The SEC Has Made Its First Dodd-Frank Whistleblower Award

Two years after the Dodd-Frank Wall Street Reform and Consumer Protection Act created an SEC whistleblower program,¹ and a year after the SEC’s regulations for that program went into effect,² the SEC has announced its first Dodd-Frank whistleblower award. At the same time, the SEC announced it has refused to pay any award to another whistleblower who sought an award in the same matter.³  

What is most striking about the SEC’s announcement (and the two substantially redacted Orders Determining Whistleblower Award Claim that were released at the same time⁴) is the fact that, not only do they withhold the identities of both the whistleblower who will receive a bounty and the whistleblower who will not, but they also disclose almost nothing about the underlying case, about the factors and analysis that went into determining the amount of the award, or about why the second whistleblower will receive nothing. The failure even to identify the defendants in the underlying case is especially curious because, as the SEC’s press release discloses, the case is in court and thus is a matter of public record.

This almost complete lack of transparency has several effects. First, it may provide some reassurance to whistleblowers who wish to remain anonymous that the SEC will go to great lengths to keep secret not just their identities but also the details of their cooperation. However, second, it provides little guidance to prospective whistleblowers (or to those with pending whistleblower claims) about how their contributions will be evaluated for the purpose of determining whether an award will be paid and what the amount will be. Withholding these details is contrary to the SEC’s stated goal to “make award determinations more transparent, predictable and fair.”⁵ Third, the secrecy does nothing to allay the considerable misgivings many have about the Dodd-Frank whistleblower program; indeed, it may reinforce or even intensify those misgivings. 

The announcement is also noteworthy because it clarifies that the SEC will pay whistleblower awards in installments as partial payments of sanctions are collected. The announcement states that the sanctions imposed in the underlying case exceed $1 million (as is required for the case to be eligible for any whistleblower award).  The whistleblower will be paid his/her 30 percent cut of the first, $150,000 sanctions payment. Historically, the SEC has had uneven results in actually collecting the sanctions awarded in court and in administrative proceedings. It seems unlikely, if the SEC’s collections ultimately do not exceed $1 million in the case, that there will be any attempt at a “claw back” of the award payment(s) to the whistleblower.

As the SEC’s press release points out, the 30 percent award is “the maximum percentage payout allowed.” That might be somewhat like scoring all 10's for an exquisitely difficult Olympic 10 meter dive. A reasonable expectation, therefore, would be that the whistleblower and his/her information must have met all or substantially all the positive factors, and none of the negative factors, that are required to be taken into account in determining the amount of an award.  Indeed, the press release quotes the Director of the SEC’s Division of Enforcement, Robert Khuzami: “This whistleblower provided the exact kind of information and cooperation we were hoping the whistleblower program would attract.” It may not be that all the positive factors were present, because the SEC has explained that “the absence of any one of the positive factors does not mean that the award percentage will be lower than 30 percent, nor does the absence of negative factors mean the award percentage will be higher than 10 percent.”⁶ Nevertheless, some of the following positive factors set forth in the whistleblower program regulations must have been present:

• The successful whistleblower provided information that was at least significant, and perhaps also reliable, complete and helpful.
• The whistleblower provided assistance, such as ongoing, extensive and timely cooperation; or encouraging or authorizing others to assist; or remediation of the harm caused by the violations, including assisting in the recovery of the fruits and instrumentalities of the violations, and may have experienced unique hardships as a result of his/her reporting and assisting.
• The whistleblower and his/her information furthered the SEC’s programmatic interest in deterring violations of the securities laws.
• The whistleblower and his/her legal representatives participated in internal compliance systems, perhaps assisting an internal investigation or inquiry concerning the reported violations.  (Since the whistleblower is anonymous, s/he was required by the program’s regulations to be represented by an attorney.)

Moreover, to get to the maximum, 30 percent award, one would expect that the following negative factors must have been absent —but the SEC’s failure to disclose the basis of the award means we cannot be sure of that:

• The whistleblower had no culpability or involvement in, and received no financial benefit from, the violations.
• The whistleblower did not unreasonably delay reporting the violations.
• The whistleblower did not undermine the integrity of the subject entity’s compliance or reporting systems by, for example, interfering with legal, compliance or audit procedures or making false, fictitious or fraudulent statements that hindered the entity’s investigation or remediation.

The fact that this award is for the maximum possible percentage raises the question whether the SEC intentionally chose a “poster child” gold medal winner for its first Dodd-Frank whistleblower award. Or it could be that the SEC is establishing 30 percent as the amount that many whistleblowers can expect and that lower awards will be reserved for cases with unusually poor whistleblower conduct. Should other prospective whistleblowers and whistleblowers awaiting awards expect they will be the beneficiaries of similar largesse?

As for the disappointed whistleblower who is going home empty-handed, the Order Determining Whistleblower Award Claim⁷ says very little about the reason(s) the claim was denied. The SEC’s press release says only that “the information provided did not lead to or significantly contribute to the SEC’s enforcement action.” Because it came too late (the successful whistleblower got there first)?  Because the information was already known to the SEC? Because the information was false, or not credible? The rationale for the no-award decision may be contained in the May 18, 2012, Preliminary Determination of the Claims Review Staff, but the SEC has not released that document. The public is left to speculate.

Even though s/he did not receive an award, this whistleblower — if s/he is or was an employee of the sanctioned entity — retains the protection of the Dodd-Frank anti-retaliation provisions. Retaliation could become the subject of an SEC enforcement action or a private civil action (offering the prospect of reinstatement, double back pay and attorneys’ fees).

The SEC’s whistleblower web page lists almost 300 matters potentially eligible for Dodd-Frank whistleblower awards (essentially, these are matters in which there are settlements or awards of monetary sanctions in excess of a million dollars). Whistleblower award claims must be filed within 90 days of the date a Notice of Covered Action is posted on that page. That deadline has passed for about 260 of those eligible matters. No information has been provided by the SEC as to how many of those claims are pending, or how many have been denied. Nor has any information been provided as to whether the SEC has succeeded in actually collecting sanctions in any of those matters — a prerequisite to payment of a whistleblower bounty.

Conclusion

The SEC’s announcement of its first Dodd-Frank whistleblower award raises far more questions than it answers. The SEC’s failure to explain the basis for its decision may feed concerns expressed in the securities industry, and among some members of Congress, that the whistleblower program may reward whistleblowers for misconduct they could have prevented, or whistleblowers who evade their companies’ internal compliance and reporting programs. We can only hope the SEC is more forthcoming with useful information in future award announcements, and in its annual report on the Dodd-Frank whistleblower program, which is due in the fall. Absent more transparency, the SEC may be inviting intrusive congressional scrutiny of its Dodd-Frank whistleblower program.

Contacts

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¹ See 15 U.S.C. § 78u-6.
² See 17 CFR § 240.21F.
³ SEC Press Release 2012-162 (Aug. 21, 2012).
⁴ Exchange Act Releases Nos. 67698 and 67699 (Aug. 21, 2012).
⁵ Exchange Act Release No. 34-64545 at 123 (May 25, 2011). 
⁶ Exchange Act Release No. 34-64545 at 123. 
⁷ Exchange Act Release No. 67699 (Aug. 21, 2012).