Whistle While You Work: SEC Announces First Retaliation Whistleblower Award

On June 16, 2014, the SEC issued its first-ever charge of whistleblower retaliation under section 922 of the Dodd-Frank Act, charging a hedge fund advisor and its owner with “engaging in prohibited principal transactions and then retaliating against the employee who reported the trading activity to the SEC.”

Paradigm Capital Management and owner Candace King Weir agreed to pay $2.2 million to settle the charges, consisting of $1.7 million of disgorgement, a $300,000 civil penalty, and pre-judgment interest on the disgorgement amount. A separate civil suit brought by the whistleblower was settled by the parties in December, 2012.

Some ten months later, the SEC announced an award to the whistleblower and the victim of retaliation in the Paradigm case. On April 28, 2015, in a first award to a whistleblower who also claimed retaliation, , the SEC announced that it will pay out the maximum possible bounty to an individual who the SEC determined provided critical information of securities fraud and was retaliated against for it. Notably, this is the first instance where the SEC charged an employer with retaliating against the whistleblower after the individual filed a report with the agency.

The SEC charged the company with committing a series of retaliatory acts against the whistleblower – whose identity remains anonymous – including:

  • removing the whistleblower from their supervisory position;
  • asking the whistleblower to investigate the very matter that person reported to the SEC; and
  • marginalizing the whistleblower from their job overall.

In the order announcing the award, the Commission justified its bounty by noting that the individual “suffered unique hardships” for filing. As a result, the whistleblower will receive the statutory maximum of 30% of the underlying monetary sanction, for a total payment of over $600,000.

Section 922(h) of the Dodd-Frank Act prohibits any discrimination or retaliation against whistleblowers who provide information to the SEC, and the SEC’s Final Rules dictate that whistleblower status is triggered if the individual has a “reasonable belief” that the information provided relates to a “possible” securities law violation. 17 C.F.R. § 240.21F-2(b)(1)(i). If the SEC then recovers at least $1 million in an enforcement action against the company, it must award a bounty of 10 to 30% to any individual who has provided critical, original information leading to the charge. 15 U.S.C. § 78u-6(b)(1)(A)–(B). The bounty is paid out of the money deposited into the SEC’s Investor Protection Fund by the company. Id. § 78u-6(b)(2). Since the inception of the SEC’s whistleblower program, the SEC has awarded 17 bounties, and paid out over $50 million.

This award highlights the SEC’s continued commitment to the whistleblower payout program and the SEC’s also taking an active role in pursuing claims of workplace retaliation.  As the number of high-profile payouts continues to increase, the SEC has also sought to expand the scope of practices it finds to be objectionable under Dodd-Frank.  For example, the SEC has begun targeting confidentiality agreements that could “muzzle” would-be whistleblowers.  Likewise, it has filed amicus curiae briefs in several cases urging courts to grant deference to its rules. The SEC has, however, encountered some resistance from the courts, and there are still several circuit splits over how various provisions of the Dodd-Frank Act should be interpreted.