The Securities and Exchange Commission (SEC) recently released its annual whistleblower report. The report comes as the U.S. Supreme Court is set to decide who is protected as a whistleblower under the Dodd-Frank Act in Digital Realty Trust v. Somers.
Key Takeaways from SEC’s 2017 Whistleblower Report
The SEC’s whistleblower program, which was first launched in 2011, provides a monetary incentive to corporate insiders and others with relevant information concerning potential securities violations to report their information to the Commission. Those who provide high-quality, original information that results in an SEC enforcement action with sanctions exceeding $1 million are eligible for awards ranging from 10 percent to 30 percent of the money collected by the agency.
Since the beginning of the program, wrongdoers in enforcement matters involving whistleblower information have been ordered by the SEC to pay over $975 million in total monetary sanctions, including more than $671 million in disgorgement of ill-gotten gains and interest. The SEC’s 2017 whistleblower report reveals several interesting trends that can help businesses improve their securities compliance strategies. Below is a brief summary:
- Awards: In total, the SEC ordered whistleblower awards totaling nearly $50 million to 12 individuals in FY2017. The largest was an award of more than $20 million to a whistleblower who “promptly came forward with valuable information that enabled the SEC to quickly initiate an enforcement action against wrongdoers before they could squander the money, leading to a near total recovery of investor funds.”
- Whistleblower Profile: About 62 percent of the award recipients to date were current or former insiders of the entity about which they reported information of wrongdoing to the SEC. Almost 83 percent of the award recipients who were current or former employees of a subject entity raised their concerns internally to their supervisors, compliance personnel, or through internal reporting mechanisms, or understood that their supervisor or relevant compliance personnel knew of the violations, prior to reporting their information of wrongdoing to the SEC.
- Defendants: 47 percent of the defendants in cases resulting in whistleblower awards were individuals. Meanwhile, unregistered entities and companies accounted for 25 percent of the defendants. The remainder (28%) were corporate entities registered with the SEC.
- Whistleblower Protections: The SEC brought four actions in FY2017 against companies that allegedly violated Rule 21F-17(a) under the Exchange Act, which provides that “[n]o person may take any action to impede an individual from communicating directly with the Commission staff about a possible securities law violation, including enforcing, or threatening to enforce, a confidentiality agreement…with respect to such communications.” All of the actions alleged that the employers used confidentiality, severance, and other kinds of agreements to interfere with an employee’s ability to report potential wrongdoing to the SEC.
- Number of Tips: The number of tips received by the SEC continues to grow. In FY2017, the SEC received 4,484 tips, an increase from the 4,218 tips received in FY2016.
- Types of Tips: In FY2017, the most common tip categories were Corporate Disclosures and Financials (21.3 percent), Offering Fraud (16.9 percent), Manipulation (10.4 percent), Trading and Pricing (6 percent), and Insider Trading (5 percent).
SCOTUS Decision in Digital Realty Trust v. Somers
The U.S. Supreme Court’s decision will help shape the future of the SEC’s whistleblower program. The specific question before the Court in Digital Realty Trust, Inc. v. Somers is whether Dodd-Frank’s anti-retaliation provision for “whistleblowers” extends to individuals who have not reported alleged misconduct to the SEC.
As more fully detailed in a prior article, the SEC’s implementing rule provides protection from retaliation to workers who make protected disclosures regardless of whether they report the information to the SEC or another source. However, the federal courts of appeal have divided regarding whether a whistleblower must complain directly to the SEC in order to qualify as a whistleblower and benefit from the law’s anti-retaliation protections.
The Court heard oral arguments on November 28, although a final decision may not be issued until next June. We will continue to track the case, so stay tuned for updates.
If you have any questions or if you would you like to discuss the matter further, please contact me, Robert Marsico, at 201-806-3364.