On November 4, 2015, the Securities and Exchange Committee (“SEC”) filed an Order, pursuant to Rules 21F-10(g) and (h), 17 C.F.R. §§ 240.21F-10(g) and (h) (the “Order”), whereby it awarded an unnamed claimant (“Claimant”) over $325,000 pursuant to the SEC’s Claims Review Staff’s Preliminary Determination for Notice of Covered Action, which recommended that Claimant receive a whistleblower award pursuant to the amount of monetary sanctions collected from his ex-employer. The SEC does not divulge the names of whistleblowers, nor does it disclose any information that could potentially reveal the whistleblower’s identity.
In determining the amount of the whistleblower award, the Claims Review Staff considered the significance of the information provided, the Claimant’s assistance in the investigation, and the applicable law-enforcement’s interests. The Claims Review Staff also considered the Claimant’s delay in reporting the improprieties, which the Claims Review Staff felt was unreasonable because such delay allowed the violations to continue, and allowed the underlying respondents to continue to reap their ill-gotten gains. In response, Claimant requested an increase in the award percentage, which typically ranges between 10 and 30 percent when the sanctions exceed $1 million, stating that the delay was too heavily weighted in the Claims Review Staff’s analysis. According to the Order, Claimant argued that the risks in reporting violations to the SEC had not been adequately accounted for, that timely reporting may lead to “poor quality tips”, and that the Claimant’s failure to report the violations internally was improperly assessed.
The SEC denied the Claimant’s request, holding that the delay occurred after the whistleblower protections contained in the Dodd-Frank Act were implemented. Pursuant to the Order, the SEC stated that before whistleblower protections were enacted, individuals did not have much incentive to report violations by firm for whom they were still employed, but with such protections in place, individuals can now safely report violations while having financial incentive to do so and without fear of retaliation. The SEC goes on to state, “[w]here 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.” However, the SEC did point out that they “did not give negative weight to the fact that Claimant declined to report the violations internally.”
Sean X. McKessy, Chief of the SEC’s Office of the Whistleblower, stated, “[t]his award recognizes the value of the information and assistance provided by the whistleblower while underscoring the need for whistleblowers to report information to the agency expeditiously.”
The SEC protects whistleblowers from retaliation by their employers. The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), which became effective in July 2010, contains new whistleblower provisions that provide substantial incentives and protection for individuals who voluntarily provide information to the SEC concerning securities law violations. Securities violations that can be reported by whistleblowers to the SEC include the following: unregistered offer or sale of securities; insider trading; market manipulation; theft or misappropriation of funds or securities; bribery of foreign officials; filing false or misleading SEC reports or financial statements; Ponzi schemes; abusive naked short selling; fraudulent conduct associated with municipal securities transactions or public pension plans; and other fraudulent conduct.
Under the Dodd-Frank Act, employers are prohibited from retaliating against whistleblowers, which means that the employer may not fire, demote, suspend, threaten, harass, or otherwise discriminate against a whistleblower. A whistleblower who suffers from employment retaliation can sue for economic damages, out-of-pocket and litigation costs, attorney fees and equitable relief, such as reinstatement of back pay, overturning a suspension, modifying a performance evaluation, and any other damages incurred.
The SEC’s whistleblower program has awarded more than $54 million to 22 whistleblowers who provided information that yielded a successful enforcement action. The awards are paid out of an investor protection fund that is financed by monetary sanctions paid to the SEC by rule violators.
Lax & Neville LLP has nationally represented small broker-dealers, financial services professionals and securities industry companies in regulatory matters and securities-related and commercial litigation. Additionally, Lax & Neville has extensive experience in successfully handling whistleblower litigation. Please contact our team of attorneys for a consultation at (212) 696-1999.