SEC Issues Order Granting First Whistleblower Award. However, the Dearth of Information Disclosed Provides Little Guidance for Practitioners.

This post is authored by Luke M. Scheuer, Assistant Professor of Law:

Last week, a host of online media sites reported that the Securities and Exchange Commission (the “SEC”) issued an order granting the first payment under a new whistleblower program authorized by the Dodd-Frank Act.  The program allows the SEC to reward whistleblowers who provide information that leads to sanctions of $1M or more.

The order and accompanying press release issued by the SEC are notable in that they provide virtually no information about the underlying case, and are therefore of little to no practical use to attorneys advising potential defendants or whistleblowers.  The SEC has an interest in protecting the identity of whistleblowers, as they provide information that allows the SEC to prevent and prosecute cases of corporate fraud.  If the identity of a whistleblower is revealed, it will naturally make future whistleblowers reluctant to come forward.  In addition, the SEC is prohibited under federal law from disclosing information that might reasonably reveal a whistleblower’s identity.  Thus, the SEC must balance the need to protect the anonymity of whistleblowers against the need for public disclosure and promotion of the program if it wants the program to be a success.

 Although the press release and order do not provide details of the underlying case, the press release states that the SEC has collected $150,000 in sanctions, and that the whistleblower has received a $50,000 award.  Under the program, the SEC can award anywhere from 10 to 30 percent of total sanctions collected.  By giving the whistleblower the highest possible monetary award of 30% in this case, the SEC seems to be sending a message that they are fully committed to the program and want to encourage other whistleblowers to come forward.  The whistleblower may receive an even larger award if the SEC is successful in collecting more in this case.

Although there are laws protecting whistleblowers against retaliation, their effectiveness is limited.  SEC Rule 21F-17 bars any person from taking “any action to impede an individual from communicating directly with the Commission staff about possible securities law violations.”  Nevertheless, if outed, whistleblowers will have a hard time remaining in their job, as colleagues will view them with suspicion.  The consequences of not protecting the whistleblower’s anonymity can be seen in the sad case of Peter Sivere who provided information to the SEC about his employer JPMorgan, only to have an SEC attorney inform JPMorgan of Sivere’s actions and provide JPMorgan confidential information received from Sivere that could be used in an employment action against Sivere. Despite the fact that the SEC admitted that its attorney had engaged in this conduct, in clear violation of SEC rules, the SEC decided to take no action against its attorney.  Sivere ended up being pushed out of his job by JPMorgan after it learned of his whistleblowing.  More can be read about the Sivere incident here. Perhaps, the lack of information in this recent whistleblower case is a necessary reaction to the Sivere incident.

Although whistleblower anonymity is critical to the success of the program, the lack of disclosure in this case is frustrating to practitioners advising potential defendants and whistleblowers. The SEC stated that the whistleblower “provided documents and other significant information that allowed the SEC’s investigation to move at an accelerated pace and prevent the fraud from ensnaring additional victims.” The SEC also denied an award to a second whistleblower because “the information provided did not lead to or significantly contribute to the SEC’s enforcement action.”  The order provides no other details that distinguish the two cases, or that might help attorneys advise their clients on the possibility they can collect an award for whistleblowing.  We know nothing about the timing of the tip, how crucial the whistleblower’s information was, or whether the whistleblower had clean hands for example.  Without this kind of information, attorneys cannot use the case as a basis on which to advise clients, whether whistleblowers or potential defendants, on where they are likely to fall within this program. This may be a necessary sacrifice for the reward program to work, but it seems to indicate a lack of faith in the effectiveness of whistleblower protection laws.

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