On June 4, 2020, the Securities and Exchange Commission (the SEC) announced a nearly US$50 million whistleblower award to an individual who provided detailed, firsthand observations of misconduct by a company. The tip resulted in a successful enforcement action that returned a significant amount of money to harmed investors. This is the largest amount ever awarded to one individual under the SEC's whistleblower program. The Order[PDF] determining the award claim notes that the whistleblower in this case “laid out in detail substantial aspects of the scheme and provided a roadmap for the investigation.”

As we have previously discussed, whistleblowers may be eligible for an award when they voluntarily provide the SEC with original, timely and credible information that leads to a successful enforcement action.The SEC's whistleblower awards can range from 10% to 30% of the money collected when the monetary sanctions exceed US$1 million.

The SEC has awarded over US$500 million to 83 individuals since issuing its first award in 2012. Interestingly, the SEC has already awarded US$114 million to whistleblowers this year alone, which is nearly twice the amount awarded in all of 2019. Three awards in 2020 are among the 10 biggest SEC payouts ever. By comparison, since its launch in July 2016, the Ontario Securities Commission (the OSC) Whistleblower Program - the first program of its kind in Canada - has awarded only just over C$8 million to whistleblowers.

SEC experiences a surge in whistleblower tips during the COVID-19 pandemic

From mid-March to mid-May, the SEC received 4,000 whistleblower tips, 35% more than the same period the year before, according to the co-director of the SEC's Division of Enforcement. By comparison, the SEC received 5,200 tips in all of 2019.

The uptick in whistleblower tips may be attributed to the fact that more people are working from home during the COVID-19 pandemic and may feel emboldened to report any wrongdoing as a result of increased privacy and feeling safer from potential retaliation. The surge in tips may also be indirectly attributable to an increase in misconduct related to the COVID-19 pandemic, such as loan fraud, price-gouging or counterfeit medical goods.

It is unclear whether Canadian securities regulators are experiencing a similar uptick in whistleblower tips. As we have maintained in a previous post, Canadian regulators are not as forthcoming with the details of tips and when and how any such tips have been relied upon in enforcement proceedings. However, regulators such as the OSC and the Autorité des marchés financiers (the AMF), have been issuing warnings about fraud and the exploitation of difficult situations like the ongoing pandemic for economic gain, suggesting that pandemic-related misconduct in the Canadian market abounds. Whether this misconduct will lead to increased whistleblower activity, enforcement action, and ultimately awards, remains to be seen.

Implications and best practices

In the era of COVID-19, it is clear that whistleblowing has become an increasingly popular tool for revealing abuses and irregularities among market participants in the U.S. The downstream effects of this surge in whistleblower activity are likely to be significant, especially when combined with the general trend of larger SEC whistleblower payouts.

In both the U.S. and Canada, we can expect to see a corresponding increase in enforcement proceedings in the months and years to come. Businesses should therefore ensure that they have appropriate and up-to-date whistleblowing and compliance measures in place to correctly address and mitigate these risks.

Originally published 16 July, 2020

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