The SEC released its Fiscal Year 2013 Annual Report   (the “Report”) to Congress on the Dodd-Frank Whistleblower Program on  November 15, 2013.  The Report analyzes the tips received over the last twelve months by the SEC’s Office of the Whistleblower (“OWB”) and provides additional information about the whistleblower award evaluation process.

Breakdown of Tips Received in FY 2013

The OWB reported a modest increase in the number of whistleblower tips and complaints that it received in 2013 – 3,238 tips in 2013 compared to 3,001 in 2012.  Overall, the 2013 whistleblower tips were similar in number, type, and geographic source to the whistleblower tips reported in 2012.  As in 2012, the most common types of allegations in 2013 were: Corporate Disclosure and Financials (17.2%), Offering Fraud (17.1%), and Manipulation (16.2%).  Most whistleblowers, however, selected “Other” when asked to describe their allegations.  In 2012, the most common complaint categories reported were also Corporate Disclosure and Financials (18.2%), Offering Fraud (15.5%), and Manipulation (15.2%).  See Appendix B to the Report, listing tips by allegation type and comparing tips received in 2013 to those received in 2012.

 

The OWB received whistleblower tips and complaints from all 50 states, the District of Columbia, Puerto Rico, Guam, and the U.S. Virgin Islands.  Domestically, the largest number of whistleblower complaints and tips were from California (375), New York (215), Florida (187), Texas (135), and New Jersey (83).   Additionally, the OWB received whistleblower tips from individuals located in 55 foreign countries.  Of these, the countries from which the most numbers of tips originated were the United Kingdom (66), Canada (62), and the People’s Republic of China (52), with Russia, India, Ireland, Australia and Germany being other countries from which the SEC received more than 10 tips.

2013 Whistleblower Awards

The SEC issued only four whistleblower awards (with one additional award made after the end of the fiscal year) in FY 2013, including one award for over $14 million.  That award was, by far, the largest SEC whistleblower award to date.  In making the award, the Commission did not specify the entity about which the tip was received, the industry in which the entity participates, or the kind of information the SEC received.  The SEC issued the remaining awards to three whistleblowers who provided information about an allegedly sham hedge fund.  The total awards for the year were $14.8 million, and the OWB reports that it had $479 million in its Fund balance at fiscal year end.  The OWB does not anticipate making “programmatic” changes to the whistleblower program, as a January 18, 2013 report by the Office of the Inspector General determined that the SEC’s whistleblower “award levels” are comparable to those of other federal agencies with whistleblower programs.

Performance Metrics

In the last quarter of 2013, the OWB implemented performance metrics in 28 internal controls areas in order to better evaluate its own performance.  For example, the OWB now monitors the percentage of calls to the whistleblower hotline to which the OWB responds within 24 business hours, as well as the percentage of initial reviews and acknowledgment or deficiency letters that the OWB completes within 30 days of an individual’s application for a whistleblower award. The OWB is also in the process of developing software to streamline its daily work flow and to track the progress of whistleblower complaints.  Perhaps because these performance metrics were not implemented until the last quarter of FY 2013, the Report did not include data on how successful these initiatives were or will be in reducing the time that it takes for the SEC to resolve whistleblower complaints.

Complaints Regarding Retaliation and Confidentiality Agreements

The OWB reviews whistleblower submissions of employee confidentiality and other agreements that potentially restricted employees from reporting possible securities violations to the SEC.  It also identifies and monitors whistleblower complaints alleging retaliation by employers or former employers for reporting possible violations both internally and to the SEC.  The OWB is monitoring the developing body of case law on retaliation for internal reporting of possible securities law violations.  It is aware of the Fifth Circuit’s recent decision in Asadi v. G.E. Energy (USA), L.L.C., 720 F.3d 620 (5th Cir. 2013), which held that the anti-retaliation provisions in the Dodd-Frank Act create a private cause of action only for employees who provide tips to the SEC, and not to those who report internally.  However, the OWB notes that the Asadi decision conflicts with certain district court decisions and may be in conflict with SEC regulations.

These remarks indicate that the SEC is actively seeking an opportunity to prosecute retaliation claims and to make an example of companies who attempt to use confidentiality or severance agreements to prevent employees from reporting possible securities law violations to the SEC.  Given the sensitivity of these issues, companies should be particularly careful when drafting confidentiality and severance agreements and when responding to whistleblower complaints so as not to trigger further investigation by the SEC.