“How am I doing?” Anyone familiar with New York City politics in the late 1970’s and 80’s recognize this as the catch phrase of the late Mayor of New York City, Ed Koch who served in that role for 12 years. As the SEC Whistleblower Program closes in on its 12th year of existence, it is timely to ask similar questions – how is it doing delivering on Congress’ intent to create and implement a system to incentivize individuals with knowledge of wrongdoing to be incentivized to report it to the SEC?
If one considers how the SEC has implemented the three critical aspects of the Program – confidentiality, anti-retaliation protections and financial awards – the unequivocal answer on all fronts is (cue Larry David) “prettay, prettaaay, prettaaaay good!”
As those of us who represent whistleblowers know all too well, the primary consideration for the vast majority of potential clients is how do I report without being identified as a whistleblower? It goes without saying that the Program’s success in attracting individuals to report is highly reliant on the SEC safeguarding the identities of those reporting to the maximum extent possible. If there was even the slightest perception that the SEC was careless relative to protecting whistleblower identity, the Program would never get off the ground, much less thrive.
The statute and implementing regulations provide significant protections, mandating that the SEC not disclose any information outside of the agency that might directly or indirectly identify a whistleblower “unless and until required” in connection with a pubic proceeding arising out of the whistleblower’s information. The Program also provides for reporting anonymously through counsel. These safeguards have proven very effective as the Enforcement Staff and the Office of the Whistleblower have proven very sensitive to confidentiality and anonymity concerns up to and including when awards have been paid. This has resulted in great confidence in the Program as evidenced by the fact that as of September 2021, the SEC has received over 52,400 tips since the Program’s inception.
For those reporting on their current (and in some instances former) employer there is no more cogent concern than having their jobs negatively affected because they had the courage to come forward and report potential wrongdoing. Recognizing this, Congress included enhanced retaliation protections, including increases in remedies, extension of the statute of limitations for retaliations claims and providing individuals with the right of private action to access the courts to sue for retaliation without having to exhausting the time-consuming OSHA process.
Significantly, Congress also provided the SEC with jurisdiction of retaliatory conduct, and the SEC has been diligent in taking advantage of this authority to send a strong message that retaliation against whistleblowers will not be tolerated. As of September 2021, the Commission has brought four anti-retaliation cases, imposing significant fines on companies specifically related to negative actions against employees who reported to the SEC. This includes one matter where the company was fined $500,000 due to its retaliation against an employee even though the matter reported to the SEC was ultimately determined to be unfounded.
Rule 21(F)-17(a) of the Program provides a powerful tool to prevent companies from engaging in “pretaliation,” that is using confidentiality agreements, codes of conducts, employee agreements, etc. to prevent their employees from preventing the reporting of information to the SEC. The rules provides that no individual can take any action, including enforcing or attempting to enforce a confidentiality agreement to impede an individual’s ability to report wrongdoing for the Commission. Here, too the SEC has been aggressive in its enforcement of this important employee protection, bringing 14 actions imposing sanctions against companies for violations of the rule.
These actions have included blatant violations, where a severance agreement specifically stated that employee agreed not to report under the SEC Whistleblower Program, to less obvious provisions, including overbroad confidentiality provisions, permitting the reporting but prohibiting the collection of any award and allowing for reporting to SEC only after informing the company of the intention to do in advance. The most recent action expanded this protection out of the employment context, fining a company who attempted to condition a settlement of a fraud claim with investors only if the investors agreed to refrain from contacting the Commission.
The SEC has reported anecdotally that it has seen significant improvement with how companies are handling these types of agreements thanks to its aggressive enforcement efforts in this regard.
The most visible aspect of the Program provides that a whistleblower who provides original information leading to a successful action resulting in monetary sanctions exceeding $1 million may be paid an award totaling form 10% to 30% of the amount collected.
The idea is simple – people who are “sitting on the fence” about reporting wrongdoing should be provided a financial incentive to overcome the significant headwinds that all too often had prevented such reporting in the past. The best way for the SEC to demonstrate how seriously it believes this incentive has been to pay as many people as much money as permissible under the Rules.
How are they doing? To date, the SEC has paid approximately $1.2 billion to 256 individuals as awards under the Program. Enforcement matters in connection with these payouts to individuals have resulted in nearly $5 billion in monetary sanctions ordered, including more than $3.1 billion in monies that have been, or are scheduled to be returned to harmed investors. Pretty impressive numbers indeed.
Given its track record to date, I think it safe to assume that Ed Koch (and Larry David) would be pleased and impressed with how the SEC’s Whistleblower Program is doing.
Written by Sean X. McKessy from Phillips & Cohen, LLP