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Understanding the Factors that Determine an SEC Whistleblower Award: Opportunities & Outcomes

Jordan A. Thomas

As the SEC Whistleblower Program grows in awareness ($387 million in awards to date is pretty good advertising) more and more individuals explore the investor protection initiative that provides eligible whistleblowers monetary incentives and employment protections with the comfort of anonymous reporting. The program has been such an unmitigated success that between August 2011, when the whistleblower rules were finalized, and FY 2018, the Commission received over 28,000 whistleblower submissions and those tips have yielded over $2 billion in monetary sanctions that have been distributed to injured investors.

Given the number of tips, why during the same period, did the agency only make 59 individual awards?

For starters, establishing a ratio between tips and awards is tricky. At any one time, the SEC actively investigates about 2,000 cases and those investigations can take two to four years. In other words, it’s possible that some – perhaps many — of those 28,000 tips might be under active investigation and might lead to blockbuster whistleblower awards. But it’s not all “perhaps,” “might,” and “maybe” in a world of whistleblower guesswork. There are givens, including a number of substantive factors that drive the success (and account for the failure) of SEC whistleblower submissions. To build the best possible case, prospective whistleblowers may wish to study those factors and learn the program rules inside and out.

The best odds for winning a whistleblower award: Provide specific information to the SEC in a timely fashion and report internally to contain organizational harm wherever possible.

Award Basics

An individual may be eligible to receive an SEC whistleblower award by voluntarily providing original information that leads to a successful enforcement action where the threshold sanctions exceed $1,000,000.

The amount of the award can range between 10-30% of the monetary sanctions collected in a successful enforcement action, with the precise amount at the agency’s discretion. Certain criteria may increase an award, such as the significance of the information, the assistance provided by the whistleblower, the law enforcement interest in making an award and the participation of the whistleblower in an employer’s internal reporting systems.

The Successful Whistleblower

The whistleblower rules refer to the “significance” of the information provided, but that does not mean that the SEC only rewards whistleblowers who provide exhaustive details on the scope, participants and mechanics of a large-scale securities fraud. Sometimes whistleblowers are only able to identify individuals involved in a scheme. In some cases, they have documentary evidence to support the government’s work in a complex ongoing investigation – and nothing more. Sometimes individuals just have a hunch and turn to a whistleblower advocacy team that functions like a first stop on the investigative highway. With financial analysts, forensic accountants, trained investigators and ex-SEC officials, such legal teams can assist a whistleblower in evaluating a hunch and, where possible, assisting in the development of a strong submission.

The sooner a whistleblower alerts the agency to wrongdoing that is ongoing or about to occur, the better. Above all, the SEC seeks to protect investors; submissions that streamline that process are a great help to the agency and the public at large.

Employee whistleblowers are generally viewed in a positive light, as reflected in their award allocations, when they exhibit efforts to work with their employers to report and detail the alleged wrongdoing. In fact, in the majority of cases, whistleblowers first report internally. That said, the SEC is well aware of the retaliation reality and will not decrease an award percentage if a whistleblower isn’t comfortable reporting possible securities violations internally.

Finally, the SEC values tipsters who don’t cut and run. Being called upon to provide follow-up information can be intimidating to the uninitiated but it is crucial to keep in mind that the government is both the whistleblower’s activist and guardian. To the extent a whistleblower keeps open lines of communication, it is viewed favorably by the agency.

Why Awards are Decreased or Denied

Keeping in mind that the amount of an award is ultimately up to the Commission, the program rules set forth some specific factors that may decrease an award, including: whether the whistleblower was culpable or involved in the underlying misconduct; if the whistleblower interfered with internal compliance systems; or, if there was an unreasonable delay in reporting the violation to the SEC.

Last year, more than 40% of awards were denied because the submissions didn’t follow the program rules. This keeps us awake at night.

Culpability is a common concern and sometimes individuals with the greatest ability to help law enforcement have some involvement in the wrongdoing. Notably, only individuals who have been criminally convicted of related wrongdoing are barred from receiving an SEC whistleblower award. Less culpable whistleblowers may receive an award, but it will be reduced based upon their level of culpability. For instance, individuals who initially were unaware that they were assisting others in committing securities violations or were pressured by their superiors to engage in violations may still be eligible to participate in the program.

While a majority of awards are denied because the information did not lead to a successful enforcement action, last year, more than 40% of awards were denied because the submissions didn’t follow the program rules. What are some examples? Perhaps a whistleblower was an employee of a foreign government or had an established duty to report misconduct to the Commission. Perhaps the whistleblower was involved in the misconduct but knowingly withheld that information in the whistleblower submission. It is also possible that the SEC provided notice of the action on www.sec.gov, but a whistleblower failed to submit an award application within the requisite 90 day period.

Make a Case, a Strong One

Just as an award may be increased based upon the significance of the information provided to the SEC, the application for an award is another opportunity for whistleblowers to emphasize the value of their submission. For instance, in the award application, whistleblowers may provide additional information to support their request for the highest possible award. If there is something new to say, or an important point to underscore, do so strenuously.

At the end of the day, we must be mindful of the enormous task facing the SEC as it sifts through thousands upon thousands of tips, complaints and referrals each year, separating the wheat from the chaff to fulfill its mission to protect the investing public. Savvy whistleblowers will prepare substantive submissions that abide by the program rules and provide as much detail as possible to enable law enforcement to quickly put an end to wrongdoing. If history is a guide, there are $387 million hints that such efforts will be handsomely rewarded.

Jordan A. Thomas is a nationally recognized SEC whistleblower attorney at Labaton Sucharow. He previously served in the Enforcement Division at the SEC, where he played a principal role in the development of its whistleblower program.

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