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Proskauer Whistleblower Defense

SEC Annual Report: Thousands of Tips, One Award & Minimal Transparency

Posted in SEC

SEC LogoIn its Annual Report on the Dodd-Frank Whistleblower Program (Report), the SEC has revealed that it has received 3,001 tips during its 2012 fiscal year (the first year of this program), and it paid out its first award to a whistleblower in 2012.

Pursuant to Section 922 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) the whistleblower bounty program directs the SEC to make monetary awards to individuals who voluntarily provide original information that leads to successful enforcement actions resulting in the imposition of monetary sanctions over $1 million.  Whistleblowers can receive awards of between 10% to 30% of the monetary sanctions collected (the percentage of the recovery is left to the SEC’s discretion).

Activities of the Office of the Whistleblower

During Fiscal Year 2012, the Office of the Whistleblower activities included:

  • Communicating with whistleblowers who sent tips and information, and claims for bounties;
  • Reviewing and processing applications for bounties;
  • Working to assist in the documentation of whistleblowers’ information and cooperation in anticipation of an eventual bounty claims;
  • Manning a whistleblower hotline for the public to call with questions about the program;
  • Reviewing and entering whistleblower tips received by mail and fax into the Commission’s Tips, Complaints, and Referrals System; and
  • Providing guidance to SEC staff regarding various aspects of the program.

Whistleblower Tips and the First Whistleblower Award

As noted, in Fiscal Year 2012, the SEC received 3,001 whistleblower tips, and has paid out one award.  More specifically, on August 21, 2012, a whistleblower who apparently had helped the SEC stop an ongoing multi-million dollar fraud received an award of 30% of the amount collected in the SEC’s enforcement action against perpetrators of the scheme—the maximum percentage payout allowed under Dodd-Frank.  The bounty recipient submitted a tip and then provided documents and other information that allowed the SEC to investigate the tip, which ultimately led to the filing of an emergency action in federal court to prevent the defendants from continuing their fraudulent scheme and deceiving additional victims.  The court ordered the perpetrators of the fraud to pay over $1 million in sanctions, of which approximately $150,000 had been collected by the SEC thus far.  The SEC has reported that it paid out a bounty of  “approximately $50,000″ and disclosed that additional collections or increase in the sanctions ordered “will increase the amount paid to the whistleblower.”  The SEC Orders can be accessed here and here.

The SEC Received Tips From Around the Globe

The most common complaint categories reported by whistleblowers were Corporate Disclosures and Financials (18.2%), Offering Fraud (15.5%), and Manipulation (15.2%).  In addition, the Commission received whistleblower submissions from individuals in all 50 states, the District of Columbia and Puerto Rico, as well as 49 countries outside the United States.  The states with the most whistleblower complaints were California (435 complaints), New York (246 complaints), Florida (202 complaints) and Texas (159 complaints).  Of the complaints made outside the U.S., the countries with the most complaints were the United Kingdom (74 complaints), Canada (46 complaints), India (33 complaints), China (27 complaints), and Australia (21 complaints).

Lack of Transparency Concerning The Bounty

While, in its annual report, the SEC reported on the categories of complaints that were made and identified the geographic locations from which tips were reported, the SEC has revealed strikingly little information about the single award that was made.  Inquiring minds want to know:

  • What were the other specific factors that led the SEC to conclude that the maximum bounty percentage was warranted?
  • Did the whistleblower report internally first?
  • What was the particular type of fraud that was perpetrated or the location in which it occurred?
  • What was the monetary value of the fraud?

This lack of transparency is concerning for employers who want to encourage employees to report internally so that prompt investigations can be conducted and take account of all relevant data that will enable them to ferret out fraud and appropriately respond to whistleblower reports on a timely basis.