In what is by far the largest whistleblower bounty award yet under the Dodd-Frank’s whistleblower provisions, the SEC on September 22, 2014 announced an award of between $30 and $35 million to a whistleblower who provided original information that led to a successful SEC enforcement action. In the SEC’s Order providing for the award (here), the name of the company against whom the report was made and the name of the award recipient are redacted. In addition to the sheer size of the award, there are a number of other interesting features about the award.
Section 922 of the Dodd-Frank Act created certain new whistleblower incentives and protections. The section directs the SEC to pay awards to whistleblowers that provide the Commission with original information about a securities law violation that lead to the successful SEC enforcement action resulting in monetary sanctions over $1 million. The size of the award may range from 10 % to 30% of the amount recovered in the enforcement action. The section also prohibits retaliation against whistleblowers. By law, the SEC protects the confidentiality of whistleblowers and does not disclose information that might directly or indirectly reveal a whistleblower’s identity.
The SEC announced its rules implementing the Dodd-Frank whistleblower provisions in May 2011, but until now there still have been relatively few awards. According to the SEC press release, there have been a total of only 14 awards so far (including nine so far in fiscal 2014, which ends next week.) Until this latest award announced on Monday, the largest previous award under the program had been the agency’s October 2013 award of $14 million (about which refer here).
The latest award is more than twice as large as the prior record award. The percentage awarded is redacted from the SEC’s Order, but the dollar figure is specified in the Order, which states that “given the monetary sanctions thus far collected, [the percentage awarded] should yield a total award of between $30 million and $35 million.” The amount awarded implies that the amount of the enforcement order was between $300 and $900 million dollars. However, there are clues in the SEC’s Order suggesting that the enforcement award was at the lower end of the range.
The Order states that in determining the amount of the award, the agency took into account the significance of the information provided and the law enforcement interests at issue. However, the whistleblower objected to the percentage of the award, arguing that it was lower than the percentage of other awards the agency has made. The Order acknowledges that a downward adjustment was made based on the whistleblower’s delay in making the report.
The Order refers to the whistleblowers “delay in reporting the violations, which under the circumstances we find unreasonable. The duration of the delay has been redacted, but the Order does say that during the period of the whistleblower’s delay in coming forward, “investors continued to suffer significant monetary injury that otherwise might have been avoided.” This discussion and the fact of the downward adjustment to the award percentage suggests that the percentage award was at the lower end of the range, which in turn suggests that the amount of the recovery from the target company was at the lower end of the conjectured range (that is, closer to $300 million).
One particularly interesting feature of this award is that the whistleblower is a foreign resident. According to the SEC’s press release this is the fourth whistleblower award to a resident of a foreign country, which the agency says “demonstrates the program’s international reach. “ The head of the SEC’s whistleblower office is quoted in the press release as saying that the award “shows the international breadth of our program as we effectively utilize valuable tips from anyone, anywhere to bring wrongdoers to justice.’” The whistleblower office head is also quoted as saying that “whistleblowers from all over the world should feel similarly incentivized to come forward with credible information about potential violations of the U.S. securities laws.” Neither the Order nor the press release says whether or not the company against which the report was made is a foreign domiciled company.
The fact that foreign residents have received whistleblower awards is in at least one respect not surprising. The SEC’s latest annual whistleblower report stated that nearly 12% of all whistleblower reports during fiscal 2013 were from non-U.S. residents. The size of this award seems likely to encourage others to come forward, both inside and outside the U.S. However, despite the size of this recent award, one factor that may discourage prospective non-U.S. whistleblowers is the recent holding of the Second Circuit (discussed here) in which the appellate court determined that the Dodd-Frank Act’s provisions protecting whistleblowers from retaliation do not apply to non-U.S. residents.
There is some irony in the number of whistleblower awards so far to foreign residents. That is, at least some other countries that have actively considered whether or not to have an active bounty system to provide monetary awards to whistleblowers have decided against it. As discussed here, the UK regulatory authorities recently rejected the idea.
There are several implications from this latest large award. The first is that this award, taken together with the $14 million award last October, shows that the agency is prepared to make some very large awards indeed. Which in turn seems likely to have the effect of encouraging others to come forward. Along the same lines, it now seems that while it has taken a while to get going, the likely will be more awards announced more frequently, which again could have the effect of encouraging prospective whistleblowers.
The second is that the whistleblower program is leading directly to significant enforcement activity. In the press release accompanying this award, an agency spokesperson is quoted as saying that in the absence of the whistleblower report the underlying fraud would have been very hard to detect. The inference is that the program is promoting additional enforcement activity.
What remains to be seen is the extent to which the whistleblower program and the increased enforcement activity will lead to increased follow-on civil litigation. There have been recent cases (refer for example here) where securities class action litigation has followed in the wake of whistleblower reports, but so far to my knowledge there have been no cases where a follow on civil lawsuit has followed after and because a whistleblower report to the SEC. Indeed, the SEC’s elaborate efforts to protect the identity of the whistleblower and the identity of the targeted company present impediments to this kind of litigation developing.
Nevertheless I think it is likely that the increased enforcement activity will lead to increased follow-on civil litigation, even if just as a result of the enforcement activity if not the whistleblower report itself. Before all is said and done the whistleblower provisions, could have a significant impact on the level of enforcement activity and on amount of civil litigation.
One final observation. The fact that this whistleblower was represented by a law firm – which published its own press release about this award – says something in and of itself. The law firm involvement clearly suggests a perception that there the whistleblower program represents a business opportunity. The involvement of counsel also suggests a way that follow-on litigation might still go forward notwithstanding the SEC’s efforts to protect the identity of whistleblowers.