2016 was a banner year for the Dodd-Frank Act’s most significant anti-fraud enforcement provisions: the whistleblower programs at the Securities and Exchange Commission and the Commodity Futures Trading Commission.
In the five years since these programs were established, whistleblowers have rapidly changed the global securities and commodities compliance landscape. The success of the Dodd-Frank whistleblower programs can be attributed largely to the significant actions the SEC and CFTC have taken that signal that whistleblowers will be rewarded and protected for their information and assistance.
As a result of the SEC whistleblower program, more than $874 million in financial remedies have been collected from companies in financial penalties and disgorgement since the program was established in 2011. Because the totals attributed to the whistleblower program are only reported after a whistleblower award has been made, the reported totals lag behind the amounts actually recovered. I believe that the actual amounts the SEC has recovered by virtue of whistleblower information exceed $1.5 billion.
Last year, the SEC surpassed the $130 million mark in total awards paid to whistleblowers. The SEC also set a new bar for whistleblower protection, demonstrating that it will go after companies that retaliate against whistleblowers or have severance or confidentiality agreements that aim to discourage employees from reporting wrongdoing to government enforcement agencies.
The CFTC, meanwhile, paid out in 2016 its largest ever award — $10 million — to a single whistleblower.
With that momentum, 2017 is shaping up to be another transformative year for these programs. Here’s what to expect:
1. More whistleblowers from outside the US will submit tips to the SEC and CFTC, including increasing numbers involving the Foreign Corrupt Practices Act.
There were more SEC whistleblowers providing information about FCPA violations (238) in fiscal year 2016 than in any prior fiscal year, according to the SEC’s most recent whistleblower program report.
In fact, FCPA whistleblower submissions have steadily increased every year since 2013 and are sure to continue to do so again in 2017.
In 2016, the US levied more than $2.5 billion in penalties on foreign companies for corruption charges. Two recent cases helped that helped bolster that tally that were December settlements with Brazilian petrochemical company Braskem S.A. and Israeli pharmaceutical company Teva Pharmaceuticals Industries Ltd. These two companies agreed to pay a combined total of $1.5 billion to settle corruption charges.
The SEC has made clear that whistleblowers don’t have to work or live in the US to participate in the SEC’s whistleblower program. The SEC has received whistleblower submissions from 103 different countries other than the US, including 67 foreign countries in 2016 alone. In fact, the largest SEC whistleblower award – more than $32 million – was paid to an international whistleblower, whom I represented.
2. The pace and size of SEC whistleblower awards are likely to continue to increase.
This past year saw an historic level of whistleblower awards by the SEC. The SEC paid roughly $80 million in whistleblower awards in 2016, bringing the total amount to more than $136 million, which went to 37 whistleblowers. Seven of the 10 largest awards were paid out in 2016.
The pace of awards picked up in the last quarter of 2016, as well, with three awards announced since mid-November. That includes a $20 million award, the third largest in agency history. All indications are that the pace of awards will continue, if not increase.
3. The CFTC will finalize new revised rules, spurring more whistleblower tips and a rapid ramp-up of whistleblower awards.
The CFTC’s whistleblower program has lagged behind the SEC’s in terms of whistleblower awards and recoveries. That is understandable, due in part to the much smaller size of the CFTC’s enforcement division.
But the CFTC will start to catch up in 2017 as a result of certain rule changes.
Under the existing whistleblower program rules, the CFTC has not taken enforcement action against companies that retaliate against whistleblowers as the SEC has. In addition, the CFTC’s whistleblower award process has not been as transparent as it could be.
In early 2017, the CFTC is expected to finalize proposed rules that would allow the CFTC to fine employers that retaliate against, or otherwise attempt to suppress, whistleblowers and will also adopt provisions making the CFTC process friendlier to whistleblowers.
Expect CFTC whistleblower awards to start being issued more steadily and with that, more whistleblower submissions to be made to the CFTC.
4. The SEC will continue to send a strong message about actions that discourage or retaliate against whistleblowers.
SEC sanctions don’t always need to come with big dollars to carry a big impact.
The Commission continues to show its willingness to protect individuals – and the program – against employers’ anti-whistleblower conduct and tactics. The SEC has an impressive list of seven employment related actions in 2016, including a $500,000 fine against International Gaming Technology for firing an employee because he reported concerns to senior management; a $340,000 penalty against HealthNet Inc. and a $265,000 fine against BlueLinx Holdings Inc., both for requiring outgoing employees to waive their entitlement to receive whistleblower awards; and a $1.4 million penalty against SandRidge Energy Inc. for whistleblower retaliation and severance agreements that prohibited participation in government investigations.
No doubt, 2017 will generate a steady flow of employment-related matters from the SEC whistleblower program, along with the first similar actions from the CFTC.
If history is a guide, the Dodd-Frank whistleblower programs will shatter more records in 2017. As the SEC and CFTC programs demonstrate that they are both effective and that they protect individuals from mistreatment, more whistleblowers will come forward. With a robust pipeline of whistleblower-initiated enforcement matters, expect many more banner years to come.
Erika A. Kelton is a partner at Phillips & Cohen LLP. Ms. Kelton has won three SEC whistleblower awards for clients, including the largest SEC whistleblower award — more than $32 million awarded to an international whistleblower in a case involving massive securities fraud.
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