Corporate compliance officers may have a new reason to be uncomfortable with the Securities and Exchange Commission’s whistleblower program: how well it appears to be working.
The whistleblower program developed by the Securities and Exchange Commission may be one of a handful of government programs that receives mostly favorable marks from those who interact with it. “The office is becoming the gold standard,” says Stephen Kohn, executive director of the National Whistleblower Center in Washington D.C.
When the program was first announced, compliance executives feared that whistleblowers could bypass internal reporting mechanisms and take concerns directly to the SEC. Companies fretted that the first time they could find out about a problem is when the SEC comes knocking at the door. Based on the volume of tips flowing to the SEC, those fears look to be substantiated.
The SEC’s Office of the Whistleblower, created by the Dodd-Frank Act, opened its doors in August 2011, and since then the SEC has received nearly 10,200 tips, and the volume keeps rising. In fiscal year 2014, which ended in September, it fielded 3,620 tips, up nearly 12 percent from 2013.
Several attributes distinguish the SEC’s efforts from whistleblower programs in other agencies, observers say. It has built a reputation for dealing fairly and promptly with whistleblowers. It has gone to court to protect whistleblowers from retaliatory measures. And it has issued awards to individuals in other countries, as well as those with compliance responsibilities.
“The SEC has institutionally embraced the whistleblower statute,” says Brian Kenney, senior partner with Kenney & McCafferty, a Philadelphia-based law firm focused on whistleblower cases. “They encourage whistleblowers and their advocates” and engage in relatively open exchanges.
The number and magnitude of the awards it pays out have also jumped. Nine of the 14 whistleblower awards issued to date occurred in fiscal 2014, including a $30 million award issued in September. In addition to being the largest so far, it was the fourth award to a whistleblower living in a foreign country.
The magnitude of the awards “really emphasizes the need for companies to invest in compliance programs,” says Robert Wild of Krieg DeVault in Chicago. The eye-popping payments it has made to some whistleblowers also provides incentives employees need to come forward, he says. “Fifty thousand dollars isn’t enough for people to risk their careers.”
Motivation From Madoff
The SEC’s current receptivity to whistleblowers may have its roots in the Commission’s failure to uncover the Ponzi scheme perpetrated by Bernard Madoff for more than a decade. An investigation by the SEC’s Office of Inspector General concluded in part, “the SEC received numerous substantive complaints since 1992 that raised significant red flags concerning Madoff’s hedge fund operations … although the SEC conducted five examinations and investigations of Madoff based upon these substantive complaints, they never took the necessary and basic steps to determine if Madoff was misrepresenting his trading.”
“The SEC has institutionally embraced the whistleblower statute. They encourage whistleblowers and their advocates.”
Brian Kenney, Senior Partner, Kenney & McCafferty
“It was a lot of embarrassment,” but gave the SEC a strong incentive to develop an effective whistleblower program, Kenney says.
Among the features of the program that aid whistleblowers is the SEC’s focus on preventing retaliation. Rule 21F-17 from the SEC prohibits anyone from taking “any action to impede an individual from communicating directly with the Commission staff about a possible securities law violation, including enforcing, or threatening to enforce, a confidentiality agreement.” “This limits companies’ abilities to hide behind confidentiality agreements,” says Kyle Eisenmann, an associate at Kenney & McCafferty.
Moreover, the SEC can bring action against organizations that retaliate or impede investigations. In 2014, the Commission pursued its first such case when it fined Paradigm Capital Management $2.2 million after the firm stripped an anonymous whistleblower of his or her job functions.
The SEC has also argued to the courts that anti-retaliation measures should protect both individuals who report to the Commission as well as those who report internally within their organizations. In his letter in the 2014 report, Chief of the SEC’s Office of the Whistleblower Sean McKessy notes that refusal to provide this protection could encourage individuals to forego their companies’ internal compliance programs.
The international reach of the whistleblower office also is a positive, Kohn says. “The office understands that violations of U.S. securities law can occur in other countries.” According the SEC’s report, it has accepted claims from individuals in 88 countries. The largest numbers have come from Canada, India, and the United Kingdom.
How Does It Stack Up?
Many of those who work with multiple whistleblower programs rank the SEC’s initiatives at the tops of their lists. While the SEC receives praise for its overall receptiveness to whistleblowers, for example, the IRS has been criticized for ignoring them.
Writing in Politico recently, Sen. Ron Wyden (D-OR), chair of the Senate Finance Committee, and Sen. Chuck Grassley (R-IA), former chair, said: “… we’ve been puzzled why the IRS often snubs whistleblowers who may provide invaluable evidence of wrongdoing, especially when the costs of inaction are only growing … we routinely hear from whistleblowers who complain about how the IRS handles their cases. They are strung along for years without any indication that the IRS is even looking into their claims. Others are flat-out ignored.”
INCREASE IN WHISTLEBLOWER TIPS
Below is a look at the amount of whistleblower tips the SEC has received since the inception of its Whistleblower Office.
For each year that the whistleblower program has been in operation, the Commission has received an increasing number of whistleblower tips. Since August 2011, the Commission has received a total of 10,193 whistleblower tips, and in Fiscal Year 2014 alone, received 3,620 whistleblower TCRs.
The table below shows the number of whistleblower tips received by the Commission on a yearly basis since the inception of the whistleblower program:
As reflected in the table, the number of whistleblower tips received by the Commission has increased each year the program has been in operation. From Fiscal Year 2012, the first year for which we have full-year data, to Fiscal Year 2014, the number of whistleblower tips received by the Commission has grown more than 20 percent.
The graphic shows by percentage the number of whistleblower tips the Commission received on a monthly basis during Fiscal Year 2014. As reflected in the chart, the volume of tips remained relatively steady throughout the year, with the highest number of whistleblower tips being received during the months of March and April.
While the SEC’s whistleblower program has garnered plaudits, that’s not to say it hasn’t come in for criticism. Connecticut lawyer Harold Burke questions the small number of awards paid out relative to the number of tips received—just fourteen awards from ten thousand tips. “A lot have been filed, but how many are turning into something?” he asks. At the same time, he acknowledges that insider-trading cases can take years to investigate and prosecute.
Indeed, the SEC’s program dwarfs the first few years of awards after the False Claims Act was strengthened in 1986, Kohn points out. Awards for the first four years, through 1991, totaled about $18.8 million. In contrast, the SEC paid at least $32 million in whistleblower awards during the first nine months of 2014 alone.
The small number of awards helps protect the program’s “long-term trajectory,” says Geoffrey Rapp, law professor at the University of Toledo College of Law. If the SEC’s whistleblower office had issued hundreds of awards its first year, the momentum would have been difficult to sustain. Rapp does question the fact that awards are only issued once the penalties collected exceed $1 million. This overlooks the fact that many victims of fraud are smaller, he says.
Kohn says the awards should include claims submitted before Dodd-Frank went into effect in 2010. The SEC has interpreted the law to cover only information received after July 2010, despite the fact that the date of eligibility isn’t actually stated in the law itself, he says, adding this is being challenged in court.
Some observers would like more transparency to the program. They argue that having greater detail on the cases would enable other companies to check they’re not making (perhaps inadvertently) the same kinds of mistakes.
Others say safeguarding the identity of whistleblowers takes priority. “What I do find great is that the SEC is committed to protecting the identity of whistleblowers,” says Jessica Tillipman, assistant dean with The George Washington University Law School. “They often risk their jobs and livelihoods.”
Rapp notes that if it was possible for outsiders to identify the organizations paying whistleblower awards, they might then be able to infer the individuals who brought forward the claims, putting them at risk. The SEC is “doing their best to satisfy multiple goals,” he adds.
One big question is how the program might change down the road. “These things are political footballs,” says Burke. A new administration could shift policy and direction and diminish the whistleblower office’s power and enforcement activities.
For now, many of those working with the program express satisfaction with the way in which it’s been developed. “Whistleblowers feel they’re getting a fair shake from the SEC,” Kenney says.