SEC Says Outsiders Can Now File Whistleblower Claims

It is a happy development that the requirement to be an “insider” in order to qualify for whistleblower rewards is under attack.

The Securities and Exchange Commission just made an award of more than $700,000 “to a company outsider who conducted a detailed analysis that led to a successful SEC enforcement action.”

This is a major development not only for the SEC whistleblower program, but for whistleblower law in general.

Historically, the requirement to be considered an insider grew out of False Claims Act case law.  People got upset with the idea that someone could stand at the courthouse steps and see someone indicted for a criminal action or read a newspaper story and then use that information to file a False Claims Case. Various controls have been in place such as the Public Disclosure Bar to the False Claims Act.

Only an original source could bring a claim if there was a public disclosure and the definitions of public disclosure and original source made it very difficult to bring claims. The idea that someone not directly connected to information, or the company committing the wrongdoing, could also be a whistleblower got tied up in all this and other provisions of the False Claims Act and grew on its own.

As of 2010, the original source exception to the less potent public disclosure bar, still has echoes of the “insider” language, but it is better for whistleblowers than it used to be:

    • (i) prior to a public disclosure under subsection (e)(4)(a), has voluntarily disclosed to the Government the information on which allegations or transactions in a claim are based, or (2) who has knowledge that is independent of and materially adds to the publicly disclosed allegations or transactions, and who has voluntarily provided the information to the Government before filing an action under this section.’-

31 U.S.C. 3739 § (e)(4)(B)

Although it does not happen very often, the government can even block the public disclosure bar entirely, even if the whistleblower does not qualify to be an original source.

Now the SEC is making the case that outsiders can also be whistleblowers when they provide information of real value to a government investigation. As one SEC official said in a statement:

    “The voluntary submission of high-quality analysis by industry experts can be every bit as valuable as first-hand knowledge of wrongdoing by company insiders,” said Andrew Ceresney, Director of the SEC’s Enforcement Division.  “We will continue to leverage all forms of information and analysis we receive from whistleblowers to help better detect and prosecute federal securities law violations.”

It only makes sense. Fraud and legal violations today involve complex industries and understanding what is happening requires a certain level of expertise. The rest of us can look at the same information as such an expert and never really understand what the violations are without that expertise.

It is time for the insider/outsider distinctions in whistleblower law to fade away. We need the information and we need the expertise to explain what companies violating law are doing. We need that much more than we need to block somebody with expertise from obtaining an award just because that person did not happen to be directly connected to the issue.

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