The SEC whistleblower rules require the SEC to pay awards to eligible whistleblowers who voluntarily provide the SEC with original information that leads to an enforcement action with monetary sanctions in excess of $1 million. A whistleblower may receive an award of between 10% and 30% of the monetary sanctions collected in the successful enforcement action.
Since the inception of the SEC Whistleblower Program, the SEC has received more than 52,400 whistleblower tips. The rules of the program permit whistleblowers to submit tips anonymously to the SEC if represented by an attorney. As of January 10, 2020, the SEC has awarded approximately $1.2 billion to whistleblowers. The largest SEC whistleblower awards to date are $114 million, $110 million and $50 million.
Prior to submitting a tip, whistleblowers should understand the SEC Whistleblower Program’s rules that govern the percentage of a potential whistleblower award. The rules include both positive and negative factors that the SEC considers when determining the appropriate award percentage of between 10% to 30% of the monetary sanctions collected in an enforcement action. Leveraging the SEC whistleblower rules effectively can potentially increase an award by millions of dollars.
Positive Factors That May Increase a Whistleblower’s Award
The SEC Whistleblower Program’s rules authorize the SEC to increase a whistleblower’s award based on several factors. Whistleblowers and their counsel can take concrete steps to leverage these factors, both before and after filing a tip with the SEC, to maximize an SEC whistleblower payout. The following four positive factors can significantly increase a whistleblower’s award share.
1. Participation in Internal Compliance Programs
When the SEC promulgated rules implementing the SEC Whistleblower Program, many companies cautioned that the program would undermine internal compliance programs by offering monetary awards to employees who reported externally to the SEC. In response to these concerns, the SEC included in the final rules an incentive to report internally. In particular, a whistleblower can recover a higher award if they report a violation internally (e.g., to a corporate ethics or compliance program) prior to reporting the violation to the SEC.
If a whistleblower initially reports internally, the whistleblower should submit the information to the SEC Office of the Whistleblower within 120 days to ensure that the date of the original internal report is deemed tantamount to simultaneously submitting the information to the SEC. Note, however, whistleblowers who are integral to a company’s compliance (e.g., an employee whose principal duties involve compliance or internal audit responsibilities) must wait 120 days after reporting internally before they can report to the SEC and be eligible for an award under the program.
2. Assistance Provided by the Whistleblower and Their Attorney
The SEC can increase the percentage of an award based on the degree of assistance provided by the whistleblower and if represented by counsel, the assistance provided by their attorney. The SEC will assess whether the whistleblower and their attorney provided ongoing, extensive and timely cooperation in the enforcement action.
3. Law Enforcement Interest
The SEC is more likely to pursue a whistleblower submission where the whistleblower has identified a violation that would promote the SEC’s enforcement priorities. According to the SEC Whistleblower Program’s FY 2021 Annual Report, the most common complaint categories reported by whistleblowers were Manipulation (25%), Corporate Disclosures and Financials (16%), Offering Fraud (16%), Trading and Pricing (6%), and Initial Coin Offerings and Cryptocurrencies (6%). If a whistleblower’s tip furthers an enforcement priority and results in a successful enforcement action, the SEC can increase the size of the whistleblower’s award.
4. Significance of the Information Provided by the Whistleblower
Since 2011, the SEC Office of the Whistleblower has received over 52,400 whistleblower tips. In order to grab the SEC’s attention as it reviews thousands of tips, whistleblowers should provide specific, credible and complete information regarding the alleged violation. For example, evidence that corporate officers precipitated the fraud will encourage the SEC to open an investigation. In addition, whistleblowers should provide the SEC with a clear roadmap for a successful enforcement action. A whistleblower who comes to the SEC with a solid case supported by strong evidence and a persuasive legal theory is likely to secure a substantial award percentage.
Providing documentary evidence to corroborate a violation will strengthen a whistleblower submission and increase the likelihood that the SEC will open a formal investigation. But whistleblowers should exercise caution and seek advice before gathering evidence. For example, disclosing privileged material can undermine an SEC investigation by forcing the recusal of SEC attorneys or investigators that saw the privileged material.
Negative Factors That May Decrease a Whistleblower’s Award
The SEC Whistleblower Program’s rules also authorize the Commission to decrease the percentage of a whistleblower’s award based on negative factors. Whistleblowers and their attorneys should take steps to avoid the SEC significantly reducing a future payout.
1. Unreasonable Reporting Delay
One of the largest SEC whistleblower awards to date could have been even larger. As noted in the SEC’s order determining the award claims, the SEC reduced the total award percentage because two of the whistleblowers “unreasonably delayed reporting the relevant facts to the Commission for an extended period of time.” The order explains that the SEC’s “rules seeks to incentivize individuals who are ‘aware of the relevant facts’ to promptly report ‘possible violation[s] of the federal securities laws.”
Based on a review of SEC orders determining award claims, an unreasonable delay in reporting is a common factor that has reduced many whistleblowers’ awards. This fact underscores why most whistleblowers should report misconduct to the SEC as soon as possible.
2. Culpability in the Misconduct
The SEC may reduce an award if the whistleblower was culpable or involved in the underlying misconduct, especially where the whistleblower substantially directed, planned or initiated the misconduct. But the SEC also understands that employees with first-hand knowledge of a fraud scheme can offer critical assistance in enabling the SEC to identify the perpetrators and halt the scheme.
As such, the SEC Whistleblower Program’s rules allow participants in misconduct to be eligible for an award in certain circumstances. The former Director of the SEC’s Division of Enforcement highlighted this rule in a September 2016 speech.
3. Interference with Internal Compliance and Reporting Systems
While the SEC may increase a whistleblower’s award percentage for reporting internally, the Commission can also decrease an award percentage if the whistleblower interferes with the company’s internal compliance or reporting system.
For example, the SEC can decrease a whistleblower’s awards if the whistleblower makes false statements or representations that hinder the company’s efforts to investigate the violation. As company management or the company’s Audit Committee may disclose the findings of an investigation to the SEC or other regulators, a whistleblower should get advice and come prepared to an interview conducted by corporate counsel.
