In November, the Securities & Exchange Commission (“SEC”) released its second “Annual Report on the Dodd-Frank Whistleblower Program” (“Whistleblower Report”), the first full-year report of its kind, announcing the achievements of the SEC and its Office of the Whistleblower in enforcing the Whistleblower Program created by the 2010 enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”). The most notable information coming out of the report, the sheer volume of formal whistleblower complaints that were filed and the complexity of the fraud reported by whistleblowers, highlights the significant impact of the new law and the importance of streamlining the burden on the SEC when coming forward with information about securities fraud.
For about as long as it has existed, the SEC has accepted tips, by mail and now through its website, from concerned citizens who witnessed securities fraud in their workplace, or from some third-party vantage point. While the federal government has long provided a reward to whistleblowers who reported fraud on the Government under the False Claims Act (“FCA”), no such incentive program existed for financial fraud whistleblowers. In the wake of the financial crisis, the federal government made the wise decision to enact provisions into the sweeping financial reform bill, Dodd-Frank, that would provide strong incentives to people blowing the whistle for financial crimes. The provisions offer whistleblowers between10-30% of any proceeds recovered by the SEC through a successful enforcement action against a perpetrator of securities fraud where the recovery is in excess of $1 million.
The 2012 Whistleblower Report states that 3,001 formal whistleblower complaints were filed with the SEC in 2012 covering a wide variety of securities fraud including corporate disclosure and financial reporting fraud (18.2%), offering fraud (15.5%), manipulation (15.2%), and insider trading (6.3%). The volume of cases, and complexity of the subject matters, show, not only that the law is working, but that it requires significant resources to continue to operate efficiently. The SEC has already committed substantial resources to the new program, creating the Office of the Whistleblower with its own staff dedicated entirely to reviewing, filtering, and investigating whistleblower complaints, and hiring a new Director of Enforcement, Sean McKenna, to manage the program. But, like any Government agency, there is a ceiling to the amount of money and resources that can be dedicated to marshalling any one project. It is, therefore, vital to the success of the program that whistleblowers streamline the investigatory process for the SEC, particularly in light of the high degree of sophistication of the schemes being reported which need to be vetted and investigated.
In this respect, a case should be thoroughly investigated with experienced counsel prior to submitting a complaint to the SEC, and the team should put together a cohesive, compelling roadmap for the SEC’s investigation. While not required by the SEC in coming forward with information and collecting a reward, a whistleblower under Dodd-Frank may only remain anonymous if he or she is represented by an attorney – a key distinguishing characteristic of the SEC whistleblower provisions that cannot be found in any other incentive-based whistleblower program. Thus, the two parties play a key role in ensuring the success of the program.
On August 21, 2012, the SEC announced the first award made under the whistleblower program, paying the whistleblower $50,000, the first installment of his 30% reward in uncovering fraud. The announcement did not reveal the case, or the name of the whistleblower, demonstrating the SEC’s commitment to maintaining the confidentiality of the courageous people coming forward with information about securities fraud. While still in its infancy, the program appears to be working, generating tips and, at least in one case thus far, producing enforcement actions. 2013 will be the year where we will see the true effectiveness of the program, as we begin to see how many of the 2012 tips actually produce results for the SEC and for the whistleblowers.