The Temple 10-Q
The SEC and CFTC whistleblower programs were created only in 2010 through the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act).
This article is the second in a series of four primers on the main legal regimes incentivizing and protecting whistleblowers who report fraud. This past spring, we published a primer on the False Claims Act (FCA) and we will follow today’s article with additional installments on the Commodity Futures Trading Commission (CFTC) and Internal Revenue Service (IRS) whistleblower programs. Both the FCA and IRS whistleblower program have been in place since the mid-1800s, but have recently experienced a resurgence after undergoing significant amendments. On the other hand, the SEC and CFTC whistleblower programs were created only in 2010 through the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act).
On balance, the FCA and three core whistleblower programs provide avenues through which individuals can report fraud occurring across a wide swath of industries. The number of whistleblower-initiated cases filed under the FCA and tips submitted to the whistleblower programs have reached unprecedented heights in recent years, as the public becomes more aware of the rewards and protections provided by the law. It has therefore become imperative for attorneys, potential whistleblowers, and potential defendants to become familiar with the applicable laws, their backgrounds, causes of action, available damages, and protections against retaliation. This four-part series combines perspectives from whistleblower and defense counsel to provide measured insight into each of the four main whistleblower regimes. In this second part, we discuss the SEC whistleblower program.
Background and Legislative History
In 2008, the United States’ economy was devastated by one of the most serious financial crises in the country’s history. In response, the government moved to increase oversight on the financial industry with the July 21, 2010, enactment of the Dodd-Frank Act. The SEC whistleblower program was created as part of this act.
On May 25, 2011, the SEC adopted final rules for the implementation of the program, which became effective on Aug. 12, 2011. It is modeled, in part, on the FCA and its IRS counterpart. The purpose of the SEC whistleblower program is to encourage internal whistleblowers to report the types of illegalities that contributed to the 2008 Recession, such as the massive Ponzi scheme run by Bernie Madoff-which many thought could have been thwarted had Madoff employees been incentivized to act.
Since its enactment, the SEC whistleblower program has grown each year. For example, in fiscal year 2012, the SEC’s Office of the Whistleblower received a whopping 3,001 tips. That number has ballooned even further to 5,200 in fiscal year 2018.
Fiscal year 2018 was also a record-breaking year for monetary recoveries, with the SEC program paying out $168 million to individual whistleblowers-more than the total amount awarded in all other years combined. Among these awards was a $50 million joint award to two individuals -the largest in the Program’s history.
Becoming an SEC Whistleblower and Obtaining a Whistleblower Award
An SEC whistleblower is any individual who “alone or jointly with others … provides the commission with information … relating to a possible violation of the federal securities laws (including any rules or regulations thereunder) that has occurred, is ongoing, or is about to occur.” A whistleblower must be an individual; companies do not qualify.
The program sets forth a detailed procedure for submitting whistleblower information. Unlike the FCA, an SEC whistleblower does not file a complaint in federal court. Instead, information is submitted directly to the SEC through a tip, complaint or referral (TCR) form. In a further departure from the FCA, SEC whistleblowers do not participate as a named party in enforcement actions resulting from the information they submit. In fact, many whistleblowers reap the benefit of the program’s anonymous reporting option, which allows for the submission of TCR forms through experienced counsel who then coordinate with the SEC on their behalf.
To be eligible for an award, the SEC must recover more than $1 million as a result of original information submitted by a whistleblower, meaning information that is not known to the government or that is not otherwise publicly available. A whistleblower can collect an award even if an SEC action already exists, so long as the additional information is original and significantly contributes to the SEC’s prosecution of that action.
An award can range from 10% to 30% of the amount the SEC collects. The SEC determines where a particular award falls within this range upon consideration of a variety of factors, including the significance of the whistleblower’s information to the investigation and the extent of the whistleblower’s assistance.
Protections Against Retaliation
Similar to the FCA, the SEC specifically prohibits retaliation against whistleblowers. Employers of whistleblowers may not discharge, demote, suspend, harass or in any way discriminate against an employee as a result of whistleblowing activities. The Dodd-Frank Act created a private right of action allowing whistleblowers to assert claims for retaliation and obtain damages arising from, including double back pay, reinstatement, attorney fees and costs.
The U.S. Supreme Court recently clarified the scope of the anti-retaliation provision in Digital Realty Trust v. Somers, 138 S. Ct. 767 (2018). Particularly relevant for our purposes, the Supreme Court held that the anti-retaliation provision extends only to those who report information to the SEC. Making an internal complaint not sufficient. While Somers was initially viewed by some as a victory for corporate clients because it limited the scope of potential whistleblowers, the practical effect suggests the opposite. Many commentators attribute the uptick of whistleblower complaints in 2018 to Somers because it encourages potential whistleblowers to go directly to the SEC rather than lodging an internal report.
In addition to barring retaliation, the SEC also prohibits any person or entity-not just an employer-from impeding an individual from “communicating directly with the [SEC] about a possible securities law violation.” In contrast to the statute’s anti-retaliation protections, which may be enforced by the SEC or whistleblowers themselves, violations of the reporting section may only be enforced through agency enforcement action.
The financial and securities markets are the lifeblood of the U.S. economy, relied upon by millions of people. Unfortunately, the complex nature of trading and other business practices make fraud difficult to detect. And even for those seeking to abide by the law, the absence of a sound internal compliance framework can allow concealed securities violations to carry on unhindered. The SEC whistleblower program was enacted to stop such misconduct, and its continued success will further fuel its already-rabid growth. As such, both employers and potential whistleblowers would be wise to fully understand the framework of this program.
Zac Arbitman is a senior associate and trial attorney at Youman & Caputo, where he represents whistleblowers in claims brought under state and federal False Claims Acts, various state whistleblower statutes, and the IRS, SEC, and CFTC whistleblower programs. He also dedicates a significant portion of his practice to representing catastrophic injury victims in cases involving medical malpractice, motor vehicle accidents, workplace injuries, premises liability, and product liability. Contact him at firstname.lastname@example.org