According to the latest annual report from the SEC’s Office of the Whistleblower, the number of whistleblower reports and the total value of whistleblower awards continued at elevated levels during fiscal 2019 (which ended September 30, 2019). Though the reports and awards remained high during the fiscal year, both were down relative to the prior fiscal year. And while the aggregate award values and even several individual awards during the fiscal year are impressive, the small number of awards relative to the vast numbers of whistleblower reports is noteworthy and striking, as is discussed further below. The Office of the Whistleblower’s November 15, 2019 report can be found here.
Background regarding the SEC Whistleblower Program
Section 922 of the Dodd-Frank Act created the SEC’s whistleblower program. The statute specifically provided that he Commission shall pay awards to eligible whistleblowers who provide the SEC with original information that leads to a successful enforcement action leading to recoveries over $1 million. The award amount is required to be between 10 percent and 30 percent of the total monetary sanctions collected in the Commission’s action. The SEC’s implementing rules went into effect in August 2011.
Statistics Regarding the Number and Type of Whistleblower Reports During FY 2019
During FY 2019, the Office of the Whistleblower received 5,212 whistleblower reports, which represents the second-highest annual number of reports since the program’s inception. While the 2019 total number of whistleblower reports is significantly higher than the annual total for all years other than FY 2018, the 2019 total does represent a slight decline (about 1.3%) compared to the 5,282 reports in FY 2018.
The slight decline in FY 2019 compared to FY 2018 represents the first year-over-year decline in the number of reports during the program’s existence – although, it should also be noted, that between FY 2012 (the program’s first full year) and FY 2019, the annual number of reports increased by about 74 percent.
During fiscal year 2019, the most common complaint categories reported by whistleblowers were Corporate Disclosures and Financials (21 percent); Offering Fraud (13 percent) and Manipulation (10 percent). Interestingly, there were 289 Crypto Currency-related whistleblower reports (or about 5.5% of the total). There were 200 Foreign Corrupt Practices Act (FCPA) related whistleblower reports, representing about 3.9% of the total.
The whistleblower reports during the 2019 fiscal year were submitted from all 50 U.S. states (including also the District of Columbia and Puerto Rico) as well as from 70 foreign countries. During the program’s life, the Commission has received reports from 123 countries outside the United States.
During FY 2019, the U.S. states with the most whistleblower reports were California (546 reports, or about 10.5% of all reports); Pennsylvania (332, or 6.3%); New York (290, or 5.5%); Texas (245, or 4.7 percent); and Florida (241, or 4.65). These top five states collectively were responsible for a total of 1,654 whistleblower reports during the fiscal year, or about 31.7% of all reports in FY 2019.
Reports from whistleblowers outside of the United States represented about 9 percent of all FY 2019 whistleblower reports. The countries with the most whistleblower reports were Canada (71); Germany and United Kingdom (both with 44); China (32); Australia (28); and India (27).
Statistics Regarding the Whistleblower Awards during FY 2019 and During the Program’s Life
According to the report, during FY 2019, the agency awarded a total of approximately $60 million to eight individuals. The eight awards during FY 2019 included the third largest award ever during the program’s history. As discussed here, in March 2019, the Commission announced awards totaling $50 million to two whistleblowers whose information assisted the agency in bringing a successful enforcement action, including an award of $37 million to one of the two individuals.
Three of the award recipients in FY 2019 were located abroad or reported conduct that was occurring abroad, “demonstrating the international reach of the program.”
The eight awards totaling $60 million in FY 2019 compares to 13 awards totaling $168 million during FY 2018. The 2018 awards included the two largest awards in the program’s history.
During the life of the program, the Commission has awarded a total of approximately $387 million to 67 individuals. According to the report, as a result of whistleblower reports, the agency has ordered wrongdoers in enforcement matters brought with information from “meritorious whistleblowers” to pay “over $2 billion in total monetary sanctions, including more than $1 billion in disgorgement of ill-gotten gains and interest, of which almost $500 million has been, or is scheduled to be, returned to harmed investors.”
Profile of Award Recipients
The report contains an interesting description of the characteristics of the successful award recipients. The report notes that of the award recipients, about 68 percent provided original information that caused the staff to open an investigation or examination, and 32 percent received awards because their information contributed toward an already-existing investigation or examination.
While there is no requirement that an individual be an employee or company insider to receive an award, about 69 percent of award recipient were current or former insiders of the entity about which they reported to the SEC. Of these, about 85 percent had raised their concerns internally within their companies. (As discussed here, the agency recently took steps to emphasize that the whistleblower laws and protections do not just extend to employees.)
In addition to current or former employees, award recipients included investors who had been the victims of fraud, professionals working in the same or related industries, or other types of outsiders, such as individuals who had a personal relationship with the wrongdoer or individuals who have a special expertise in the market.
The Importance of the Whistleblower Anti-Retaliation Provisions
Within the report is a separate section in which the agency underscored the importance to the program of the Dodd-Frank Act’s anti-retaliation provisions. As the report notes, “retaliation protection remains a key tenet of the whistleblower program.” The agency’s Whistleblower Office “continues to support enforcement investigations where retaliation occurred after the whistleblower reported securities violations to the Commission.”
Both the number of whistleblower reports and the magnitude of whistleblower reports remained at elevated levels during FY 2019. It is worth noting that the number of reports, the number of awards, and the total value of the awards were down in FY 2019 compared to FY 2018. However, though these figures were down in FY 2019 compared to FY 2018, all were up compared to the prior years.
The agency is quite correct to tout the very impressive totals involved with the magnitude of the whistleblower awards. However, in reading the report, I was struck by a remarkable contrast. There seems like a huge disconnection between the vast number of reports (5,212 during FY 2019) and the relatively small number of awards (eight during FY 2019).
By my calculation, during the life of the program (including the relatively brief period that the program was effective during FY 2011), there have been a total of 33,312 whistleblower reports to the agency. While this number is very impressive, it stands in jarring contrast to the total of only 67 individual awards that the agency had made during the life of the program. In other words, only about 0.2% of all reports to the agency have actually resulted in an award.
The very low number of awards relative to the massive number of reports does raise some questions. What does the low award rate mean? Is most of the information that comes into the agency from the whistleblower reports low quality? Is it duplicative of information that the agency already has from other sources? Or is there something wrong with the process? The agency has long been criticized for its slow, cumbersome and bureaucratic process for making awards – as much as the agency has awarded, should it making more awards and making them sooner?
And when I look at the fact that of the total number of reports the agency has received 99.98 percent have not resulted in awards makes me wonder whether this program is really worth it. Sure seems like a lot of activity, almost all of it not to the purpose.
Is it time we had a dialog about this program? Maybe it is. The agency itself has some proposed rules changes pending. Some of these supposedly are calculated to try to streamline the award process. However, the proposed rules themselves have also been criticized; among other things, the revisions’ proposed $30 million award cap has been criticized in a number of quarters for dis-incentivizing would-be whistleblowers.
The one thing I will say is the agency was very right to emphasize in its report the importance of the Dodd-Frank Act’s whistleblower anti-retaliation provisions. As events in other quarters have recently show, the first thing that the targets of a whistleblower report will do upon learning of the report is to try to identify the whistleblower, and the next thing they will do if they are able to identify the whistleblower is to try to rip the whistleblower to shreds (this long-standing pattern of whistleblower retaliation was one of the important topics I noted in my review of the recent prominent book about whistleblowing in our economy, our society, and our culture).
In any event, the low number of awards relative to the vast numbers of reports is a subject that I think warrants further discussion. At a minimum, the extremely low success ratio seems to suggest that making a successful report is almost like having a winning lottery ticket. Which in turn almost suggests a kind of randomness. Whatever the case may be, I think the very low success rate is something that should be discussed.
Upcoming Global D&O Event: On December 3, 2019, I will be participating as a panelist in a Chubb Agency Education event entitled “Impact of Global Litigation Trends on Multinational D&O Insurance.” I will be joined on the panel by my good friends Perry Granof, of Granof International LLC, and David Williams, of Chubb. Among other things, the webinar will address the global rise of collective investor actions; the rise of cross-border regulatory collaboration; and the significance of third-party litigation funding. The hour-long session will begin at 2:00 pm EST and is free and open to readers of The D&O Diary. For more information and to register, please refer here.
And Finally: If you have not seen it, the current issue of The New Yorker has a very interesting and perceptive article about U.S. Supreme Court Justice Elena Kagan entitled “Is the Supreme Court’s Fate in Elena Kagan’s Hands?” (here).