Amidst the flurry of Supreme Court decisions, new lawsuits, and other activity in the last few days, I have not yet had the chance to comment on a particularly important development earlier this week. That is, on March 19, 2018, the SEC announced the two largest whistleblower bounty awards in the history of its whistleblower bounty program. The value of the two awards to three whistleblowers, whose reports led to a $415 settlement with Merrill Lynch, totaled roughly $83 million. These awards are significant, and not just because of their size, as discussed below. The SEC’s March 19, 2018 press release about the awards can be found here, and the SEC’s heavily redacted March 19, 2018 Order Determining Whistleblower Award Claims can be found here.


In its March 19 press release, the SEC stated that two individuals will be equally sharing a nearly $50 million award and a third whistleblower was receiving more than $33 million. Both of these awards are larger than the agency’s previous largest award of $30 million. The awards are to be paid under the separate investor protection fund that Congress created in the Dodd-Frank Act. The fund itself is in turn funded by monetary sanctions paid to the SEC by securities law violators. In keeping with its prior practice, the agency took pains to protection the whistleblowers’ identities, avoiding the disclosure of information that might directly or indirectly.


The agency’s press release does not identify the violator or matter in connection with which the awards were being made. However, a March 19, 2018 press release by the Labaton Sucharow law firm (here) states that the firm represented the whistleblowers and identifies the target of the whistleblowers’ reports as Merrill Lynch. The awards specifically relate to a 2016 SEC enforcement action that found that Merrill Lynch had engaged in a series of complex trades between 2009 and 2012 designed to reduce the legally required amounts of customer cash the brokerage held in a reserve account, in order to free up billions of dollars that Merrill Lynch was then able to use for its proprietary trading.


As the SEC noted in its June 23, 2016 press release in which it reported that Merrill Lynch had agreed to pay $415 million and admit wrongdoing (here), the agency said that “Had Merrill Lynch failed in the midst of these trades, the firm’s customers would have been exposed to a massive shortfall in the reserve account.” According to the Wall Street Journal (here), the 2016 settlement with Merrill Lynch was the second-largest ever with a Wall Street bank.


There are a number of interesting features of the awards that are detailed in the agency’s heavily redacted March 19 order.


First, the agency noted that the two whistleblowers that are to share the $50 million award “provided original information” that led to “successful enforcement” of the enforcement action. Their initial information they provided was “specific and detailed” and served as the “cornerstone” of the agency’s subsequent investigation and enforcement action. The individuals also provided follow-up information in meetings, calls, and supplemental submissions.


Interestingly, while the award the individuals will share is the largest ever, it is not as large as it might have been; the agency reduced the amount of the award (although less than they might have, because the whistleblowers “unreasonably delayed in reporting their information to the Commission.”


Second, with respect to the whistleblower that received the more than $33 million award, the Order said, “provided information that was previously unknown to the staff handling the investigation” and triggered a second, separate investigation and contributed to the Commission’s “successful pursuit” of the subsequent enforcement action.


Third, apparently these three were not the only whistleblowers making reports. There were several other whistleblowers involved, but the agency determined that these individuals were entitled to awards. The information they provided did not lead to the successful enforcement nor did it cause the Commission to commence an examination, open or reopen and investigation, or to inquire into different conduct that was not already under investigation. The whistleblowers reported only “very generally and in vague terms problems at the company” and the information was “duplicative of information” already received. The agency considered and rejected the whistleblowers argument that the agency should adopt “a more flexible or lax standard in determining whether a claimant’s original information” led to the success of an enforcement action.


In its press release about the latest record whistleblower awards, the agency noted that whistleblowers can provide “incredibly significant information” that can help the agency address serious violations. The agency also noted that since 2012 it has made a total of more than $262 million in awards to 53 whistleblowers. The press release also includes a statement from the head of the SEC’s whistleblower office saying “We hope these awards encourage others with specific, high-quality information regarding securities laws violations to step forward and report it to the SEC.”


The involvement of the Labaton law firm on behalf of the whistleblowers received separate media attention. A March 20, 2018 New York Times article profiled Jordan A. Thomas, a Labaton attorney who came to the firm from the SEC, where he helped create the SEC’s whistleblower program. Among other things, the article says that the based on the awards the law firm could “pocket more than $25 million,” with Thomas himself “personally reaping a significant slice of that.” The article says that the firm helps guide whistleblowers and to reassure them about the process. The article reports that the SEC is still investigating another 27 whistleblower submissions from Mr. Thomas’s clients.



The sheer size of these latest awards is enough to get your attention. But in thinking about the significance of the awards, there is one additional consideration that needs to be added to the mix, and that is the U.S. Supreme Court’s February 21, 2018 decision in the Digital Realty Trust, Inc. v. Somers, in which (as discussed in detail here) the Court held that the Dodd-Frank Act’s whistleblower protection provisions (protecting whistleblowers against retaliation) extend only to whistleblowers who report to the SEC, and not to internal whistleblowers.


The upshot of the Supreme Court’s decision is that whistleblowers concerned about their job security and financial interests are now much more likely to make their reports first to the SEC rather than through internal channels. The SEC’s latest largest-ever whistleblower awards underscore the financial incentives that whistleblowers have to report to SEC, in addition to the practical considerations of anti-retaliation protection.


The existence of law firms out there seeking to encourage, guide and advocate on behalf of whistleblowers provides a way for prospective whistleblowers to fully understand and consider their options before they reach out to the agency. The involvement of outside counsel undoubtedly provides prospective whistleblowers with a measure of reassurance as they consider whether or not to make a report. The fact that the attorney advisors could profit as well, perhaps handsomely, is a trade-off for the reassurance that counsel’s involvement undoubtedly would provide.


The point here is not just that it is now well-established beyond question that whistleblowers can reap significant financial rewards for making a report to the agency. The point is that in effect a cottage industry has sprung up to ease and assist whistleblowers. The existence of these mechanisms along with the availability of whistleblower protection only for those who make their reports to the SEC, in addition to the sheer magnitude of the financial rewards available, seem to likely to encourage many other whistleblowers to come forward.


The fact that the $50 million whistleblower award was not as large as it could have been merely underscores how significant whistleblower bounty awards might be. The SEC expressly stated that it hopes through its awards to encourage others to come forward. The possibility of reaping these kinds of financial rewards seems likely to encourage others.


In its most recent annual report of its whistleblower program (discussed in detail here), the SEC reported among other things that the number of whistleblower reports it has received has grown every fiscal year during the program’s assistance. The recent record-breaking awards seem likely to encourage and reinforce this trend. Significantly, the agency reported that the agency has ordered wrongdoers in enforcement matters involving whistleblower information to pay over $975 million  in total monetary sanctions, including more than $671 million in disgorgement of ill-gotten gains and interest, the majority of which has been (or will be) returned to harmed investors. Results of this kind suggest that the program will continue to receive strong support, even in the current administration.


The possibility of whistleblowers making reports to the SEC obviously is a serious risk management concern for all companies – and, it should be emphasized, not just public companies. The SEC’s recent enforcement action against Theranos was in effect a public service announcement that the securities laws apply to private companies. Accordingly, the possibility of a whistleblower report to the SEC is a concern for both private companies and public companies.


Anyone who is concerned about the potential liabilities of companies and their executives will want to be aware of the whistleblower program’s growing momentum. The likelihood is that the whistleblower program is likely to be an increasingly important part of the corporate liability landscape.