The U.S. Securities and Exchange Commission (SEC) recently awarded more than $325,000 to a former investment firm employee who tipped the agency off to fraudulent activity at his company — but the whistleblower may have received more had he come forward with information about the wrongdoing sooner.
The estimated $325,000 award, which the SEC announced Nov. 4, is a percentage of the monetary sanctions the SEC was able to collect from the whistleblower’s former employer after he provided information that enabled the commission to bring a successful enforcement action against the company.
Neither the claimant nor his former employer have been identified, because by law, the SEC protects the confidentiality of whistleblowers and does not disclose information that might directly or indirectly reveal a whistleblower’s identity.
The SEC also did not disclose exact amount of the award. Under the SEC’s Whistleblower Program, whistleblowers are eligible for awards that can range from 10 percent to 30 percent of the money collected when the monetary sanctions against the offending company exceed $1 million. However, the commission did say that because the whistleblower waited until after leaving the firm to come forward to the SEC, “the award could have been higher had this whistleblower not hesitated.”
In a Nov. 4 filing, SEC Secretary Brent J. Fields said in determining the percentage of the whistleblower’s award, the commission’s claims review staff “considered the claimant’s delay in reporting the violations, which under the circumstances, was found to be unreasonable.”
Under the SEC’s Whistleblower Program, set forth in Section 922 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the commission assesses whether the whistleblower unreasonably delayed reporting securities violations, taking into account whether he was aware of the relevant facts, but failed to take reasonable steps to report or prevent the violations from occurring or continuing; whether he was aware of the relevant facts, but only reported them after learning about a related inquiry, investigation, or enforcement action; and whether there was a legitimate reason for the whistleblower to delay reporting the violations.
In this case, the SEC said that “during the period of delay, the violations continued and the respondents in the underlying action obtained additional ill-gotten gains, with a resulting increase in the monetary sanctions upon which the claimant’s award is based.”
In September, the claimant’s legal counsel requested an increase in award percentage, arguing that the SEC’s claims review staff relied too heavily on the claimant’s reporting delay in assessing the award percentage. The claimant asked the SEC to reconsider its award, arguing that the claims review staff failed to consider the personal and professional risks faced by whistleblowers in reporting to the commission or whether prompt reporting may lead to poor quality tips from whistleblowers, and improperly assessed his failure to report the misconduct internally with his former employer.
But the SEC disagreed, concluding, “We believe that the delay was unreasonable in light of the incentives and protections now afforded to whistleblowers under the commission’s whistleblower program.”
“We have given due consideration to the personal and professional risks faced by whistleblowers in reporting their information to the commission, and find it significant that the delay here occurred entirely after implementation of the whistleblower program under the Dodd-Frank Act,” Fields stated. “Where the period of delay occurs entirely after the creation of the commission’s whistleblower program, we will weigh the delay more heavily in assessing the appropriate award percentage.”
Regarding the claimant’s contention that, by encouraging prompt reporting, the SEC may be encouraging the submission of lower-quality tips and complaints, the SEC noted that this particular case is not one where a whistleblower either took, or reasonably needed to take, additional time to gather more information to understand that violations had occurred or to appreciate the scope of the misconduct. “More generally, we note that whistleblowers are free to, and often do, supplement their initial tips with additional information or materials after making their first submission to the commission,” the SEC said. “Additionally, we believe it would undermine our objective of leveraging whistleblower tips to help detect fraud early and thereby prevent investor harm if whistleblowers could unreasonably delay reporting and receive greater awards due to the continued accrual of wrongful profits.”
Finally, the SEC noted that it did not give negative weight to the fact that the claimant did not report the violations internally before he left the company.
“We did not decrease claimant’s award percentage because (claimant) declined to report internally, but because after becoming aware of the wrongdoing, did nothing to report the information and did nothing to try to stop the violations from continuing to occur, which under the facts and circumstances, we find unreasonable,” Fields stated.
The SEC also said it considered factors that mitigated the unreasonableness of the claimant’s reporting delay, including that the delay was “somewhat limited,” as well as “the fact that claimant witnessed a single violation and was unaware of the full extent of the fraud.”
To date, the SEC has paid more than $54 million to 22 whistleblowers gave the commission “unique and useful” information that contributed to successful enforcement actions. Because of increasing public awareness of the program, the number of whistleblower tips received by the commission has increased each year since the program started in 2011. According to the SEC’s annual report to Congress on the program, the commission received nearly 4,000 whistleblower tips in fiscal year 2015, a 30 percent increase over the number of tops received in fiscal year 2012, the first year for which it has full-year data. The SEC received more than 120 whistleblower award claims last year, according to the report.