Nearly ten years ago, following a global financial collapse spurred by serial wrongdoing, Congress enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act. Within its 2,000 pages of sweeping reform was the charge to establish an investor protection initiative, which emerged as the SEC Whistleblower Program. Its three pillars—anonymity safeguards, substantial monetary bounties, and significant employment protections—shaped a first-of-its-kind paradigm to encourage individuals to report suspected violations of the federal securities laws. The formidable combination of these programmatic mainstays and an enforcer armed with early actionable intelligence has proven to be a game changer. It’s not just recoveries and reform, however. Behind the results, including in the just-released Office of the Whistleblower’s Annual Report to Congress, stand everyday people willing to take a bold step forward, to be the outsider and the anti-hero, no matter the size of Goliath and his balance sheet.
Recent Results of the SEC Whistleblower Program
Over the last year, the whistleblower program demonstrated great momentum and reformative power. The numbers tell a good story. The SEC received 5,200 tips, a 74% increase since the program’s inception, with the highest number originating from California, Pennsylvania, and New York. Whistleblower submissions from Pennsylvania, in fact, have shown a 239% increase, from 98 to 332 in the last fiscal year. Approximately 9% of all submissions came from whistleblowers outside U.S. borders—479 individuals from 70 foreign countries. The highest concentration of international tips came from Canada, Germany, and the United Kingdom. In Fiscal Year 2019, submissions from Germany increased by over 50% and from Russia by over 22%.
Since 2012, the SEC has paid out more than $387 million to whistleblowers, and the large bounties ensure that individuals will continue to shoulder the tremendous risks of blowing the whistle. More than 15% of that sum was paid in Fiscal Year 2019, when, in one covered action alone, the Commission granted $50 million to two whistleblowers. The $37 million awarded to one of them represents the third largest award ever granted by the agency. In addition to the size of awards, their scope is compelling: More than one-fifth of award recipients were foreign nationals or resided outside of the United States when they submitted tips to the SEC.
The single most important accomplishment of the whistleblower program, and too often this is absent from deliberations about program amendments, is its impact on investors. As a result of monetary sanctions collected in enforcement actions involving whistleblowers, nearly half a billion dollars has been, or is slated to be, returned to injured investors. The figure is staggering, but the intangible impact even more so: whistleblowers restore public faith in the markets. They are the counterweight, the assurance that compliance isn’t lip service and law enforcement’s eyes and ears extend very, very far.
A Global Impact: The SEC Inspires Other Nations
In addition to the SEC program’s traction domestically, on an international scale, the past year demonstrated how the success of the program has encouraged other nations to examine their measures to combat corporate misconduct. By way of example, in 2016, after hearing testimony (PDF: 376 KB) from many of us who were closely involved in the development of the SEC’s program, the Ontario Securities Commission (OSC) launched a bounty regime to incentivize individuals to report wrongdoing. Modeling the SEC program, the OSC focused on financial incentives, anonymity protections, and anti-retaliation measures. Earlier this year, the regulator announced the first awards paid out under the program–$7.5 million paid to whistleblowers in three separate enforcement actions.
Australia also made meaningful progress in 2019, when its new law went into effect to enhance whistleblower protections for the corporate and financial services industry. The securities regulator, ASIC, established an Office of the Whistleblower to provide protections fashioned after various components of the U.S. regime.
Finally, in September of this year, the EU adopted a directive to establish a common program covering reporting standards and anti-retaliation protections for whistleblowers. The member states have two years to comply with the directive. This was particularly important insofar as it will standardize and strengthen the policies of more than two dozen countries.
The Whistleblower and the Workplace
While an SEC whistleblower doesn’t have to be an employee, in Fiscal Year 2019, 69% were current or former corporate insiders. This figure is both obvious and curious. As employers stress rigorous compliance and employee handbooks wax poetic about the importance of internal reporting, don’t “snitches get stitches?” In a 2015 survey (PDF: 1.94 MB) of financial services professionals in the U.S. and U.K., 19% of respondents felt it was likely that their employer would retaliate if they were to report wrongdoing. In a 2018 survey, 44% of respondents indicated that they had experienced retaliation for reporting workplace misconduct, double the figure from 2013. When it comes to a suspected violation of the federal securities laws, why would an employee even bother?
For one thing, whistleblowers who report to the Commission can rest assured that they’ll receive protection. In 2018, the Supreme Court ruled in Digital Realty Trust, Inc. v. Somers (PDF: 149.11 KB) that an employee must report to the Commission to trigger Dodd-Frank’s employment protections. Since 2015, when the SEC first flexed its new authority to bring actions against organizations for retaliating against employees—a $600,000 whistleblower award paid to a trader at Paradigm Capital Management—the SEC has certainly demonstrated, and SCOTUS affirms, that the Commission is the best channel for employee protections and enforcing corporate compliance.
Nevertheless, employees generally still report concerns internally in the first instance and only go to law enforcement after their concerns are inadequately addressed or met with retaliatory conduct. This has proven to be true in the SEC whistleblower program, including this year, when seven of the eight award recipients reported their concerns first to the company. What drives a whistleblower to report misconduct internally notwithstanding tremendous personal risk? A powerful faith in the employer and its ethical bedrock.
Faith, it turns out, is everything: both the fuel and output of the whistleblower program.
The Horizon
In the days ahead, it is likely that much will change in the whistleblower landscape. Some predictions are positive, others less so. The SEC has come out in full force against companies seeking to bar their employees from communicating with it about suspected violations of the federal securities laws, including through the use of unlawful confidentiality agreements. This, coupled with the Supreme Court’s decision in Digital Realty, has had a powerful deterrent effect on employers’ efforts to come between an individual and his or her government.
There also have been proposals to amend the program itself, first announced in 2018. Among the various proposals, two particularly interesting amendments relate to award amounts and would have affected certain awards issued in 2019. The Commission has proposed an amendment that would give it discretion to adjust a whistleblower’s award upward if the potential award would yield a payout of less than $2 million. While the existing rules permitted this, making this clearer to potential whistleblowers would be a positive step. The agency also has proposed instituting a new review of awards over $30 million and potentially exercising its discretion to lower them. This throttling mechanism is extremely controversial; although very few awards are over $30 million, they arise in the cases in which investor harm is greatest, and this measure likely would discourage the most significant whistleblowers from breaking their silence and coming forward. Time will tell what rules the Commission ultimately adopts, but what is for sure is their decisions will have a long-term impact on the program, for better or worse.
Current events may also have dampened the notion of whistleblowing. Still, SEC whistleblowers come forward in great numbers each year, despite economic and personal risks. Their ability to be – and make others – better stewards of their organizations, the markets, and the public at large demonstrates the value of robust protections and an anonymous, incentivized reporting structure. To that end, going forward, we must continue to appreciate how this rare government program achieves such remarkable success with zero cost to the American taxpayer and in perfect partnership with the public.
Jordan A. Thomas is a partner and chair of the SEC whistleblower representation practice at Labaton Sucharow. He previously served as an Assistant Director in the Enforcement Division of the SEC and as a Trial Attorney at the Department of Justice.
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