SEC Pays First Ever Dodd-Frank Whistleblower Bounty Award

On August 21, 2012, the Securities and Exchange Commission (SEC) announced that it has awarded its first whistleblower bounty, just over one year after the SEC’s Dodd-Frank whistleblower rules became effective. The SEC’s Claims Review Staff issued a short order, Release No. 34-67698, granting the whistleblower’s award, which notes that the SEC declined to award a claim to a second whistleblower involved in the action.

According to the SEC, the whistleblower receiving the award, who wished to remain anonymous, provided the SEC with documents and other relevant information that allowed the SEC to rapidly complete its investigation. The SEC did not provide any further details or information regarding the company that was fined or the type of financial fraud involved with the whistleblower’s tip. The SEC stated that the information provided by the whistleblower ultimately resulted in a court ordering over $1 million in sanctions, and the whistleblower will receive the maximum award of 30% of the monetary sanctions collected in the action. Since the SEC has only collected $150,000 of the total sanctions thus far, the whistleblower will receive approximately $50,000 initially, but the whistleblower’s award will increase significantly as the SEC continues to collect sanctions.

The SEC’s Director of Enforcement Robert Khuzami said “the whistleblower provided the exact kind of information and cooperation that [the Commission] was hoping the whistleblower program would attract.” SEC Chairman Mary L. Schapiro, a major proponent for the whistleblower program, said “the whistleblower program is already becoming a success” and noted that the agency has seen high-quality tips that are saving time and resources for investigators. As part of the whistleblower initiative, the SEC developed the Office of the Whistleblower, through which individuals may submit a whistleblower tip. The Chief of the SEC’s Whistleblower Office, Sean McKessy, said that the whistleblower program receives about eight tips per day.

The SEC did not approve a claim from a second individual seeking an award in this matter because the information provided did not lead to or significantly contribute to the SEC’s enforcement action, as required for an award.

The SEC’s press release announcing the award is available here.

What this Means to Companies and Proactive Steps to Consider

After months of multiple statements by senior SEC officials that the first bounties under the Dodd-Frank whistleblower provisions would be paid “any day”, this first award and the substantial publicity that will no doubt follow will likely lead to additional tips being filed with the SEC.

Securities class action plaintiff lawyers, False Claims Act lawyers, and traditional employment lawyers have all jumped headlong into the SEC whistleblower program, often urging their clients to bypass internal reporting and compliance programs that companies have put in place since the passage of the Sarbanes-Oxley Act of 2002. In this regard, the SEC press release does not reveal whether the whistleblower was an employee of the sanctioned entity and/or whether the issue had been reported internally to the company. Under the Dodd-Frank regulations, whistleblowers who do not report internally can receive an enhancement of their bounty percentage up to the maximum of 30% of the sanctions collected.

Given the real incentives available to Dodd-Frank whistleblowers and their attorneys who report to the SEC, companies need to review their internal compliance and reporting policies and potentially revise these policies to stress the importance of internal reporting, and also to encourage employees to come forward and report suspected fraud without fear of retaliation.

However, taking into consideration the SEC’s unwillingness to mandate internal reporting as a condition of receiving a Dodd-Frank bounty award, the likelihood that such effort undertaken by companies to encourage internal reporting will yield positive results remains to be seen.