There is big money flowing through the whistleblower program at the Securities and Exchange Commission (SEC), and the stakes are creating a significant increase in litigation.
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 created the Securities Whistleblower Incentives and Protection Program under section 21F. Section 21F directs the SEC to make monetary awards to eligible individuals who voluntarily provide original information that leads to successful SEC enforcement actions resulting in monetary sanctions over $1 million and successful related actions. Over the past seven years, the program trend shows continued growth and an emerging cottage industry in the legal arena.
Whistleblower Program a Success
As an enforcement tool, the program, according to Jane Norberg, chief of the SEC’s Office of the Whistleblower, has proven successful. In fiscal year 2017, the SEC reported its highest number of whistleblowing tips and second-highest total amount of awards in a single year. “[T]he value of the whistleblower program is exhibited most directly and importantly by the hundreds of millions of dollars returned to investors as a result of actionable information brought to the agency,” says Norberg. Since its beginning, the SEC has ordered wrongdoers in matters involving whistleblower information to pay over $975 million in monetary sanctions, including more than $671 million in disgorgement of “ill-gotten gains and interest, the majority of which has been, or is scheduled to be, returned to harmed investors.”
By the Numbers
According to the SEC’s 2017 Annual Whistleblower Report to Congress, the stark success of the program is further illustrated by the number and amount of awards over the previous year in addition to the program’s inception. “We’re very pleased with the progress of the program,” said Michael Kohn, co-founder and president of the National Whistleblower Center. In fiscal year 2017, the SEC ordered nearly $50 million in whistleblower awards to 12 individuals, and since its inception, the program has awarded roughly $160 million to 46 individuals who assisted the agency in bringing successful enforcement actions and related actions brought by non-SEC authorities. But three of the ten largest whistleblower awards were made by the Commission in 2017.
Another indicia of growth: over 4,400 whistleblower tips to the SEC; nearly a 50 percent increase since 2012, the first full-year of data. The most common types of allegations in 2017 were corporate disclosure and financials (19%), offering fraud (18%), and manipulation (12%). During fiscal year 2017, the highest number of complaints and tips were from California, New York, Texas, Florida, and New Jersey. In addition, tips were received from individuals located in 72 foreign countries and, since inception of the program, 114 different countries. These data points indicate a likely surge in program-related litigation.
With the increase in complaints and recoveries, some commentators question, nevertheless, how the program will fare under the Trump administration. “It’s too early to tell,” says Greg Keating of Choate Hall & Stewart. “I’d personally be surprised if they cut back on the program, but unpredictability has been a hallmark of this administration. It would not be in the best interests of the government to turn away from a program that has brought in close to $1 billion,” said Keating.
How It Works
While a company has a right to maintain the confidentiality of its proprietary information, the program encourages potential whistleblowers to provide the government confidential company information within their control. To enhance potential whistleblowing, the SEC regularly enforces its rule forbidding actions that may impede potential whistleblowers. According to section 21F, no action may be taken to impede an individual from communicating directly with the SEC staff about a possible securities law violation, including enforcing or threatening to enforce a confidentiality agreement with respect to such communications.
So who are these whistleblowers? Sixty-two percent of all award recipients to date were current or former company insiders, and almost 83 percent of those either raised their concerns within the company before reporting to the SEC or knew the company was otherwise aware of the issues before reporting violations to the SEC. The remaining recipients obtained their whistleblower-related information because they were victims of fraud, were professionals in a related industry, or had a relationship with the purported wrongdoer. Interestingly, almost 46 percent of award recipients did not have counsel when they submitted their tips to the SEC, and roughly, 19 percent filed anonymously.
Supreme Court Wades Into Retaliation Waters
The U.S. Supreme Court, on November 28, heard oral argument in Digital Realty Trust, Inc. v. Somers, on the issue of whether the whistleblower anti-retaliation provision of the Dodd-Frank Act covers individuals who have reported alleged misconduct directly to their employer, but not to the SEC and thus fall outside the Act’s definition of a whistleblower. A decision from the U.S. Supreme Court is expected around June 2018.
The case involves an employee who was terminated in 2014 for reporting internally that his supervisor had eliminated internal controls in violation of the Sarbanes-Oxley Act of 2002. The employee filed suit claiming that his termination constituted improper retaliation against a whistleblower under the Dodd-Frank Act. The SEC, in 2011, took the position that the Dodd-Frank Act whistleblower protection extends to individuals who disclose potential securities law violations internally to employers, as well as those who report directly to the SEC. The SEC reiterated its position in a 2015 rule, reasoning that this interpretation strengthened the “investor-protection and law-enforcement benefits that can result from internal reporting.”
The circuit courts have split over the proper interpretation of the anti-retaliation provision. The Ninth Circuit’s decision in Somers v. Digital Realty Trust Inc. held that section 21F “unambiguously and expressly protects from retaliation all those who report to the SEC and who report internally.” The Second Circuit in Berman v. Neo@Ogilvy LLC found that 21F is “sufficient[ly] ambiguous to warrant our deference to the SEC’s interpretive rule.” However, the Fifth Circuit in Asadi v. G.E. Energy (USA) LLC “reject[ed] the SEC’s expansive interpretation of the term ‘whistleblower’ for purposes of the whistleblower-protection provision,” holding that a potential whistleblower must report a violation to the SEC to receive protection under section 21F.
Statements and questions by the justices during argument suggest that the Court may hold that the Dodd-Frank Act’s anti-retaliation provision applies only to individuals who report alleged misconduct to the SEC. With the potential for a more restrictive view of the anti-retaliation provision on the horizon, companies’ internal compliance programs encouraging employees to report misconduct internally may fall by the wayside. Instead, employees will be encouraged to report misconduct directly to the SEC in order to obtain anti-retaliation protection as well as to potentially secure a piece of the ever-growing whistleblower pie. Regardless of the ultimate decision, whistleblower suits in size and volume will likely continue to increase.
Daniel S. Wittenberg is an associate editor for Litigation News.
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