[Editor’s Note: The following post is authored by Goodwin Procter LLP]
On June 12, 2013, the U.S. Securities & Exchange Commission announced its second-ever whistleblower award under the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”). Having received over 3,000 whistleblower tips in the first year of the revamped program, the SEC made its first whistleblower award in August of 2012 and is expected to issue an increasing number of awards in the coming months.
Among other things, Dodd-Frank provides a direct mechanism for whistleblower complaints to the SEC and enhanced protection for eligible whistleblowers who come forward and cooperate in SEC investigations and proceedings involving the corporation that employs them. Dodd-Frank also authorized the SEC to provide incentives in the form of financial awards to eligible whistleblowers who voluntarily provide the SEC with original information about a violation of federal securities laws that leads to successful enforcement proceedings — 10 to 30 percent for penalties collected over $1 million. Particularly in light of the recent awards and the expected uptick in the coming months, companies that fail to take appropriate steps to respond to the increased risks associated with the program could pay a steep price.
The Second Wave of Rewards
Earlier this month, the SEC announced that it will present Dodd-Frank whistleblower awards to three individuals. Without naming the whistleblowers, the SEC announced that these three individuals will receive 5 percent of any sanctions the SEC will collect from its enforcement action against Locust Offshore Management LLC and its CEO Andrey C. Hicks, which is currently pending in Massachusetts federal court.
The SEC indicated that two of the whistleblowers provided the information that triggered the investigation, while the third provided confirmatory evidence. The actual amount each whistleblower will receive is unclear. While it has not yet collected any of the $7.5 million judgment in the Locust case, the SEC has indicated that the whistleblowers may apply for an allocation from the $800,000 collected by the Department of Justice in the companion criminal case.
Recent comments made by SEC staff suggest that these three awards are just the first of many to come. Stephen Cohen, Associate Director of the SEC’s Division of Enforcement, recently commented on the future of whistleblower program at a Corporate Crime Reporter conference. Mr. Cohen indicated that the program will produce “incredibly impactful cases” including some with “some extremely significant whistleblower awards.” Mr. Cohen went on to add, “[t]here will be a likely change in the discussion about the magnitude of some of these awards over the next six to twelve months.”
The Whistleblower Pipeline
The comments noted above are not surprising given the results discussed in the SEC’s Annual Report on the Dodd-Frank Whistleblower Program for fiscal year 2012, which was released in November 2012. In the report, the SEC stated that it had received 3,001 whistleblower tips for the fiscal year ending on September 30, 2012.
As was the case in 2011, the year the program was launched, the largest four categories of whistleblower tips involved allegations related to corporate disclosure and financials, offering fraud, manipulation and insider trading. The remaining tips involved a wide variety of other allegations, including FCPA violations, trading and pricing violations, unregistered offerings, and municipal securities and public pension violations.
The states with the largest number of whistleblower tips were California (14.5%), New York (8.2%), Florida (6.7%) and Texas (5.3%) with all other states accounting for 48.8% of the total. Over 10% of the whistleblower tips during the first year of the Dodd-Frank whistleblower program originated outside the United States. The largest number of international tips came from the United Kingdom, followed by Canada and India.
While the extraterritorial reach of the program’s provisions is not a settled issue, these complaints at least make clear that employees of United States companies operating in foreign jurisdictions are also aware of the SEC’s rising enforcement activity and increased protections and incentives for employees who report violations at their companies.
While it is still unclear exactly how many of these tips will ultimately result in investigations or prosecutions, the expansion of the whistleblower program is expected to lead to an increase in the SEC’s already active enforcement in a variety of areas — including accounting fraud, insider trading and the FCPA. The incentives for whistleblowers to report violations follow increased enforcement efforts by the SEC over the past several years in an expanding array of areas.
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