On September 23, the U.S. Securities and Exchange Commission (SEC) approved a number of rule changes to its highly successful whistleblower program. These rule changes address several aspects of the program, including determinations for whistleblower awards.
Through the SEC Whistleblower Program, qualified whistleblowers, or individuals who voluntarily provide the SEC with original information that leads to a successful enforcement action, are entitled to a monetary award of 10-30% of funds recouped by the government. The SEC releases final orders detailing every whistleblower award that they issue as well as award claims that are denied.
Detailed analysis of the 11 final orders issued in the past month offers important insights into the SEC Whistleblower Program. While the specific details of orders are redacted in the public version in order to protect whistleblowers’ confidentiality, the orders always explain the factors the SEC weighed in making the award determinations.
Timeliness in Making a Disclosure
Almost all of the final orders examined made note of the speed at which the whistleblower made their disclosure. The timeliness of a disclosure is a factor that the SEC weighs when determining the exact award percentage. Perhaps even more importantly, an SEC whistleblower can only be eligible for an award when they provide original information. If a whistleblower waits to make a disclosure, they risk another whistleblower providing the information first.
For example, on September 30, the SEC announced two whistleblower awards for the same case: one for $22 million and one for $7 million. According to the award order, one of the principal reasons the second whistleblower received such a notably smaller reward is that “much of Claimant 2’s information was duplicative of Claimant 1’s information.”
Likewise, in the award order for the recently issued record-setting $114 million award, the SEC explains why the one whistleblower received the award while three other claimants’ claims were denied. The SEC denied one claimant’s claim partially because “Office staff did not learn of Claimant 2’s allegations until approximately three years after the opening of the investigation. Although Office staff spoke with Claimant 2’s counsel, they had already learned of the details concerning [REDACTED] from other sources.”
In one of two award denials issued in the past month, the SEC pointed to the extreme delay in the whistleblower’s disclosure: “specifically, Claimant 2’s information was submitted over five years after the investigation was opened and approximately one year after the Covered Action was filed.”
Even when a whistleblower provides original information, a delay in making a disclosure can lead to a reduction in the size of an award. A September 30 award order for a $1.7 million award contains a lengthy discussion about why the reward was reduced due to a delay in reporting. The SEC stated, “while we recognize Claimant’s efforts to document the Company’s and the Company Employee’s wrongdoing, we find that Claimant’s decision to delay reporting information to the Commission for approximately three years after the adoption of the Dodd-Frank Act to be unreasonable.”
The inverse of this award reduction is also true. Among the positive factors listed in a September 28 award order for a $1.8 million award is that the “Claimant, an unaffiliated outsider of the company, was expeditious in reporting the information to the Commission.”
Taken together, these final orders highlight the necessity of making a timely whistleblower disclosure. Delay can result in more damage to the victims of the misconduct and can cost the whistleblower substantially.
Related to the matter of timely disclosures is the speed with which whistleblowers submit award claims. Once the SEC posts a Notice of Covered Action for a case, qualified whistleblowers have 90 days to submit award claims. Failure to meet this deadline can automatically disqualify a whistleblower from receiving an award that they are otherwise eligible for. In one award claim, the SEC notes that they “preliminarily determined to deny Claimant 3’s award claim on the alternative ground that it was submitted after the 90-day deadline for submitting claims for the Covered Action.”
While none of the examined final orders reference the matter, the recently approved rule changes to the SEC Whistleblower Program include a new rule concerning a deadline for formally filing a whistleblower tip with the SEC. Whistleblowers must formally submit a tip form (TCR) within 30 days of initial contact with the SEC. This 30-day window is tolled until the whistleblower obtains constructive knowledge of the TCR filing requirement, however. Notably, obtaining legal counsel in connection with a whistleblower disclosure constitutes “constructive knowledge.” For whistleblowers, this highlights the importance of hiring an experienced and knowledgeable whistleblower attorney.
Further Assistance
The degree of further assistance the whistleblower provides the SEC is another factor that is the most frequently referenced in the award determinations. For example, in the order referenced above that detailed the separate $22 million and $7 million awards, the SEC noted that the second whistleblower received a smaller award partially because “Claimant 2 provided more limited assistance as compared to Claimant 1.”
In an award order for a joint $400,000 whistleblower award, the whistleblowers’ further assistance was listed as a positive factor: “Claimants provided continuing cooperation and assistance, including having numerous meetings and discussions with staff.” Likewise, the SEC positively noted that the recipient of the record-setting $114 million award “provided substantial and ongoing assistance to the Office staff throughout the investigation, which saved a considerable amount of time and resources.”
Conversely, in an award order for an $800,000 award, the SEC listed the lack of assistance as a negative factor: “beyond the initial tips, Claimant did not provide further assistance to the staff during the course of the investigation.”
However, the SEC recognizes that not all whistleblowers can provide further assistance, whether due to the risk of retaliation or other reasons. For example, in an award order for a $1.8 million reward, the SEC stated, “We also recognize that Claimant was not in a position to provide continuing helpful information and assistance during the investigation.”
Overall, these recent final orders highlight that whistleblowers who provide further assistance to the SEC are rewarded accordingly.
Internal Disclosures
Another factor referenced in a number of the final orders was whether the whistleblower internally reported the alleged securities violations. A September 25 award order for a $1.8 million award contains a lengthy discussion about an internal whistleblower’s eligibility for an award. In this case, the whistleblower made his disclosure to his company’s internal compliance program before filing an official tip with the SEC. The whistleblower’s internal disclosure led the company to launch an internal investigation. The company subsequently reported the findings to the SEC, which then launched its own investigation that led to a successful enforcement action. In accordance with the Exchange Act, the SEC ruled that the whistleblower’s initial internal disclosure led to the successful SEC enforcement action. Thus the whistleblower was entitled to an award.
In another award order, the SEC noted that a pair of whistleblowers faced retaliation for reporting internally. Among the positive factors used to determine the award percentage, the SEC listed that “Claimants reported internally to their supervisor before reporting to the Commission and suffered personal hardships as a result of their reporting.”
While these final orders suggest that the SEC supports internal whistleblowers, one newly approved rule change threatens to completely undermine this support. The SEC approved a rule change that strips the agency of the authority to protect internal whistleblowers from retaliation. This change corresponds with the Supreme Court ruling in Digital Realty v. Sommers, which ruled that internal whistleblowing was not protected under the Dodd-Frank Act, and that to be protected, whistleblowers must directly contact the SEC. Therefore, while these award orders positively value internal disclosures, it is essential that whistleblowers directly contact the SEC to ensure they are protected and eligible for awards.
Independent Analysis
An October 15 award order for an $800,000 award details that the whistleblower provided independent analysis. The SEC states that they “positively assessed that Claimant authored information containing a detailed analysis that alerted Commission staff to the underlying securities violations.”
Whistleblower awards of this type are threatened by the recent SEC Whistleblower Program rule changes. In September, the SEC approved guidance that altered its current rule defining what level of “independent analysis” qualifies an individual for a whistleblower reward. Before the vote on the rule changes, six U.S. Senators sent a letter to the SEC arguing against this guidance because it “would permit the SEC to create an insurmountable hurdle for a whistleblower to establish original information based on ‘independent analysis.’”
However, in a definitive analysis of the rule changes, attorneys from the qui tam whistleblower law firm Kohn, Kohn & Colapinto note that “the instruction is only interpretive guidance and was not codified as a rule… any rulings that conflict with the clear definition of ‘analyst’ that exists in the statute or the current rules (which were good) can be applied by commissioners or the courts to ensure that analysts are properly covered.”
Conclusion
To what degree last month’s rule changes will alter the SEC Whistleblower Program award determinations remains to be fully seen. Future analysis of final orders could reveal award denials based on a failure to comply with the new TCR filing requirement deadline. Future orders may also reveal a drop-off in the number of awarded whistleblowers who make internal disclosures or provide an independent analysis.
The main takeaways are that individuals should report potential securities violations directly to the SEC as quickly as possible and should provide the SEC as much assistance as possible. Doing so accomplishes a win-win to ensure that investors are protected from fraud and maximize the whistleblower award amount. It is also essential for SEC whistleblowers to work with experienced attorneys with knowledge of the SEC Whistleblower Program.