United States: For Whom The Whistle Blows: SEC Whistleblower Office Issues Its 2015 Annual Report

The SEC released its Fiscal Year 2015 Annual Report (the "Report") to Congress on the Dodd-Frank Whistleblower Program on November 16, 2015. The Report analyzes the tips received over the last twelve months by the SEC's Office of the Whistleblower ("OWB"), provides additional information about the whistleblower awards to date, and discusses the OWB's efforts to combat retaliation against whistleblowers.

Breakdown of Tips Received in FY 2015

The OWB received whistleblower tips and complaints from all 50 states, the District of Columbia, Puerto Rico, and the U.S. Virgin Islands. Domestically, the largest number of whistleblower complaints and tips were from California (646), New York (261), Florida (220), and Texas (220). Notably, California tips were up by over 16% year over year.  Additionally, the OWB received whistleblower tips from individuals located in 61 foreign countries. Of these, the countries from which the most numbers of tips originated were the United Kingdom (72), Canada (49), the People's Republic of China (43), India (33), and Australia (29) with Brazil, Chile, Ireland, and Mexico being other countries from which the SEC received more than 10 tips.

The OWB reported a modest increase in the number of whistleblower tips and complaints that it received in 2015 – 3,923 tips in 2015 compared to 3,620 tips in 2014. Overall, the 2015 whistleblower tips were similar in number and type of whistleblower tips reported in 2014. As in 2014, the most common types of allegations in 2015 were: Corporate Disclosure and Financials (17.5%), Offering Fraud (15.6%), and Manipulation (12.3%). Most whistleblowers, however, selected "Other" when asked to describe their allegations.

2015 Whistleblower Awards

Overall, the SEC awarded more than $37 million to whistleblowers in 2015, bringing the total payout under the program to over $54 million. The number of whistleblower award claims has also continued to increase each year, which the OWB attributes to "the increased public awareness of the SEC's whistleblower program and in response to the tens of millions of dollars that have been paid to whistleblowers under the program."

The SEC issued eight whistleblower awards in FY 2015, including one award for the maximum 30% bounty to a whistleblower whom the SEC determined was a victim of retaliation for his reporting activity. The OWB reported it reached its decision to award the maximum after considering the unique hardships the whistleblower faced, such as: (1) being stripped of his or her position; (2) tasked with investigating the very conduct the whistleblower reported to the SEC; and (3) being otherwise marginalized at his or her company.

Also, 2015 marked the first time the SEC utilized the "substantial injury" exception to the Whistleblower Rules excluding individuals whose principal duties involve compliance or internal audit responsibilities. Further, the SEC issued its first award to a company officer. In doing so, the SEC utilized an exception to the Whistleblower Rules which makes corporate directors and officers eligible to receive an award if he or she reports information to the SEC more than 120 days after other responsible compliance personnel possessed the information but failed to adequately address the situation. Finally, the SEC paid out its record $30 million bounty it awarded in September 2014. The whistleblower's information from this action also led to several successful related actions, so the whistleblower received additional payments in 2015 based on amounts collected.

Profiles of Bounty Recipients

The OWB reports that almost half of award recipients were current or former employees of the company about which they reported violations.  Of those, approximately 80% either raised their concerns internally first or knew that the company was otherwise aware of the issues before they reported the violations to the SEC.  The award recipients who were not current or former employees obtained their information either because they were (i) victims of the fraud, (ii) professionals in a related industry, or (iii) had a personal relationship with the alleged wrongdoer.  Approximately 20% of award recipients submitted their tips to the SEC anonymously.

The OWB noted that approximately 20% of the SEC bounty awards made to date were reduced because of what the SEC determined to be an unreasonable reporting delay by the recipients.  Such delays were particularly problematic in the OWB's view when they led to a continuation of securities law violations and an increase in ill-gotten gains.

Retaliation and Confidentiality Agreements

In addition, OWB has been continuing to work to identify employee confidentiality, severance, and other types of agreements that may interfere with an employee's ability to report potential wrongdoing to the SEC. The SEC brought its first enforcement action against KBR in April, 2015 for its use of confidentiality agreements; ultimately, the company settled the action for $130,000 and agreed to amend its confidentiality statements to comply with SEC guidance. Based on this success, the SEC noted assessing confidentiality agreements for compliance with Rule 21F-17(a) will continue to be a top priority for OWB in FY 2016.

Internal Reporting

Finally, the OWB filed amicus curiae briefs in several cases in FY 2015 to urge courts to hold, in deference to the SEC's rule, that individuals are entitled to employment retaliation protection if they report information about a possible securities law violation internally at a company, regardless of whether they have separately reported the information to the SEC. There is currently a split of authority on this issue. In addition, the SEC issued interpretive guidance reiterating its position in this regard.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Authors
Renee B. Phillips
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