On August 21, the SEC announced the first award issued as part of a new whistleblower program mandated by the Dodd-Frank Act. The program is designed to encourage individuals to submit high-quality evidence of securities fraud. Under the program, if a whistleblower submits information that results in a successful SEC enforcement action in which more than $1 million in sanctions is ordered, the SEC will pay up to thirty percent of the money obtained. The SEC stated that it paid the maximum thirty percent, in this case $50,000 of the $150,000 collected thus far from the enforcement action. The SEC did not reveal the matter for which the whistleblower provided evidence of fraud and did not reveal the individual’s name, noting that the Dodd-Frank Act provisions require the SEC to protect any information that could reasonably be expected to reveal a whistleblower’s identity.
On November 14, the SEC reported the results of its enforcement program for the fiscal year ending September 30, 2012. During the year, the SEC filed 734 enforcement actions, which included an increasing number of actions focused on highly complex products, transactions, and practices. The SEC obtained orders requiring more than $3 billion in penalties and disgorgement, an 11% increase over the amount required in 2011. The SEC believes these metrics indicate “sustained high-level performance,” which it attributes to various reforms and innovations put in place over the past two years. The announcement highlights certain cases related to (i) the financial crisis, (ii) insider trading, (iii) investment advisers, (iv) broker-dealers, (v) FCPA, and (vi) municipal securities. On November 15, the SEC released its Annual Report on the Dodd-Frank Whistleblower Program. The annual report provides an overview of the program and notes that the SEC received 3,001 whistleblower tips from all 50 states and from 49 countries, including a tip that resulted in the first ever award under the program. There were 143 enforcement judgments and orders issued with potential for a whistleblower award. The most common complaints related to corporate disclosures and financials (18.2%), offering fraud (15.5%), and manipulation (15.2%).
The SEC whistleblower program, implemented under Section 922 of the Dodd-Frank Act, is primarily intended to reward individuals who act early to expose violations and who provide significant evidence that helps the SEC bring successful cases. The whistleblower rules contain three key provisions that can be integrated into a company’s existing compliance infrastructure to encourage internal reporting, thereby affording the company time to further investigate the claim, provide a solution, or self-report potential violations. The three key provisions are:
- 120-day rule: Whistleblowers who report internally are considered to have reported the same information to the SEC as of the date of the internal report so long as the whistleblower, or the company on the whistleblower’s behalf, provides the same information to the SEC within 120 days.
- Tacking: If an entity conducts an internal investigation based on a whistleblower’s internal report, and thereafter provides that information to the SEC, for purposes of determining whether an award is due and how much, the whistleblower will receive credit for the submission of the same information.
- Bump Up: Making use of a company’s internal compliance and reporting system to report wrongful conduct is a positive factor that will potentially increase the amount of a whistleblower award.