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Public sounds off to SEC on proposed whistleblower changes

Joe Mont | September 19, 2018

In June, the Securities and Exchange Commission released a proposal to amend rules that govern its whistleblower program. Now, through letters submitted during the public comment process, we are getting a sense of what the public feels about these suggested changes.

Section 922 of the Dodd-Frank Act added Section 21F to the Securities Exchange Act, establishing the program. It authorizes the SEC to pay monetary awards to eligible individuals who voluntarily provide original information that leads to successful enforcement actions resulting in monetary sanctions of more than $1 million. Awards are made in an amount equal to 10 to 30 percent of the monetary sanctions collected.

One proposed change would allow awards based on deferred prosecution agreements and non-prosecution agreements entered into by the U.S. Department of Justice, a state attorney general in a criminal case, or a settlement agreement with the Commission outside of the context of a judicial or administrative proceeding to address violations of the securities laws.

Under another change, for awards that could yield a payout of less than $2 million to a whistleblower, the Commission could adjust the award percentage upward to an amount of $2 million (subject to the 30 percent statutory maximum). 

Another proposed amendment would prevent the “irrational result” that could occur if a whistleblower receives multiple recoveries for the same information from different whistleblower programs.

A change to Exchange Act Rule 21F-8 would clarify the Commission’s ability to bar individuals from submitting whistleblower award applications if they are discovered to have submitted false information to the Commission. The SEC would also be empowered to bar individuals who repeatedly make frivolous award claims.

Among those weighing in on the proposed rule amendments was Harry Markopolos of the research firm that bears his name. He and his small staff of investigators uncovered the massive frauds committed by Bernie Madoff years prior to his arrest, but they were largely ignored.

He suggested a look at “false filers,” those who file whistleblower applications for rewards on cases for which they have no basis to expect one.

“Those false filers appear to have a ‘you have to be in it, to win it’ mentality, as though the SEC whistleblower program were a state lottery,” Markopolos wrote. “My advice is to be ruthless with false filers; it should be ‘one and done’ for false filers, not ‘three strikes and you’re out’ [as is proposed in the rule changes].”

It also seems that attorneys are filing some of the frivolous claims, he added. “Barring offending attorneys from practicing before the Commission and publicizing their punishment should prove a good deterrent for others that are similarly inclined to file for an award without legitimate grounds. This program is too important for the smooth functioning of our capital markets to let these false filers diminish its efficacy.”

“The resulting personal financial losses and emotional trauma for protesting unlawful behavior and practices have been devastating and unrelenting with no relief or upside. The SEC Whistleblower Bounty Award Program provides a vestige of hope for financial remedy and justice.”

Eileen Morrell, Senior Corporate Finance Professional

Markopolos also “strongly disagrees” with a proposed discretionary cap on awards exceeding $100 million. “Although well-intentioned, this provision would be a gift to the major investment banks and other large public companies, as it would deter high-ranking officers at those entities from turning whistleblower,” he wrote. “It was my hope all along—a hope shared with many at the Commission who designed the program—that the potential rewards from blowing the whistle would be lucrative enough to draw in high-ranking industry professionals.

“Capping awards would all but ensure that the elephant never walks through the Commission’s doors—only rabbits and the occasional zebra. This program should always aim high, not low or average. That was how it was designed and it is how it should remain.”

As might be expected, the National Whistleblower Center weighed in on the proposed rules. Jane Turner, chair of its Whistleblower Leadership Council, and Frederic Whitehurst, its chairman of the board, were joint signatories to the resulting comment letter.

Their request was not met to delay the public comment period past Sept. 15, until access to documents requested in a Freedom of Information Act filing were granted by the Commission.

That request included communications between the SEC and the U.S. Chamber of Commerce “to discern what special interests had lobbied for the Proposed Rule.”

“The Commission’s amendments to the whistleblower program were made in secret, potentially relying on anti-whistleblower interests instead of the experts in the whistleblowing community,” they wrote. “The public has a right to know who proposed these changes, who had input into the proposal, and what the motives behind these deleterious alterations were in order to understand how the rule, and the new program, would function in practice.”

As for advice, the group addressed the idea of establishing a cap on the amount of compensation offered to whistleblowers.

“Only in such large fraud cases would whistleblowers suffer a radical reduction in the amount of compensation for which they are eligible,” the comment letter says. “Proposed Rule (d)(2) reduces the compensation available to the most important whistleblowers to the lowest possible amount, thereby discouraging the reporting of large frauds by well-placed insiders worldwide.”

“It is beyond question that establishing a rule that would limit the amount of awards available to whistleblowers who disclose large frauds that result in fines and sanctions in excess of $100 million against fraudsters would not help motivate whistleblowers to step forward,” the letter adds. “Reducing the amount of awards available to employees who courageously risk retaliation from these high-ranking or well-placed fraudsters violates the ‘core objective’ of the SEC whistleblower law.”

The Think Computer Foundation is a non-profit organization that focuses, in large part, on transparency issues, including matters that affect public markets.  In the opinion of Aaron Greenspan, its president, “the SEC’s whistleblower program has arguably been one of the most effective (and least controversial) aspects of the Dodd-Frank Act.”

Greenspan’s group says it does not object to defining a deferred prosecution agreement or a non-prosecution agreement as an “action” for the purpose of allowing whistleblowers to receive reward payments. It does question, however, “the high frequency with which the SEC and Department of Justice appear to use DPAs and NPAs to resolve cases of wrongdoing where actual admissions of guilt and/or criminal prosecutions are necessary to ensure the proper functioning of markets.

“If and when a DPA or NPA must be used for lack of any other option, we believe it is proper for the SEC to treat these agreements as the result of administrative actions, and monetary payments obtained there-from could reasonably be called monetary sanctions,” he wrote. “This logic could also apply to other kinds of settlement agreements obtained by the Commission, but again, DPAs, NPAs, and settlement agreements should only be entered into as an absolute last resort.”

Generally, the SEC should give the broadest possible interpretation to any statutory language that would allow a whistleblower to be rewarded for providing valuable, original, or especially insightful information to the government for the benefit of the public, the comment letter adds. “It would follow that any monetary payment to the SEC by an entity accused of wrongdoing, after and because of the commencement of an SEC inquiry, could be fairly classified as the result of an administrative action, even if the matter does not proceed to be heard by an administrative judge.”

Regarding efforts to redefine monetary sanctions in the proposed rule, Greenspan wrote: “We do not believe that receivership fees and costs, taxes, and attorney’s fees should count under the definition of ‘monetary sanctions’ used to calculate SEC whistleblower payments, unless a whistleblower has simultaneously filed a separate whistleblower claim with the Internal Revenue Service, in which case federal taxes collected may be relevant for those calculations.”

"The SEC’s fear about whistleblowers taking ‘multiple bites at the apple’ is overblown and also moot,” he added. “If a hypothetical drug cartel uses a publicly traded company to launder money through the United States and is evading taxes, and a whistleblower presents information about all of the cartel’s wrongdoing to the SEC, obvious jurisdictional issues would prevent the SEC from investigating the tax aspects of the case. The same obvious jurisdictional issues would prevent the IRS from looking into securities law violations.”

Eileen Morrell, identified as a senior corporate finance professional, is also an SEC whistleblower who is currently in the program.

“The resulting personal financial losses and emotional trauma for protesting unlawful behavior and practices have been devastating and unrelenting with no relief or upside,” she wrote. “The SEC Whistleblower Bounty Award Program provides a vestige of hope for financial remedy and justice.”

During the six years prior to her termination, she held senior finance roles at a smaller reporting public company that provides professional services to government agencies.

Problems began when the company acquired a small private professional services company. Immediately after the acquisition, a major customer cut back on requirements that significantly reduced expected revenue and cash flows generated by the newly acquired business.

“That is when the company machinations began, internal controls were thwarted, my public financial reporting responsibilities were diminished and then removed, my internal protests up through the chairman of the board and outside legal counsel were ignored, I was abruptly terminated without notice, and asked to sign a separation agreement that waived my rights to due process,” Morrell wrote. “I did not sign the agreement.”

She disagrees with the “Commission’s recommendation of limits on exceedingly large awards.”

Morrell also addressed proposed changes where the monetary sanctions collected are de minimis, less than the Dodd-Frank requirement of at least $1 million collected by the SEC.

“Whistleblowers are harmed whether they work for a very large or very small company and must work just as hard to prove their allegations to the SEC,” she said.

Not all comments were in opposition to the proposed amendments. A respondent identified as Joe Fischer, wrote as much, “particularly the additional tools in award determinations.”

“There are various forms of prosecution agreements including DPAs and NPAs, and various routes to employ such as Federal departments, and state attorney generals. Whistleblowers come forth seeking justice and change,” he wrote. “Their reward should not be administratively confined as it is today because they didn’t choose the right venue, or the one they selected pursued agreements or results that did not yield a monetary award. The expanded tools will strengthen the whistleblower award incentive for persons to take time and maybe expose themselves to report what should be reported.”

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