SEC sees slight decrease in number of whistleblower tips fielded

“Even with the government shutdown” the SEC managed to record “its second highest year for whistleblower complaints,” observed Brendan Quigley, a partner at law firm Baker Botts. The 1 percent dropoff from last year, ultimately, “wasn’t that much,” he said.

The SEC’s whistleblower program was created by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. Whistleblowers may file tips anonymously, and employers are prohibited from retaliating against whistleblowers who provide information to the SEC. Since the inception of the program, the SEC has received more than 30,000 tips.

Still more accomplishments

Also in FY2019, the SEC made its third all-time largest award since the program began: $37 million. The highest award, $50 million to joint claimants, was made in FY2018. The second highest award—$39 million—also was made in FY2018.

The most common complaint in FY2019 involved corporate disclosure and financials (21 percent), offering fraud (13 percent), and manipulation (10 percent). Coming in fourth were cryptocurrency tips (6 percent), followed by insider trading tips, trading and pricing tips, and Foreign Corrupt Practices Act tips.

Most tips came from California (546 in FY 2019), Pennsylvania (332), New York (290), Texas (245), and Florida (241), according to the report. The SEC also receives tips from whistleblowers located outside the United States. In FY2019, the most foreign tips were reported from Canada (71). Germany and the United Kingdom were next, tied at 44 each.

The whistleblower program’s continued international reach is a “very interesting trend” as indicated by “the number of tips (479) and a significant award of $500,000 to an overseas whistleblower,” observed Susan Resley, deputy practice leader of the securities enforcement and litigation practice at law firm Morgan Lewis.

Whistleblower awards are paid from the Investor Protection Fund, which is financed through monetary sanctions paid to the SEC by securities law violators. Since the beginning of the program, the SEC has awarded roughly $387 million to 67 people. Approximately 69 percent of award recipients have been current or former insiders of the entity about which they were whistleblowing. Of those, about 85 percent reported their concerns to their supervisors or compliance personnel or through internal reporting mechanisms or knew that their supervisors or compliance personnel were aware of the misconduct before the whistleblowers approached the Commission.

The slowness of the process

The SEC acknowledged in its report that “the time between the submission of a whistleblower tip and when an individual may receive payment of an award can be several years, particularly where the underlying investigation is especially complex, litigation is lengthy, there are multiple, competing award claims, or there are claims for related actions.”

The SEC is “taking steps to make whistleblower award determinations a bit quicker,” observed Matthew Stock, counsel at Zuckerman Law. Even so, he said, the delay in part “may also be a result of the limited resources of the SEC.” The SEC has had “a hiring freeze for quite a bit of time now,” Stock noted.

A $30 million cap on awards, or not?

In 2018, the SEC proposed some changes to its rules geared toward running the awards application process more efficiently.

That proposed rule change is not final yet and, indeed, has generated a bit of confusion regarding the size of certain rewards.

“Those proposed rules involve some common-sense changes to clarify and streamline the whistleblower process, but also includes some controversial changes, like giving the SEC more power to reduce awards that are on the high end of the range of awards,” observed John Berry, a partner at law firm Munger, Tolles & Olson and former SEC enforcement head.

The SEC wrote in its proposed changes the rules would authorize the Commission to adjust the award percentage to yield a payout “that does not exceed an amount that is reasonably necessary.” For large awards, “in no event would the award be adjusted below $30 million,” the SEC wrote. Some interpreted this verbiage to mean the SEC is imposing a $30 million cap.

“After the proposed amendments were issued, there were questions about whether the SEC was pulling back its support for the whistleblower program,” said Jina Choi, a partner at law firm Morrison & Foerster and a former director of the San Francisco Regional Office of the SEC.

“There’s been a lot of discussion around this,” observed Stock. He noted the whistleblower program came about “as a result of the financial crisis of 2008.” To that end, the legislation creating it was not so much intended to focus on small-scale fraud but “the really big frauds” à la Enron or WorldCom.

“Any barrier put into place, or additional discretion on the SEC’s part, is threatening people coming forward with those types of cases,” Stock said. After all, the people who know about big-time misdoing “a lot of times are high-level people who make a lot of money, and they would risk a lot by sending these tips to the SEC.”

SEC Chairman Jay Clayton acknowledged the aspect of the Commission’s proposal that “received significant attention” was its “proposed framework to guide the exercise of discretion by the Commission in the case of awards over $30 million.” In a statement released when the SEC announced its report to Congress, Clayton insisted that “the proposed provision was not a ‘cap,’ it could not and was not intended to operate as a ‘cap,’ and I do not support a cap.”

What about the CFTC?

The Commodity Futures Trading Commission’s report to Congress filed last month showed its whistleblower program, also established under the Dodd-Frank Act, fielded 455 tips, complaints, and referrals last fiscal year, down from 760 in FY2018.

The CFTC awarded more than $15 million to five whistleblowers in FY2019, a massive decrease from the more than $75 million awarded to five in FY2018. FY2018 was a banner year in terms of whistleblowing, though­—one of the awards accounted for some $30 million and was the largest ever awarded since the program was created in 2010.

Lori Tripoli is a writer based in the greater New York City area who focuses on legal and regulatory issues.