Early last month, in a heavily censored report, the U.S. Securities and Exchange Commission (SEC) publicly announced an award of roughly half a million dollars to [redacted], who reported original information about [redacted] that occurred at [redacted] over the course of [redacted]. ((Press Release, U.S. Securities and Exchange Commission, Former Company Officer Earns Half-Million Dollar Whistleblower Award for Reporting Fraud Case to SEC (Mar. 2, 2015), http://www.sec.gov/news/pressrelease/2015-45.html#.VSKPhFxN1FI.)) Needless to say, the entire case remains shrouded in mystery.
Moreover, this announcement came just months after the Commission issued a report announcing a jaw-dropping $30 million award to another corporate do-gooder. ((Press Release, U.S. Securities and Exchange Commission, SEC Announces Largest-Ever Whistleblower Award (Sept. 22, 2014), http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370543011290#.VRhP7lxN1FJ)) Though the eight-figure award issued last fall was, and still is, the largest ever made under the SEC’s whistleblower program, the accompanying four-page report fails to provide any remotely serviceable information for other corporations, in-house counsel, compliance professionals, stockholders, or other would-be whistleblowers. ((Whistleblower Award Proceeding, Securities Exchange Act of 1934 Release No. 73174 (Sept. 22, 2014), available at http://www.sec.gov/rules/other/2014/34-73174.pdf.)) Last month’s award follows a similar pattern. Inquiring minds must instead find utility in knowing the whistleblower provided information that “allowed the Commission to discover a substantial and ongoing fraud that otherwise would have been very difficult to detect.” ((Id.))
Such a lack of transparency in the SEC’s whistleblower program is merely a consequence of well-intentioned federal law. Authorized by Congress under the Dodd-Frank Act, the whistleblower program purports to help the Commission minimize harm to investors, ensure integrity in the country’s capital markets, and hold accountable those responsible for securities violations. In doing so, the SEC pledges to protect the identities of whistleblowers to the fullest extent possible. This often results in bare-bones press releases devoid of any facts or information about the case that could possibly compromise a whistleblower’s anonymity. In the corporate compliance landscape, however, the SEC’s vow of silence might ultimately do more harm than good.
The SEC’s bounty program borrows much of its framework from similar provisions of the False Claims Act (FCA), a federal law passed in the midst of the American Civil War under the administration of President Abraham Lincoln. The FCA generally provides that individuals and companies are subjected to liability for defrauding the federal government. ((31 U.S.C. § 3729 (2015).)) Notably, the FCA also allows for qui tam actions, where private individuals, acting on behalf of the government, file suit and allege such fraudulent behavior. ((31 U.S.C. § 3730 (2015).)) These whistleblowers, known as “relators,” are eligible to receive anywhere from fifteen to thirty percent of the money recovered in a successful case. ((Id.)) Since the law was amended in 1986 to strengthen the statute and increase incentives for whistleblowers to bring qui tam actions, the frequency of these lawsuits has increased exponentially. ((Jill Fisch, Class Action Reform, QuiTam, and the Role of the Plaintiff, 60 LAW & CONTEMP. PROBS. 167, 185 (1997).)) More than $27 billion in taxpayer money has been recovered during that timespan. ((David Savage, Financial reform law includes big cash incentives for whistle-blowers, Los Angeles Times (July 23, 2010), http://articles.latimes.com/2010/jul/23/business/la-fi-reform-whistleblower-20100723.)) Last fiscal year, the Justice Department recovered nearly $6 billion in FCA cases, with whistleblowers receiving $435 million in qui tam cases specifically. ((Press Release, U.S. Department of Justice, Justice Department Recovers Nearly $6 Billion from False Claims Cases in Fiscal Year 2014 (Nov. 20, 2014), http://www.justice.gov/opa/pr/justice-department-recovers-nearly-6-billion-false-claims-act-cases-fiscal-year-2014.)) To be sure, the sheer volume of qui tam suits filed each year, as well as the billions of dollars recovered by the government, strongly suggests that bounty programs like the FCA are both valuable and effective.
Since its inception in 2011, the SEC’s Office of the Whistleblower has found its early efforts to be just as successful as those advanced under the FCA. Thousands of reports of possible wrongdoing have been submitted, and more than a dozen tips have led to successful enforcement actions by the SEC. ((Peter J. Henning, Tattletales Embraces as Whistle-Blower Programs Gain Support, The N.Y. Times (Dec. 1, 2014), http://dealbook.nytimes.com/2014/12/01/tattletales-embraced-as-whistle-blower-programs-gain-support/.)) In 2014 alone, the Commission received more than 3,500 whistleblower tips – a 20 percent increase over the previous year – and successfully pursued nine instances of whistleblower-reported securities violations. ((Josh Hicks, $30 million award to tipster underscores banner year for SEC whistleblower program, The Wash. Post (Nov. 19, 2014), http://www.washingtonpost.com/blogs/federal-eye/wp/2014/11/19/30-million-whistleblower-award-underscores-banner-year-for-sec-program/.))
By any measure, this level of enforcement is beneficial to the business community and individual investors alike. Active policing of fraudulent or otherwise illegal behavior in the securities markets should be applauded. Similarly, the SEC’s commitment to confidentiality and retaliation protection for whistleblowers has indisputable merit. It effectively incentivizes anyone with original information to come forward without fear of reprisal. Of course, the lure of a lucrative monetary award helps to sweeten the deal. The prospect of hitting the whistleblower jackpot is undoubtedly a factor in the proliferation of reports submitted to the SEC. In fact, the SEC has even gone so far as to ban at least one tipster from submitting more reports after he filed 196 claims, 195 of which lacked “even a superficial factual nexus to the covered actions.” ((Final Order, Preliminary Determination of the Claims Review Staff, U.S. Securities and Exchange Commission (May 12, 2014), available at https://www.sec.gov/about/offices/owb/orders/owb-multiple-final-051214.pdf.)) In reporting any successful enforcement action resulting from a whistleblower tip, the SEC practices an overwhelming degree of censorship. In the case of the record $30 million award authorized by the SEC last September, public knowledge of the incident is dramatically limited in scope. The Commission’s official report indicates that the whistleblower lives outside the United States, but fails to provide any other identifying personal information. What’s more, we know virtually nothing about the corporation or the unique circumstances of its violations in question. The public is left in dark when it comes to information that could actually prove helpful in the SEC’s broader mission of ensuring market integrity. Did the company have an internal reporting process in place? Was there an effective compliance program with policies that provided for training, auditing, and monitoring? Had the SEC disclosed even the most basic facts that speak to these issues, it seems likely that many stood to benefit, including compliance lawyers and professionals within other corporations, retail investors, and individuals who might possibly become whistleblowers themselves in the future. Although the SEC provides outstanding incentives to whistleblowers across the globe to come forward with novel information about securities violations, heavily redacted reports of the Commission’s resulting enforcement actions provide virtually no guidance to those who are actually capable of effecting meaningful change in the realm of corporate compliance.
This is not to suggest that whistleblowers should lose the cloak of anonymity that they currently receive under the Dodd-Frank Act. Yet remaining silent across the board seems counterproductive. It seems most prudent for the SEC to report enforcement actions under this program in a manner that more effectively functions to deter fraudulent behavior in the securities market – all the while protecting only the identity of the whistleblower. Successful prosecutions under the Dodd-Frank Act should set examples for other corporations that strive to encourage and maintain compliant behavior within their organization. By disclosing relevant facts about the case – yet maintaining the confidentiality of the whistleblower – the SEC can reasonably expect that other companies may use the information to catch fraud within their own ranks. They can encourage compliance programs to take decisive action and make meaningful changes to existing policies. Absent such an approach, it must ultimately be asked whether the SEC is doing all that it can to carry out its mission of protecting investors in an increasingly complex market.
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