The year 2020 has not been full of much good news. So in May, many were heartened to read the Wall Street Journal headline, “SEC Ramps Up Whistleblower Awards.” The article reported that the U.S. Securities and Exchange Commission (SEC) had paid over $64 million to whistleblowers in the first seven months of the fiscal year.
This amount was more than the SEC had awarded in any full year of its whistleblower program. By the time the SEC’s fiscal year ended on September 30, 2020, its 39 individual whistleblower awards totaled approximately $175 million, eclipsing 2018 and creating a new record.
The SEC Whistleblower Program, Summarized
In response to the 2008 financial crisis, Congress enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act (colloquially as “Dodd-Frank”) on July 21, 2010. In the summer of 2011, one of the most critical reforms that arose from this new legislation was launched – the Securities and Exchange Commission’s Dodd-Frank Whistleblower Program, commonly referred to as the SEC Whistleblower Program.
When whistleblowers provide timely and credible information the SEC successfully acts upon, the SEC Whistleblower Program allows them to receive an award. The types of fraud that may lead to SEC enforcement actions include (1) financial statement fraud; (2) insider trading; (3) theft of investors’ funds; (4) market manipulation; (5) violations of broker-dealer rules; and (6) bribery and accounting Foreign Corrupt Practices Act.
Successful enforcement actions can result in whistleblower awards ranging from 10-30% of the money collected, as long as sanctions exceed $1 million. Importantly, the SEC keeps key details strictly confidential, protecting the whistleblower’s identity.
The SEC Whistleblower Program has been very successful to date, with the SEC reporting whistleblower awards of almost $562 million to 106 individuals since issuing its first award in 2012. Given the success of the program and its banner year of 2020, some opined that the SEC was finally using its resources to clear the backlog and that whistleblowers were seeing the benefit of this practice.
The Bad News
So what’s the bad news? Well, lurking in the background of all of this good news were lingering amendments to the rules governing the SEC Whistleblower Program that were proposed back in June 2018.
One of the most divisive portions of this proposed rule was a provision that would have given the SEC more discretion to a whistleblower award in an action that resulted in at least $100 million in sanctions. This reduction of whistleblower awards would occur if the SEC found that the awards exceeded what is “reasonably necessary to reward the whistleblower and to incentivize other similarly situated whistleblowers.”
The proposal generated strong criticism, with commentators pointing out that the rule would cap large awards or set them at the 10% statutory minimum percentage for whistleblower awards.
Although the SEC did not adopt this heavily-criticized proposal, it adopted an alternative rule amendment that many feel is not much better. When the SEC finally adopted amendments to its whistleblower program rules on September 24, 2020 by a vote of 3-2, it asserted its discretion to consider the amount of the monetary sanctions awarded when determining what percentage of the award the whistleblower should receive.
Commissioner Allison Herren Lee, who voted against the amendments, explained the problems inherent in this broad discretion as it “is applicable to all awards, no matter their size” and results in “no transparency” in the use of that discretion.
On the plus side, the SEC did clarify that “if none of the negative criteria [that the SEC uses to determine whistleblower percentages]…are present [for an award above $5 million], the award amount would be expected to be in the top third of the [10-30%] award range.”
The Silver Lining
That said, there is more good news, as many of the other SEC rule amendments should help whistleblowers. For example, the new rules provide that when there is an SEC whistleblower award of $5 million or less, there is a presumption that the SEC will pay the whistleblower the maximum percentage allowed of 30% unless negative award factors are present. This rule is especially important because the vast majority of whistleblower awards – roughly 75% – have been statutorily limited to $5 million or less.
More good news comes in the form of amended rules that streamline the claims review process to make it more efficient. The claims review process is where the SEC determines whether a whistleblower is eligible for an award and, if so, how much that award should be.
In the past, the claims review process was rife with delay, with most reviews taking more than two years. Some of the SEC amendments that should help cut this review time so that successful whistleblowers can get paid more quickly include:
- Penalties for repeated frivolous applications: The new rules allow SEC to bar permanently any whistleblower from receiving an award in cases where the SEC determined that the whistleblower has previously submitted at least three frivolous award applications. Prior to this rule, the SEC was forced to review these applications, delaying the claims review process for all whistleblowers.
- Quicker resolution of fatally flawed award applications: The new rules allow the SEC to use a summary disposition process for specific denials. These include untimely award applications, applications where tips are not provided to the SEC in the required form, and applications where the tipster’s information was never used by investigating staff.
Contact Bracker & Marcus LLC
If you’re a potential whistleblower who would like a free evaluation from a False Claims Act attorney, contact Bracker & Marcus LLC today – we represent whistleblowers in qui tam actions nationwide.