United States: CFTC Awards More Than $10 Million To Whistleblower

Last Updated: April 14 2016
Article by Sohair A. Aguirre, Jonathan H. Flynn, Anthony M. Mansfield and Gregory Mocek

Most Read Contributor in United States, September 2017

On April 4, 2016, the Commodity Futures Trading Commission ("CFTC") announced a whistleblower award of more than $10 million.  This is only the third whistleblower award that the CFTC has approved since the inception of the CFTC whistleblower program in 2011, and by far, the largest award amount.  The last award that the CFTC issued was in September 2015 in the amount of approximately $290,000.  The first whistleblower award was issued in May 2014 for the amount of $240,000.

Background on CFTC Whistleblower Rules

Part 165 sets out the CFTC's whistleblower rules ("Whistleblower Rules").1  The Whistleblower Rules establish the standards for financial awards to eligible whistleblowers who report violations of the Commodity Exchange Act, as amended ("CEA") and CFTC regulations to the CFTC.  An "eligible whistleblower" who voluntarily reports "original information" that leads to the collection of more than $1 million in "monetary sanctions" is entitled to receive 10% - 30% of the "monetary sanctions." 

An "eligible whistleblower" is any individual who voluntarily provides original information about a possible violation of the CEA and does so before his/her employer receives a request for information from the CFTC that covers the whistleblower's original information.  The following persons are expressly not eligible to be whistleblowers:

  • Regulatory and law enforcement personnel;
  • Non-natural persons;
  • Company lawyers (unless disclosure is permitted by federal or state attorney conduct codes);
  • Internal compliance and audit personnel, unless:

    • He or she has "a reasonable basis to believe" that disclosure is necessary to prevent substantial injury to the company or its investors; or
    • 120 days have elapsed since the whistleblower learned the information and since such time as the whistleblower has reason to believe that the whistleblower's supervisor or the entity's audit committee or chief legal officer became aware of the information.

"Original information" is non-public information that was not previously known to the authorities and that:  (1) materially added to the information the CFTC already had and significantly contributed to the success of the action; or (2) was credible, specific and timely to cause opening or reopening of a governmental inquiry.  Original information must be based on either:  (1) independent knowledge of the whistleblower; or (2) the independent analysis of the whistleblower whether done alone or in combination with others.

"Monetary sanctions" include penalties, disgorgement, restitution, and interest ordered to be paid and can be based on monetary sanctions imposed in related actions of other federal agencies, registered entities, self-regulatory organizations, states, and foreign futures authorities that are based on the same original information. 

Notably, under the Whistleblower Rules, the whistleblower is not required to internally report the potential violation before reporting it to the CFTC.  Moreover, the whistleblower is not required to cooperate with a company's internal investigation.  Finally, the Whistleblower Rules provide protection to the whistleblower from retaliation by the employer.  An employer may not discharge, demote, threaten or discriminate against a whistleblower.  These anti-retaliation protections apply even if the whistleblower does not qualify for a monetary award.

The Third CFTC Whistleblower Award

In making the Third CFTC Whistleblower Award, the Whistleblower Award Determination Panel ("Panel"), which is the final authority on whistleblower award applications, determined that the whistleblower did not fall into any of the categories of individuals that are ineligible for an award under the Whistleblower Rules.  The Panel also noted that the "award appropriately recognizes the significance of the information the [whistleblower] provided to the [CFTC], and the size of the award should serve to incentivize future whistleblowers to come forth with high quality information while not creating perverse incentives possible as a result of oversize rewards."  In addition, the Panel found that whistleblower's information caused the CFTC to commence its investigation, and that during the investigation, the whistleblower was "forthcoming and cooperative."

Although the CFTC Whistleblower Rules are not new, this award is a reminder that there are now potentially powerful incentives for people to report internal wrongdoing.  Please contact any member of the Cadwalader team to discuss strategies to address potential risks.

Footnotes

1 Please visit www.cadwalader.com/resources/clients-friends-memos for previous memos on this issue.

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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