While the SEC’s Dodd-Frank whistleblower program has drawn significant attention, the fact is that the program has gotten off to a slow start. As of the end of the last fiscal year, the SEC had during the program’s history received a total of 10,193 whistleblower reports, but had made only 14 whistleblower awards. (Indeed, the agency had rejected more award requests – 19 – than awards given.) While the agency’s deliberate pace in making awards seems unchanged, the agency continues to make substantial awards and the aggregate value of the awards is gradually becoming quite considerable.
On July 17, 2015, the SEC announced yet another significant award, a $3 million award to a company insider whose information “helped the SEC crack a complex fraud.” Consistently with the law’s requirements, the agency did not disclose the name of the whistleblower or the company involved. The SEC’s July 17, 2015 press release can be found here. The redacted July 17, 2015 SEC Order determining the whistleblower award can be found here.
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.
According to the SEC’s press release, the most recent award is the third largest whistleblower bounty award in the program’s history. As discussed here, the agency made a $30 million award in 2014, and as discussed here, the agency made an award of more than $14 million in 2013.
The agency’s press release also states that since its 2011 inception, the whistleblower program has paid more than $50 million to 18 whistleblowers. Given that the agency had made 14 awards as of the end of the last fiscal year (on September 30, 2014), the inference is that agency has made only four awards so far during the nine-and-one-half months of the current fiscal year, which began on October 1, 2014.
The press release does not contain any specifics regarding the nature of the scheme that the whistleblower uncovered nor does it say who the scheme targeted. However, the press release does say that the whistleblower’s “specific and detailed” information “comprehensively laid out the fraudulent scheme” that “otherwise would have been very difficult for investigators to detect.” The whistleblower’s tip “also led to related actions that increased the whistleblower’s award.”
Interestingly, in a footnote, the agency’s order determining the award says that “due consideration was given to Claimant’s unreasonable delay in reporting illegal conduct to the Commission, although we have not applied this factor as severely here as we otherwise might have done had the delay occurred entirely after the whistleblower award program was established by [the Dodd-Frank Act].”
The whistleblower awards are not funded by the amount of the agency’s recovery, but rather out of the Investor Protection Fund that Congress created to finance the Dodd-Frank whistleblower bounty awards. As of the end of the last fiscal year, the fund contained $437.8 million, so there are no resource constraints on the agency’s awarding whistleblower bounties.
There is no reason to question the statement in the press release of the agency’s enforcement division head that “the SEC’s whistleblower program continues to be profoundly effective in helping us protect investors and hold wrongdoers accountable.” Just the same, though the agency continues to receive numerous whistleblower reports, and though the agency has ample funds to finance bounty awards, the agency’s actual making of awards continues to reflect a very deliberate process and a very gradual approach overall to the program. Because of this deliberate approach, the program arguably has not had as significant of an impact as it seemed like it might when first instituted and the program’s potential deterrent effects arguably have been moderated.
The SEC Office of the Whistleblower’s report at the end of the 2014 fiscal year is reviewed here.
SEC Chair Responds to Senator Warren: Regular readers likely will recall that last month Senator Elizabeth Warren sent a public letter to SEC Chair Mary Jo White in which Warren blasted the agency Chair and criticized White’s performance at the agency. According to a July 10, 2015 Wall Street Journal article (here), White has now responded with a letter of her own back to the Senator, defending the agency and her own tenure at the SEC’s Chair. (I have been unable to obtain a copy of the actual letter that SEC Chair White sent to the Senator; it does not appear to be posted on the agency’s website. I would be grateful if any reader who can provide me with a copy of the letter would send it along to me so that I can link to it here. UPDATE: H/T Bruce Carton’s Securities Docket, here is a link to White’s letter.
According to the Journal, the letter “denied the agency had been soft in punishing wrongdoers, saying the commission brought a record number of enforcement cases—as well as a record amount of fines—in the most recently completed fiscal year.” The letter also defended the agency’s rulemaking record, although the Journal article itself notes that as a result of partisan divides at the agency, ”in 2014, Ms. White’s first full year at the helm, the agency voted to complete seven rules, compared with an average of nearly 17 each year in the preceding decade.” That record has, according to the Journal, “opened Ms. White to criticism over her leadership, particularly from Senate lawmakers who say postcrisis rules are advancing too slowly.”
Among other things, White’s letter reportedly responds to Warren’s criticism that the agency has been slow to implement the new policy requiring wrongdoing admissions as a part of enforcement action settlements. The Journal quotes her letter as saying that “Our record implementing the new admissions policy has been strong and the protocol continues to evolve and grow,” Ms. White said, adding that she participated in more enforcement matters than any of the other commissioners during her first full year as chairman.
U.S. Chamber of Commerce Urges Reform of SEC’s Use of Administrative Judges: The SEC’s use of its in-house administrative tribunals has recently drawn significant criticism, and the practice has been challenged in court. Now, a major business group has stepped forward to criticize the agency’s practices.
In a July 15, 2015 press release (here), the U.S. Chamber of Commerce’s Center for Capital Markets Competitiveness released a detailed report examining the SEC’s enforcement practices and providing recommendations to “improve” the agencies enforcement procedures. The Chamber’s report can be found here.
The Chamber’s report is interesting in a number of respects, but a particular noteworthy feature of the report is it express call for the SEC’s to overhaul the agency’s use of its in-house administrative tribunals. The report says that the agency’s shift to an increased use of the administrative tribunals “raises serious fairness issues.” The report proposes an overhaul of the administrative tribunals’ procedural rules and for restriction of the tribunals’ use in more complex cases. The report also proposes that defendants charged with serious offenses the right to request a trial by jury in federal court.
The Wall Street Journal’s July 15, 2015 article about the report (here) quotes the head of the SEC enforcement division as saying that the recommendations in the report “would significantly weaken the Commission’s ability to protect investors through strong and effective enforcement of the federal securities laws.”
A Nifty New D&O Gadget: During my recent visit to Munich, I was introduced to a nifty new D&O app that Munich Re has developed, called the D&O Scout. The D&O Scout is an application that is downloadable onto iOS and Android powered tablets. (It is not yet available for phones.) It has interactive features that facilitate inquiries about D&O insurance, about policy terms and conditions, and about program structure. It is a very cool little gadget. Information about the D&O Scout can be found here and the app can be downloaded from the Apple App Store here. Download the app and check it out.