On September 22, 2014 the Securities & Exchange Commission (SEC) announced that it would pay a Dodd-Frank Act (DFA) whistleblower award of $30 to $35 million to an anonymous foreign tipster. DFA authorizes awards of 10% to 30% of the SEC’s recovery if the tip leads to an SEC enforcement action with sanctions exceeding $1 million. This latest reported award is more than the reported $14 million to a whistleblower in 2013. The award would have been even larger, but the SEC reduced it because the whistleblower delayed before reporting the tip.
The sheer size of the award increases concern that employees will have enormous incentive to bypass internal reporting processes, and will instead prompt them to direct their concerns to the SEC in the hope of a “jackpot” award. That incentive risks weakening the effectiveness of a company’s internal reporting processes and makes it more difficult to identify, prevent or correct problems. Also, this well-publicized large award increases the incentive for employees to make more numerous and frequent anonymous claims to the SEC, even based on weak, exaggerated or meritless grounds, as if playing the lottery. The fact that the SEC penalized the whistleblower in this case for delay only increases the risk that employees will go to the SEC at the first sign of anything they hope might become a basis for a lucrative “tip.” The downside is that companies will have to devote more time and resources to responding to what likely will be an ever-growing volume of SEC inquiries and investigations.
For organizations with overseas operations or subsidiaries, this award to a foreign whistleblower is significant. Indeed, the SEC’s reasoning for the award seems in tension with the Second Circuit’s recent ruling that the DFA’s anti-retaliation provisions do not protect foreign whistleblowers employed outside the United States. The SEC contends that the DFA’s whistleblower award provisions are different from the anti-retaliation provisions, and that it can make a whistleblower award even though the whistleblower is a foreign national who resides overseas, the information was submitted from overseas, and the alleged misconduct occurred entirely overseas. The SEC posits that it can make an award whenever the whistleblower’s information leads to a successful SEC enforcement action based on the alleged violations of U.S. Securities laws as raised by the tipster. Notably, “successful enforcement” includes SEC investigations that are settled — as most are — involving claims not fully adjudicated by any court.
This ongoing trend in DFA-whistleblower awards should prompt organizations to review and bolster their internal processes to aggressively detect and correct any conduct that could later ripen into an alleged securities law violation. Internal monitoring, controls, and auditing are increasing important given that passively waiting for employees to report possible wrongdoing is no longer sufficient. In short, organizations must aggressively seek and correct wrongdoing with the assumption that, in this jackpot-like environment, employees are now clearly incented to report matters to the SEC rather than internally.