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SEC Whistleblower Program Shifts Into High Gear

Bruce Carton | December 10, 2013

The Securities and Exchange Commission's 2013 Annual Report to Congress on the Dodd-Frank Whistleblower Program, issued in November, indicates that the program is hitting its stride as it concludes a second full year in operation.

The SEC reported that the number of whistleblower tips and complaints it received during fiscal year 2013 rose 8 percent to 3,238 from 3,001 during the same period in 2012. The SEC received tips and complaints from all 50 states, the District of Columbia, and the U.S. territories of Puerto Rico, Guam, and the U.S. Virgin Islands. The highest number of whistleblower tips originated in California (375), New York (215), and Florida (187).

As the number of tips and awards has increased, the case law and regulations surrounding the program have also begun to develop to the point that there are now more concrete guidelines for companies and counsel to follow in the Dodd-Frank whistleblower area.

SEC whistleblowing is also going international. The SEC also received 404 tips from individuals in foreign countries this year, including 66 from the United Kingdom, 62 from Canada, and 52 from China. To date, the SEC has now received whistleblower tips from individuals in 68 countries outside the United States.

The types of tips and complaints coming into the program were very similar to those submitted in 2012. The top categories this year were corporate disclosures and financials (17 percent), offering fraud (17 percent), and manipulation (16 percent).

The SEC ramped up the payment of awards to whistleblowers this past year. Six awards have now been issued, with four of those awards coming in FY 2013. On September 30, the last day of FY 2013, the SEC awarded a single whistleblower $14 million—an amount that dwarfs the SEC's second-highest award of $150,000, and which has sent a jolt through the companies and counsel that focus on whistleblower issues.

Although interest in the $14 million whistleblower payout was high, details on the case were scarce. The recipient of the $14 million requested anonymity, forcing the SEC to protect the confidentiality of the case—including any information about the company involved, its industry, the amount of the penalty involved, the percentage of the penalty used to calculate the award, or the nature of the allegations.

The lack of information provided by the SEC on the $14 million award has, of course, made it difficult for companies to derive any real lessons learned from it other than the fact that big dollars are at stake, which are likely to incentivize  potential whistleblowers.

Jay Perlman, a director with Navigant Consulting, says that the SEC could provide additional information about its whistleblower awards—without disclosing a whistleblower's identity—that would allow companies to improve their compliance programs. Perlman points to the Department of Justice's Opinion Procedure Release process as an example of disclosure that protects the anonymity of those involved while also providing guidance to companies.

Anti-retaliation Case Law

A look at the cases that have been litigated in the time since the SEC's whistleblower office opened its doors in August 2011 shows that anti-retaliation issues have emerged as an important battleground. Indeed, law firm Gibson Dunn notes that since September 2011, no fewer than 12 federal district court decisions and one Fifth Circuit Court of Appeals decision have been issued on the scope of the anti-retaliation provisions set forth in the Dodd-Frank Act. The most hotly litigated issue to date has been whether a whistleblower seeking protection under Dodd-Frank from retaliation must have actually reported information to the SEC, as opposed to only having reported information internally to the company involved.

The ongoing dispute on this important issue is the result of competing definitions in Dodd-Frank as to what constitutes a whistleblower. On one hand, the law defines a whistleblower as “any individual who provides … information relating to a violation of the securities laws to the Commission in a manner established … by the Commission.” Separately, however, Dodd-Frank's anti-retaliation provision states that no employer may retaliate against a whistleblower because of “any lawful act done by the whistleblower in … making disclosures … required or protected [by Sarbanes-Oxley or other laws subject to SEC jurisdiction],” and the SEC's implementing regulations for Dodd-Frank specifically define “whistleblower” to include anyone who reports information relating to a securities law violation, including internally to an employer.

With a total of 6,573 tips and complaints from whistleblowers already in hand from whistleblowers since it opened ... the SEC's Office of the Whistleblower will no doubt be awarding an increased number of whistleblower bounties in the coming years.

According to Gibson Dunn's John Chesley, seven of the nine federal district courts to address this specific issue have deferred to the SEC's interpretation that the anti-retaliation provisions also protect whistleblowers who only report misconduct internally. Chesley notes, however, that the one federal appeals court decision on this point to date held directly to the contrary. In Asadi v. G.E. Energy, the Fifth Circuit held that Dodd-Frank's definitions section unambiguously requires that a whistleblower provide information to the SEC. The court held that notwithstanding the SEC's “expansive” implementing regulations, one cannot be a Dodd-Frank “whistleblower” unless he or she actually reports information to the agency. 

Joe Warin of Gibson Dunn adds that the litigation stance taken by companies in these cases—that the anti-retaliation provisions do not apply to individuals who report internally—has not gone unnoticed by Sean McKessy, chief of the SEC's Office of the Whistleblower. Warin says that at a compliance conference in October, McKessy noted the “ironic tension” in the fact that the same companies that lobbied the SEC so hard to encourage internal reporting as part of its Dodd-Frank implementing regulations are now essentially arguing in court that they are “free to retaliate” against employees who do so instead of reporting to the SEC.  “What started out as trying to be collaborative over the value of reporting internally [has now become] a little bit antagonistic,” McKessy stated at the conference. “My view is, if you are going to litigate this—you are going to argue in courts that if your own employee who reports to you shouldn't be protected—then I've got to let your employees know that they should probably come to us,” McKessy said.

120 Days

Another major development that has emerged from implementation of the SEC's whistleblower program is the impact it has had on corporate internal investigations. In two separate SEC rules passed as part of implementing Dodd-Frank, the agency selected 120 days as an important timeframe. Under one rule, the SEC will not consider information received from compliance and internal audit personnel, as well as public accountants, for bounty-eligibility unless the person has waited at least 120 days after making an internal report. Under a second rule, if a whistleblower reports to the SEC within 120 days of making an internal report (or a report to another entity such as Congress), the tip will be deemed to have been made to the SEC on the date of the internal report for purposes of a bounty award.

In a Webcast on whistleblower issues this month, Warin and Chesley stated that the impact of these two rules is that 120 days has quickly become the “new standard” for the length of corporate internal investigations. They observe that the whistleblower's bar has picked up on this development, as well, and has begun to request when helping whistleblowers submit internal reports that companies complete their investigations and report their findings within 120 days. Accordingly, Warin and Chesley assert that internal investigations that allow a company to make a disclosure decision within 120 days should be deemed presumptively reasonable with respect to the amount of time taken to conduct the investigation.

With a total of 6,573 tips and complaints from whistleblowers already in hand from whistleblowers since it opened, and in the wake of the recent eye-popping $14 million award, the SEC's Office of the Whistleblower will no doubt be awarding an increased number of whistleblower bounties in the coming years. Whistleblower Office Chief McKessy has said that he anticipates that there will be many more high-dollar awards to come, as well. After a slow start, the SEC's whistleblower program seems to have found some traction in FY 2013, and companies should expect the program and the compliance issues that surround it to continue to grow in importance in 2014.