Home » Dodd-Frank Act » SEC Report Shows Increases in Securities Fraud Whistleblowing and Reveals Insight Into Continued Aggressive Enforcement

SEC Report Shows Increases in Securities Fraud Whistleblowing and Reveals Insight Into Continued Aggressive Enforcement

As part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the SEC created a whistleblower program to encourage people to submit information to help the SEC’s Division of Enforcement discover and prosecute violations of the federal securities laws. To entice whistleblowers, the program provides potentially substantial monetary rewards to whistleblowers, provides them legal protection from retaliation, and affords them confidentiality.

A couple days ago, on November 18th, SEC’s Office of the Whistleblower submitted its 2014 Annual Report to Congress on the Dodd-Frank Whistleblower Program. In it, the Office of the Whistleblower touted fiscal year 2014 as an historic year both in terms of the number and the size of whistleblower awards. And it sent a clear message that the Dodd-Frank-mandated whistleblower office will continue to grow and continue to emphasize prosecution of matters brought to its attention by whistleblowers.

The data shows a large increase both in complaints asserted and in the number of awards issued. Since August 2011, the whistleblower office has received 10,193 whistleblower tips, with 3,620 of those in fiscal year 2014 alone. Most of the tips have originated in California, Florida, New York, and Texas. And in that time, fourteen whistleblowers have received awards. In fiscal year 2014 alone, the whistleblower office authorized nine awards, including a record payment of more than $30 million to one whistleblower. More than 40% of the individuals who have received awards were current or former employees of the company involved in the related enforcement action. Of those current or former employees, more than 80% had raised their concerns internally before reporting the allegations to the SEC.

Indeed, the report suggests that whistleblowers who report alleged securities laws violations internally first may be in a better position to obtain awards from the SEC following a successful enforcement action. In one case, for example, an individual with internal audit responsibilities received an award of $300,000; although the general rule is that individuals with compliance or internal audit responsibilities are not eligible for awards, an exception exists where the person raises the issue internally at least 120 days before providing the information to the SEC. And another whistleblower was awarded $400,000 after aggressively working internally – to no avail – to obtain corrective action before reporting the issue to the SEC.

It is also important to note that the SEC is also serious about protecting employees or insiders who blow the whistle. In once case, for example, the SEC ordered a company to pay $2.2 million to settle retaliation and other charges relating to a company’s ill treatment of an employee who reported information to the SEC that the company had engaged in prohibited principal transactions. According to the Report, the SEC’s “action sends a strong message to employers that retaliation against whistleblowers in any form is unacceptable.”

As the Office of the Whistleblower articulated in its report when discussing the $30 million award to one whistleblower, “[w]e hope that awards like this one will incentivize company and industry insiders, or others who may have knowledge of possible federal securities law violations, both in the U.S. and abroad, to come forward and report their information promptly to the Commission.” Employers must take whistleblower allegations seriously; they can’t be disregarded or ignored. Instead, internal investigations and serious, diligent handling of whistleblower allegations must be a fact of life for public companies.

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