The United States Securities and Exchange Commission recently released its 2015 Annual Report to Congress on the Dodd-Frank Whistleblower Program, highlighting some of the major trends and issues for 2015 and giving employers some guidance for what to keep an eye on in 2016.
By way of brief background, the Dodd-Frank Act, which amended the Securities Exchange Act of 1934, allows the SEC to make monetary awards to whistleblowers who provide information resulting in monetary sanctions of over $1 million against a company for Securities violation. Awards to the individual are required to be made in an amount equal to 10 to 30% of the monetary sanctions collected, which strongly incentivizes such whistleblowing, and has likely contributed to the rise in “tips,” as discussed below. Cases in which whistleblowers receive awards vary widely. As the Report states, “[s]everal of the cases in which a whistleblower received an award concerned firms involved in the financial services industry, with some involving broker-dealers or financial advisers. A number of the award recipients reported information to the Commission concerning suspected Ponzi-like schemes. Other award recipients provided tips to the commission relating to false or misleading statements in a company’s offering memoranda or marketing materials, false pricing information, among other types of misconduct.” The most common categories of information reported to the SEC by whistleblowers included Corporate Disclosures and Financials (17.5%), Offering Fraud (15.6%), and Manipulation (12.3%).
As the Report indicates, whistleblower activity is on the rise. In FY 2015, the number of whistleblower tips went up 30% to nearly 4,000 tips since 2012 when the SEC began tracking full-year data. The SEC attributes increased public awareness of the program to the substantial growth in number of whistleblower tips since the SEC’s new rules went into effect in 2011. It also helps that whistleblowers have been paid handsomely for the information they provide, the numbers are staggering, actually. In fact, this past year, one whistleblower received over $30 million in a single award (the SEC’s highest award yet). Indeed, many of these tips have led to substantial investigations that have resulted in the payment of $54 million to 22 whistleblowers since 2011. This past year alone, more than $37 million was paid to whistleblowers in cases where they led the SEC to recovering more than $1 million in monetary sanctions.
For employers, it is important to note that “to date, almost half of the award recipients were current or former employees of the company on which they reported information of wrongdoing.” Approximately 80% of those individuals complained internally to their supervisors or other appropriate personnel before taking their complaint to the SEC. So it is critical to have the proper internal complaint procedures and guidelines to resolve Securities-related complaints.
Review Company Policies
Employers should be wary of having any company policies that violate the SEC mission to promote the disclosure of Securities violations. The Annual Report highlighted the SEC’s focus on employer’s use of confidentiality, severance, and other types of agreements that interfere in any way with an employee’s (or former employee’s) ability to freely report potential wrongdoing to the SEC without fear of retaliation or other adverse employment action. Notably in 2015, the SEC conducted its first enforcement action regarding a company policy that improperly restricted employees from providing information to the SEC. The Houston-based, global technology and engineering firm KBR Inc. at issue was charged with violating whistleblower protection Rule 21F-17 under the Dodd-Frank Act. The company required its employees who were witnesses to certain internal investigations to sign confidentiality statements restricting their disclosure of the information without prior approval from the company. By requiring its current and former employees to sign such agreements imposing pre-notification requirements before contacting the SEC, the company improperly discouraged employees from reporting violations to the SEC. The company agreed to pay $130,000 in penalties and to change their policy. As the SEC Whistleblower Chief has publicly made clear, the SEC will be taking aggressive enforcement efforts to discourage employers from having such unlawfully restrictive employee policies.
Employers should also be mindful of the anti-retaliation policies. Notably in 2015, the SEC announced a maximum whistleblower award payment of 30% of amounts collected in connection with the case of In the Matter of Paradigm Capital Management, Inc. and Candace King Weir, File No. 3-15930, where the whistleblower received over $600,000 for providing information that led to action by the SEC. The SEC determined that the whistleblower suffered unique hardships and retaliation as a result of providing information to the SEC. Employers should review their severance policies and other agreements to ensure that they are compliant with current laws and do not allow retaliatory conduct in response to lawful internal complaints.
Takeaway: In addition to steering clear of actual Securities violations, it’s clear from the trends observed by the SEC and the rise in whistleblower activity that employers should be increasingly mindful of appropriate company policies. The policies should deal appropriately with internal whistleblower complaints (anti-retaliation) and also not interfere in any way with an employee’s ability to complain internally or to the SEC or any other government agency.