United States: SEC Confirms That Whistleblowers Will Continue To Carry A Baton In Its Race To Enforce SOX

This summer, viewers of the Olympics in Brazil will watch track and field events, in which the members of each team will carry a baton for a leg of the race in their collective effort to win the gold. In case there remained any doubt, last Thursday, the Securities and Exchange Commission (SEC) confirmed that whistleblowers will be key "teammates" carrying the baton for crucial legs of the SEC's enforcement investigations of the Sarbanes-Oxley Act of 2002 (SOX), 15 U.S.C. 7201, et seq. And for the whistleblowers, the gold at the end of the race is often millions of dollars, and that pot is growing.

On June 9, 2016, the SEC announced a whistleblower award of more than $17 million to a former executive whose tip substantially advanced the agency's investigation and resulted in a successful enforcement action.¹ This is the second-largest award since the SEC's tipster program began in 2010, and only the second time that the SEC has rewarded an employee for significantly contributing to the successful enforcement of a pending investigation. Whistleblowers who provide original and useful information to the SEC can collect 10 percent to 30 percent of a penalty when it exceeds $1 million, ² which means that the company paid between $56 million and $170 million to yield a whistleblower award of more than $17 million.

An Executive's Information Leads to a Successful Enforcement Action of Conduct Already Under Examination

Only a few weeks ago, we noted that the SEC had made its first publicized award to a whistleblower whose mid-investigation tip "significantly contributed" to the success of the resulting enforcement action under Rule 21F-4(c)(2).³ To qualify for an award under Section 21F of the Exchange Act, a whistleblower must voluntarily provide the SEC with original information that leads to the successful enforcement of a covered judicial or administrative action or related action.⁴ Original information "leads to" a successful enforcement action if either:

• the original information caused the staff to open an investigation, reopen an investigation, or inquire into different conduct as part of a current investigation, and the SEC brought a successful action based in whole or in part on conduct that was the subject of the original information; or
• the conduct was already under examination or investigation, and the original information significantly contributed to the success of the action.⁵

With the SEC's $17-million-plus award, the agency is again recognizing the efforts of an employee-whistleblower whose original information has led to a successful enforcement action of conduct under examination or investigation.⁶] This is a critical expansion of the SEC's approach to whistleblowers, and the fact that the SEC has doubled down on this approach within weeks of its first award is suggestive. Andrew Ceresney, director of enforcement for the SEC, stated that "employees are often best positioned to witness wrongdoing," and indicated that the SEC intends to "leverage that inside knowledge to advance [its] enforcement of the securities laws and better protect investors and the marketplace."⁷] The recent awards emphasize that companies will be best off when they, too, leverage their employees' inside knowledge, and encourage them to report concerns internally so that companies can take action. Along with encouraging internal reporting, of course, companies must be careful not to run afoul of Dodd-Frank's anti-retaliation provisions and related legislative rules in dealing with employees once an SEC investigation has begun.⁸

Give Employees a Better Option

As of the date of this publication, more than $81 million has been awarded to 32 whistleblowers from the SEC's Whistleblower Program, and five whistleblowers have collected more than $26 million in the past month alone.⁹ This enforcement tool is here to stay.

As we recently discussed (regarding the U.S. Commodity Futures Trading Commission's (CFTC)'s $10-million-plus whistleblower award in April 2016),¹⁰ many whistleblowers have tried to report their concerns internally, to management, before taking external action. While regulators have made clear that attempts to interfere with or discourage whistleblowing will not be tolerated, companies regulated by SOX and the Commodity Exchange Act can and should create internal compliance programs and a culture that encourages their employees to come to them with their good faith concerns. Once those internal reports are made, moreover, it is crucial that companies have processes in place to promptly and effectively respond. Companies should:

• Periodically assess and update their code of conduct, ethics and whistleblower policies.
• Create a culture of compliance – with substantive and anti-retaliation laws.
• Avoid language in separation and confidentiality agreements that could be seen as impeding whistleblowers from reporting to regulators.
• Periodically assess and update their internal investigation procedures to ensure timely and effective responses to internal reports.

Conclusion

Last week's $17-million-plus whistleblower bounty is an opportunity for companies in the securities space to make employees part of their race to compliance gold, instead of becoming champions for the SEC. Companies will stand tall on the winner's podium by adopting a platinum-standard culture of prevention, transparency, and compliance.

Footnotes

1 In the Matter of the Claim for Award, Exchange Act Rel. No. 34-78025 (June 9, 2016).

2 Whistleblower Office At a Glance, U.S. Internal Revenue Service, https://www.irs.gov/uac/Whistleblower-Office-At-a-Glance (as of June 12, 2016).

3 It's Not Over Until the Last Whistle Blows: Beware of the Mid-Investigation Tip, Baker & Hostetler LLP, May 23, 2016, http://www.bakerlaw.com/alerts/its-not-over-until-the-last-whistle-blows-beware-of-the-mid-investigation-tip.

4 15 U.S.C. § 78u- 6(b)(1).

5 Rule 21F-4(c)(1)-(2), 17 C.F.R. § 240.21F-4(c)(1)-(2) (emphasis added).

6 In the Matter of the Claim for Award, Exchange Act Rel. No. 34-78025 (June 9, 2016).

7 SEC Awards More than $5 Million to Whistleblower, U.S. Securities and Exchange Commission, May 17, 2016, https://www.sec.gov/news/pressrelease/2016-91.html.

8 15 U.S.C. § 78u-6(h)(1).

9 Samuel Rubenfeld, SEC Issues $17 Million Whistleblower Award, Wall Street Journal, June 9, 2016, http://blogs.wsj.com/riskandcompliance/2016/06/09/sec-issues-17-million-whistleblower-award/.

10 This Is Not a Test: The CFTC Joins the SEC and IRS in Awarding Substantial Whistleblower Bounties, Baker & Hostetler LLP, April 14, 2016, http://www.bakerlaw.com/alerts/this-is-not-a-test-the-cftc-joins-the-sec-and-irs-in-awarding-substantial-whistleblower-bounties.

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