According to a recently-released academic study on the impact of whistleblowers on financial misrepresentation enforcement actions, the involvement of whistleblowers in securities enforcement actions has a significant impact on both the penalties imposed and jail time faced by company executives and employees. In particular, SEC and DOJ enforcement actions relating to financial misrepresentations to shareholders result in financial penalties for companies that are $90-$93 million greater, financial penalties for executives that average $50-$56 million more, and prison sentences for executives and employees that average 22-27 months longer when a whistleblower is involved.
Designed as an incentive to encourage employees to report wrongdoing, rewards for whistleblowers can be substantial. Under Dodd-Frank, for example, rewards may range from 10%-30% of monetary sanctions over $1 million from investigations and/or enforcements resulting from the employee’s report. The increasing trend toward greater financial rewards for whistleblowers and high-level government encouragement of their actions give rise to a corollary question whether whistleblower involvement in enforcement actions makes a meaningful difference.
Exploring that question, the study reviewed all SEC and DOJ enforcement actions associated with financial misrepresentation between 1978 and 2012, focusing on the effect of employee whistleblowers’ involvement on financial penalties assessed, sentences imposed, and duration of the enforcement actions. Over the study period, approximately $70 billion in penalties were assessed, and various industries were represented, including financial services, utilities, health care, and manufacturing. In the end, the study concluded “that whistleblower involvement in an SEC or DOJ investigation is associated with a significant increase in penalties.”
Whistleblowers would, therefore, seem to be a valuable source of information for regulators, both in terms of disclosing misconduct that might otherwise go undiscovered and in facilitating higher penalties. Companies across a wide range of industries and sectors would be wise to revisit their policies to ensure they have mechanisms in place to timely and properly address whistleblower complaints when they are voiced.