. Government. Our team has experience in accounting, securities trading, programming and other issues which frequently arise in these cases.
We primarily look at three aspects in evaluating potential clients and cases. First, we look at whether the individual is credible. Education, industry experience, and other factors all play a role in our determination of credibility. Second, we look at the evidence of wrongdoing. We examine both the documentary evidence (emails, photos, etc.) as well as law in order to. Finally, we look at our existing workload and the risk/reward from taking on the representation.
After you contact us, we will schedule a phone interview to learn more about the misconduct so that we can begin our research and evaluation process. We will review your evidence and answer any questions that you have about us and the process. If you want to hire us and we agree to take on your case, we will prepare and both sign a retainer agreement that specifies the contingency fee and terms of representation. After you hire us, we begin preparation of a Form TCR which provides your information and evidence about violations of the federal securities laws to the U.S. Government.
In evaluating cases and determining the amount of government resources which should be put on a case, the attorneys from the government will want to assess the credibility of the individual’s information. One component of it is the credibility of the whistleblower. The government would prefer to know the identity of the individual, but understands that many people prefer to proceed anonymously. If your anonymity becomes a problem, our hope is that the government will inform us of that fact and allow you to make a decision whether to reveal your name.
The SEC provides a phone number for questions about the program. However, it is not a hotline for tip submission. All tips must be submitted either electronically, by fax or through mail to the Office of the Whistleblower.
Some whistleblower programs also pay a reward when another government agency takes action as a result of a tip. In the Dodd-Frank Act authorizing the SEC program, this is called a related action. The SEC program will pay for certain actions taken by agencies other than the SEC when they are eligible under the program rules for related actions.
There is an extensive process following the settlement of an investigation or enforcement action before an award is issued. Approximately one month later, the government will issue a notice of covered action. This notifies whistleblowers to submit a claim for an award within 90 days. After the deadline for submissions passes, the government will then evaluate the claims and issue a preliminary award determination. Following the notification of the preliminary determination, the whistleblower(s) has(have) time to submit additional information and argument on why a different result or percentage is warranted. Following reconsideration, if necessary, the SEC will then issue its award announcement.
At this point in 2015, we are aware of awards which we believe were made between 1 and 3 years after enforcement actions concluded.
The whistleblower program and award payments are funded out of the Investor Protection Fund created by Congress as part of the Dodd-Frank Act. The fund receives a portion of monetary sanctions collected by the SEC in enforcement actions. It does not draw from funds established by an award of disgorgement and set to be return to investors.
The amount paid out to whistleblowers comes out of the Investor Protection Fund and not the proceeds of the individual enforcement action. No investors harmed by the securities violation at issue in a whistleblower tip will receive less money because of the reward payment.
The SEC provides both a press release and a redacted copy of the award determination. The press release typically includes an interesting fact about the case. We have seen announcements highlighting the fact it was the fourth award to an international whistleblower, the second award to a compliance/audit professional, or the first award to an individual for independent analysis identifying a securities law violation. The award determination generally presents any legal arguments made, with any significant facts which could identify the individual redacted. The enforcement action which generated the award is not typically disclosed.
The Dodd-Frank Act requires both the SEC and the CFTC to inform Congress about the operation of their whistleblower program every year. The SEC report is usually issued in November governing the prior fiscal year (which closes at the end of September). The first report was issued in November 2011 governing Fiscal Year 2011 and largely covered the implementation of the program, the processing of tips and statistics concerning the tips received during the first year. The second report covered the first award made under the program.
The annual report typically covers the awards issued over the past year, the categories of violations identified by whistleblowers in their tips and the geographic location of the whistleblower identified on the tip.
In the Fiscal Year 2015 report, the program also released additional data concerning the awards received and the whistleblowers. It did so in order to provided greater transparency concerning the program while still protecting the identity of the individuals. The SEC policy is to redact any information that could reveal a whistleblower’s identity before awards are issued. The government released information such as the percentage of award recipients who were current or former employees, the number reporting internally first, and the number submitting tips jointly with another individual.
Years. From start to finish, it is not a fast process. We expect that it will be several years before any enforcement action/settlement and another 1-3 years before an award determination is made.
From the SEC Whistleblower Office
The following video was made by the SEC. It features Sean McKessy, the head of the Whistleblower Office there. The approximately 5 minute long video provides an overview of the investigative process. It encourages individuals to provide specific, timely and credible information to the government. It explains why cases take so long to complete and the process to apply for an award. The video provides an excellent overview of the internal process that the SEC follows in evaluating tips, bringing enforcement actions and the factors that go into determining award percentages.
The SEC has taken many steps to develop and protect whistleblowers during its short time in existence. It quickly returns phone calls with questions about the program. It has brought an enforcement action against an investment firm for retaliation against a whistleblower and another one against a company for confidentiality agreements which discourage whistleblowing. It has also filed numerous amicus briefs at the local and appellate levels in support of internal whistleblowers being challenged by corporations in court with their retaliation lawsuits.