Reprinted with permission from the December 2, 2014 issue of The Legal Intelligencer. © 2014 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.
Last month, the U.S. Securities and Exchange Commission's (SEC) Office of the Whistleblower (OWB) released its 2014 annual report to Congress on the Dodd-Frank whistleblower program (found at http://goo.gl/45Rj9A). As OWB's chief, Sean X. McKessy, states in the report, the 2014 fiscal year was "historic" for the OWB "in terms of both the number and dollar amount of whistleblower awards." As McKessy explains, the commission issued awards to more whistleblowers (nine individuals) during 2014 than in 2011-13 combined (five individuals), and made a "record-breaking" award of $30 million to a single whistleblower in September 2014. McKessy points out that the SEC made the $30 million award to an individual living in a foreign country, "demonstrating the program's international reach." The 2014 OWB report itself provides detailed information regarding the number of whistleblower reports and awards made since the SEC established the OWB in 2011. Unlike OWB's annual reports in prior years, the report also includes a "profile" of the 2014 award recipients (without disclosing their identities) and describes, in particular, two recipients who provided information to the SEC only after they reported their concerns to the appropriate personnel at their company employers and after the companies failed to take "corrective action."
In 2010, Congress enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act, which, among other things, added "Securities Whistleblower Incentives and Protection" provisions to the Securities Exchange Act of 1934. These provisions—set forth in Section 21F of the Exchange Act—offer powerful financial incentives to employees and other potential whistleblowers to report directly to the SEC suspected violations of the federal securities laws by public companies and/or their subsidiaries. The act directs the SEC to pay awards, subject to certain limitations and conditions, to any one or more whistleblowers who "voluntarily" provide the SEC with "original information" about a violation of the securities laws that leads to a "successful enforcement" action resulting in monetary sanctions exceeding $1 million. Section 21F further requires that an eligible whistleblower receive an award equal to 10 to 30 percent of the total monetary sanctions imposed in the SEC action or related actions. As required under Section 924(d) of Dodd-Frank, the SEC created the OWB as a separate office within the commission's Enforcement Division to administer the whistleblower program. As the OWB report explains: "It is OWB's mission to administer a vigorous whistleblower program that will help the commission identify and halt frauds early and quickly to minimize investor losses."
Section 924(d) of the act also directs the OWB to issue an annual report to Congress. Under Section 21F(g)5 of the Exchange Act, the OWB's annual report must describe, inter alia, the number of awards granted and the type of cases in which awards were granted during the preceding fiscal year.
The 2014 OWB Report
The 2014 OWB report explains that, "to increase transparency regarding claims for [whistleblower] awards that the commission has reviewed," OWB posts all final orders issued by the commission (either awarding or denying a claim for an award) on a separate page of the OWB website, http://www.sec.gov/whistleblower. OWB also maintains a whistleblower hotline (established in May 2011) to respond to questions from the public about the program. According to the report, OWB returned more than 2,731 phone calls pertaining to, inter alia, how the caller should submit a tip, concerns about keeping a whistleblower's identity confidential, and tracking the status of an individual's complaint. In addition to the hotline, OWB communicates on a regular basis with whistleblowers who have submitted tips.
According to the report, in 2014, OWB received 3,620 whistleblower tips, an 11.8 percent increase over the 3,238 received in 2013, and a more than 20 percent increase over the 3,001 received in 2012. In addition, since the beginning of the program, most tips have pertained to alleged securities violations involving corporate disclosures and financials, offering fraud, and manipulation.
With respect to the SEC's $30 million award, the report explains that "the information provided by this whistleblower allowed the commission to discover a substantial and ongoing fraud that otherwise would have been very difficult to detect. The whistleblower's information not only led to a successful commission enforcement action, but also to successful related actions." The report also highlights the fact that this payment was the fourth award the SEC has issued to an individual living in a foreign country. As the report points out, "in issuing the award, the commission specifically noted that allowing foreign nationals to receive awards under the program best effectuates the clear congressional purpose underlying the award program, which was to further the effective enforcement of the U.S. securities laws by encouraging individuals with knowledge of violations of these U.S. laws to voluntarily provide that information to the commission." According to the report, the SEC received whistleblower submissions from individuals in 60 foreign countries in 2014 alone. The report does not speculate, however, whether the recent decision by the U.S. Court of Appeals for the Second Circuit, Liu Meng-Lin v. Siemens AG, No. 13-4385 (2d. Cir. Aug. 14, 2014), holding that Congress did not intend Dodd-Frank's anti-retaliation provisions to apply to claims by a foreign whistleblower employed abroad by a foreign corporation where all events related to the whistleblower's disclosures occurred outside the United States, will have any impact on the volume of foreign whistleblowers in fiscal year 2015.
Although Dodd-Frank prohibits the SEC from disclosing whistleblowers' identities (subject to certain exceptions), the 2014 OWB report provides the following "commonalities" among the nine successful whistleblowers in 2014:
The information provided by each award recipient was specific, in that the whistleblower identified particular individuals involved in the fraud, or pointed to specific documents that substantiated their allegations or explained where such documents could be located. In some instances, the whistleblower identified specific financial transactions that evidenced the fraud. The alleged misconduct was relatively current or ongoing. Because of the specific, credible and timely nature of their tips, their information was forwarded to Enforcement Division staff, who followed up by contacting the whistleblowers. These whistleblowers then provided additional information or assistance to the staff during the course of the investigation.
In addition, several of the successful whistleblowers were "company insiders," more than 40 percent of them were current or former company employees, and 20 percent "were contractors, consultants, or were solicited to act as consultants for the company committing the securities violation."
The report describes two of the successful company employee whistleblowers who raised their concerns internally to their supervisors or compliance personnel and reported their information to OWB "only after reporting the information internally and understood that the entity was not taking steps to address or remedy the violative conduct." According to McKessy, these two awards "drive home" the "important message" that "companies not only need to have internal reporting mechanisms in place, but they must act upon credible allegations of potential wrongdoing when voiced by their employees."
Given the significant increase in the number and magnitude of SEC whistleblower awards in 2014—as well as a more than 20 percent increase in OWB whistleblower tips in just two years—companies should take McKessy's message seriously and continue to maintain and implement a strong internal compliance and reporting program.
Robert L. Hickok and Gay Parks Rainville
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