Whistleblower

How Much is Too Much? Whistleblower Bar Challenges the SEC’s Recent Whistleblower Program Amendments

On January 13, 2021, prominent whistleblower attorney and a principal architect of the Dodd-Frank Act whistleblower program, Jordan A. Thomas, filed a complaint against the U.S. Securities and Exchange Commission (“SEC” or “Commission”) seeking a declaratory judgment that certain provisions of the SEC’s recent whistleblower program amendments are invalid and cannot be enforced.  Specifically, the complaint challenges the SEC’s “clarification” of its authority to limit the size and number of certain whistleblower awards.

Under Dodd-Frank, the Commission pays a monetary award to a whistleblower that provides information to the SEC that leads to an enforcement action in an amount equal to but not less than 10% and not more than 30% of the monetary sanctions imposed by the SEC. Under Rule 21-F6, the agency calculates whistleblower awards in that 10-30% range by assigning an award percentage based on an array of positive and negative factors. The SEC then issues an award by multiplying the award percentage by the total monetary sanctions that the SEC collected.

Under the whistleblower program, awards in a single enforcement action as high as $114 million have been paid.  Thomas states that his clients have received some of the largest whistleblower awards in history, with three of his clients’ cases involving monetary sanctions in excess of $100 million.

The SEC voiced concerns in 2018 that excessively large awards could deplete the Investor Protection Fund. As a result, the SEC originally proposed a revised Rule 21F-6 in 2018 that would have expressly provided the Commission with the ability to make downward adjustments in connection with large awards where the monetary sanctions equaled or exceeded $100 million as long as the award payout did not fall below $30 million. However, the SEC ultimately scrapped the proposed rule and instead clarified in the new rules that it has always had the authority and discretion to consider the total dollar payout when applying the award criteria and adjust downward for large awards as reasonably necessary.

In addition, under the prior Rule 21F-3, the SEC would pay awards based on amounts collected in “related actions” and defined “related action” as a “judicial or administrative action that is brought by [specified agencies or self-regulatory organizations], and . . . based on the same original information that the whistleblower voluntarily provided to the Commission.” The SEC’s recent amendments revised Rule 21F-3 to award information provided in a “related action” “only if the Commission finds . . . that its whistleblower program has the more direct or relevant connection to the action.” Further, the Final Rule 21F-3 prevents whistleblowers from receiving an award if they have already been granted an award by another agency or if they have been denied an award by another agency’s whistleblower program.

According to Mr. Thomas’s complaint, the previous rules encouraged whistleblowers to come forward by guaranteeing that those individuals who acted properly would be awarded accordingly and would not have their awards unfairly and arbitrarily diminished.  In his complaint, he argues that this “clarification” to Rule 21F-6 is unlawful under the Administrative Procedure Act (“APA”) for at least five reasons: (1) the Final Rule was not a “logical outgrowth” of the proposed rule; (2) the SEC enacted the rule without acknowledging that it was changing its position; (3) the SEC failed to weigh the costs and benefits of the Final Rule; (4) the SEC adopted the rule without providing a reasoned explanation and despite the harms it will cause the whistleblower program; and (5) the SEC had no statutory authority to enact the rule. Furthermore, the complaint alleges the amendments to Rule 21F-3 are unlawful under the APA because (1) the SEC had no statutory authority to enact the changes and (2) the SEC adopted the rule without providing a reasoned explanation and despite the harms it will cause the whistleblower program.

As the complaint asserts, “[T]he potential for large monetary awards is the primary motivation for individuals to blow the whistle to law enforcement and regulatory authorities” and the challenged rule amendments “turn[] the Commission into a kind of casino that aggressively courts high-rollers with the promise of large jackpots but reserves the right to lower their winnings if those winnings get ‘too large.’” Further, the complaint surmises that would-be whistleblowers may weigh the costs and benefits of the revised whistleblower program and choose not to report possible securities violations to the SEC if they are worried their awards may be adjusted downwards or denied outright under the related action rules, ultimately reducing the number of individuals who report.

Certainly for the whistleblower bar, significant contingent legal fees are at stake.  The complaint notes that Thomas currently has nine whistleblower clients awaiting a final determination of entitlement to an award from the SEC, and that given the monetary sanctions collected, his clients collectively are eligible for awards of more than $300 million.  On each of these potential awards, Thomas’ firm will receive a contingency fee, and Plaintiff Thomas will receive incentive compensation for recovering the award on behalf of his client.

This is the first action attacking the Final Rule and no doubt will be met with a vigorous defense by the SEC.  We will monitor the progress of this action and questions of standing (i.e., whether lawyers that represent whistleblowers have standing to challenge this Final Rule) and whether the Final Rule passes muster under the APA.

Regulators Offer Insights Into SEC, CFTC, and OSHA Whistleblower Program’s Trends and Priorities

On July 13, 2020, three prominent whistleblower law regulators spoke at PLI’s Corporate Whistleblowing in the Coronavirus Era 2020, which was co-chaired by Orrick partners Mike Delikat and Renee Phillips. With the standard disclaimer that their comments and opinions were their own and not the official comments of their respective agencies, each spoke about their agencies’ whistleblower program’s current progress, challenges, and priorities. READ MORE

SEC Awards Largest Bounty Ever and More Expected to Come Out of the COVID-19 Pandemic

As we reported last month, the Securities & Exchange Commission (SEC) has continued to award numerous multi-million-dollar bounties under its Dodd-Frank whistleblower program notwithstanding the current COVID-19 crisis. READ MORE

SEC Whistleblower Program Going Strong During Coronavirus

Notwithstanding the current COVID-19 crisis, the Securities & Exchange Commission has continued to award numerous multi-million-dollar bounties under its Dodd-Frank whistleblower program.

Since January 21, 2020, when the CDC confirmed the first case of COVID-19 in the United States, the SEC has issued 12 whistleblower awards totaling approximately $64 million. Some of the highlights of these awards include: READ MORE

Responding to Healthcare Employee Concerns in the COVID-19 Age

As the battle against COVID-19 intensifies, healthcare workers have become vocal about their perceptions of deficiencies surrounding patient care and safety within their workplaces and have expressed their views publicly on social media and other platforms. Videos, photographs, and testimonials underscore employees’ concerns about patient care and the availability of protective gear and other supplies. Healthcare employers have, at the same time, struggled to regulate the flow of information and misinformation about COVID-19 in their facilities. In some cases, healthcare employers have prohibited employees from speaking to the media without express authorization under new or existing policies. READ MORE

CFTC Whistleblower Program Ends the Year with Another Seven-Figure Bounty Award

On December 19, 2019, the U.S. Commodity Futures Trading Commission (CFTC) announced that it will award more than $1 million to an individual whose tip helped expose a securities fraud scheme and eventually led to the CFTC filing charges. The individual first provided the information through the employer’s internal compliance program, which the employer submitted to another regulator, and the individual subsequently provided that information directly to the CFTC.  The award is significant because it recognizes that individuals are eligible to receive an award for: (1) being the original source of information the CFTC receives from another regulator; and (2) a tip that leads to evidence of a violation the CFTC ultimately charges, even if the reported conduct itself does not form the basis for those charges. READ MORE

The Whistle Keeps Blowing: SEC Whistleblower Office Releases Its 2019 Annual Report

The SEC’s Office of the Whistleblower (“OWB”) released its Fiscal Year 2019 Annual Report (the “Report”) to Congress on the Dodd-Frank Whistleblower Program on November 15, 2019. The Report analyzes the tips received over the last twelve months by the OWB, provides additional information about the whistleblower awards to date, and discusses the OWB’s efforts to combat retaliation and other actions that muzzle whistleblowers. To date, the SEC has recovered over $2 billion in total monetary sanctions from its enforcement actions arising from whistleblower tips, including more than $1 billion in disgorgement of ill-gotten gains and interests, and it has or is scheduled to return almost $500 million to harmed investors. READ MORE

Can You Hear The Whistle Blowing?: CFTC Releases 2019 Annual Report

The U.S. Securities Exchange Commission (“SEC”) and Commodity Futures Trading Commission (“CFTC”) administer whistleblower claims under the Sarbanes-Oxley Act of 2002. While the SEC has jurisdiction to regulate U.S. securities markets, the CFTC regulates the U.S. derivatives markets, which includes futures, swaps, and certain types of option contracts. In October, the CFTC’s Whistleblower Office (“WBO”) released its 2019 Annual Report (the “Report”) to two congressional subcommittees to provide insights into its whistleblower program and customer education initiatives. The Report provides an overview of the tips received by the WBO from October 1, 2018-September 30, 2019 (the “reporting period”), highlights several of the whistleblower awards from the past year, and discusses the WBO’s efforts to educate stakeholders about its whistleblower program. READ MORE

Regulators Offer Insights Into SEC, CFTC, and OSHA Whistleblower Program’s Trends and Priorities

On July 16, 2019, three prominent whistleblower law regulators spoke at PLI’s Corporate Whistleblowing in 2019, which was co-chaired by Orrick partners Mike Delikat and Renee Phillips. With the standard disclaimer that their comments and opinions were their own and not the official comments of their respective agencies, each spoke about their agencies’ whistleblower program’s current progress, challenges, and priorities. READ MORE

Inside-Out: CFTC Enhances Whistleblower Award For Internal Reporting

On May 6th, the Commodity Futures Trading Commission (“CFTC”) announced that it made a whistleblower award of approximately $1.5 million to an individual whistleblower. The individual provided information that assisted in the successful prosecution of a CFTC action and a related action brought by another federal regulator.  In particular, the CFTC recognized that the whistleblower initially sought to report his or her concerns internally prior to reporting to the CFTC, and it enhanced the individual’s award as an incentive.

In making the announcement, the Director of CFTC’s Whistleblower Office Christopher Ehrman explained, “While there is no requirement that a whistleblower report internally before approaching the Commission, today’s award demonstrates that the Commission may pay enhanced awards to those that do – that is one of the positive factors set out in our rules for the Commission to consider in making its award determination.”  Furthermore, the CFTC recognized that the information the claimant provided “was directly incorporated into strategy involving witness interviews, and his/her early assistance saved Commission resources through his/her explanation of a complex scheme.”

Since the beginning of the CFTC’s whistleblower program in 2014, the agency has awarded more than $85 million to whistleblowers.