The SEC awarded approximately $36 million to a whistleblower for assisting SEC staff and furnishing information in connection with an enforcement action, but denied two other claimants.
The SEC stated that the whistleblower's contribution played a significant role in the success of the SEC enforcement action involving an illegal scheme, as well as actions by another federal agency. The SEC noted that the whistleblower's contribution included (i) several meetings with SEC staff and (ii) identification of critical documents and witnesses. In addition, the SEC denied awards to two other whistleblowers ("Claimant 2" and "Claimant 3") that furnished information related to the enforcement action. The SEC explained that Claimant 2 did not provide "a substantial and important contribution" to the SEC, offering information primarily on an entity that was not charged in the action or related to the investigation leading to the action. The SEC stated that in addition to not providing substantial information, Claimant 3 was ineligible for an award because at the time of the investigation, Claimant 3 was an "employee, officer or member of a foreign government or any political subdivision, department, agency or instrumentality thereof."
Commentary
The SEC stated that the whistleblower unreasonably delayed reporting to the Commission for over five years and was culpable in the underlying fraudulent scheme. However, because the whistleblower did not "direct[], plan[] or initiate[]" the misconduct, the SEC determined that Exchange Act Rule 21F-16 (which would have barred recovery for the whistleblower) did not apply. Whistleblowers of this nature have caused intense debate among legislators and industry experts. For many, it is tough to stomach that a whistleblower can receive tens of millions of dollars when they are partly blameworthy for the conduct they are reporting. However, the Commission believes that the benefits of these tips to the public good outweighs the costs of rewarding an individual who is partly at fault.
This highlights the importance of companies providing anonymous reporting mechanisms for potential misconduct. Ensuring that even culpable individuals feel comfortable reporting conduct internally can dramatically change the trajectory of a future enforcement action.
Primary Sources
- SEC Press Release: SEC Awards Approximately $36 Million to Whistleblower
- SEC Order: Determining Whistleblower Award Claim
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