Securities and Exchange Commission Whistleblower Program

The Securities and Exchange Commission whistleblower program was enacted as part of the Dodd-Frank financial reforms, and it is undergoing quite a bit of activity given the number of reports and tips filed with the Commission. There are now thousands of such tips and reports filed each year, according to their annual reports, but relatively few compared to the thousands of reports filed have generated collections so far.

The whistleblower files a form TCR and the form TCR can be submitted by mail or by fax. They can also fill out one online. The form TCR is how the SEC is first notified of potential action. Form TCR also allows the whistleblower to say when they have internally reported or may have previously contacted other government agencies.

It may be critical to contact a DC whistleblower attorney to learn more about how you are expected to interact with the SEC’s whistleblower program when filing a whistleblower case.

Defining the SEC’s Relationship with Whistleblowers

As of 2017, some 46 whistleblowers had been awarded approximately $160 million for reporting fraud to the agency. The SEC had ordered fines and disgorgement of up to $975 million, all of which protect investors from fraud by making clear to those who commit fraud that they may be liable for a serious action. It is fair to say that as the law continues to be used and continues to attract whistleblowers to provide reports, and as the SEC gets more time to process these reports, there will be more and more substantial awards in the future.

One reason that the Securities and Exchange Commission whistleblower program may not be as well-known as it otherwise ought to be is coincidentally something that makes it extremely valuable to whistleblowers. Most SEC whistleblower rewards indeed, most whistleblower actions before the SEC, are conducted by anonymous whistleblowers.

Will the Securities and Exchange Commission Need to Identify the Whistleblower?

It is a rare instance when the SEC is required to identify a whistleblower. That might happen in the event that the whistleblower is a witness in an SEC-supported action and potentially could collect an award, or would be likely to collect an award. However, even in instances where the SEC has awarded whistleblowers money, the Commission will not identify that whistleblower if they have not previously been identified and have filed anonymously, or unless the whistleblower comes forward themselves.

As a result, many of the great successes that the whistleblower reward law under the SEC whistleblower program are harder to publicize and remain less public. Of course, the defendants have little incentive to promote successful actions under this program.

As such, lawyers who work in this field have a responsibility to promote this law. The Supreme Court recently ruled that the whistleblower protections under the SEC whistleblower program enacted as part of the Dodd-Frank Act do not kick in unless and until the whistleblower reports allegations to the SEC itself.

Safeguards the SEC Has in Place to Maintain Anonymity for Whistleblowers

The SEC has a strong track record of not revealing the names of whistleblowers. They have only released names so far under extreme circumstances. One may be when they have pursued a defendant in court and want to use the whistleblower as a potential witness.

It will require the whistleblower to be identified then because such testimony might be to be biased by the possibility of a reward and if that fact were not revealed to the defense, it could be prejudicial. However, the SEC has been very careful in announcing awards with whistleblowers so as to protect their identity even when providing awards in successful actions.

Internal Reporting and Impact of Receiving Tips

Internal reporting is not currently protected as a result of Court decisions under the SEC whistleblower program unless the whistleblower has filed with the SEC first. That is to say, reporting directly to one’s boss may be protected by other laws, but to be protected under the Securities and Exchange Commission whistleblower program and have a right to sue for retaliation under it, one has to report to the SEC.

If this interpretation of the law remains and is not fixed by proposed legislation, it is likely to deluge the SEC with a lot of additional tips, but one could argue that incentivizing reporting fraud to the SEC was the purpose of this part of the Dodd-Frank Act anyway. It is recommended prior to reporting internally that anyone checks with counsel to determine their rights for any number of reasons including that this aspect of the law is subject to change by legislation.

Arguably, that is all part of the process. However, it remains to be seen whether the SEC will obtain the required staffing and funding from Congress to handle all the information if in fact they do get deluged with even more tips than they currently are receiving.

The whistleblower must provide information, original information to the SEC, and voluntary is defined as information that is not as a result of an investigation by a government agency or as result of an arrest or as result of a subpoena or any type of action taken by a regulatory or government agency coming after it. If the whistleblower is directed to provide that information to somebody else who is also under investigation, that would also not be voluntary. The information does not have to be provided directly to the SEC first to make it voluntary. If one provided information to another government agency, that will also count as prior information or voluntarily provided.

How Does the SEC Choose Their Cases?

The SEC already handles several thousand tips and reports of fraud a year, and they have been, as anyone would expect them to be,  relatively selective with respect to the cases that they actually pursue. It is more than reasonable for the SEC to use their authority judiciously, but if there is a major issue of securities fraud or at least an issue that could be believed to fall under the category of securities fraud, filing with the Securities and Exchange Commission may make a great deal of sense, particularly because as long as an attorney is hired to file it, a person can maintain anonymity throughout most of if not the entirety of the process.

What Is a Typical SEC Collection?

The SEC whistleblower reward program does provide an award of 10 to 30 percent in the event that there is a collection. A collection is pursuant to what is called a “covered action.” The SEC publishes on its website any covered action with an amount collected by the commission of more than $1 million.

At that point, persons who may have filed a whistleblower report initially have 90 days to file and claim their awards. The SEC whistleblower program begins the process of assessing whether or not a whistleblower should be entitled to an award and/or how much.

It is an unusual and new procedure that does not provide an independent right for whistleblowers to sue anyone directly in court except for a claim of retaliation. It does not provide a whistleblower a way to sue for the underlying fraud by themselves, but the SEC has the authority to use the information in the prosecution of securities fraud. Therefore, whatever allegations an individual may be attempting to bring to the forefront, they have to be related to securities violations to use this program, and the whistleblower is dependent upon the Agency to take action.

The SEC has a mandate to investigate securities fraud, and while many areas may touch on securities fraud, an allegation sent to the Commission must include at least some aspect as to why investors may be harmed or are defrauded in order to bring that charge. The SEC does not have jurisdiction over fraud committed against the government unless, as an example, a state government’s pension funds were also defrauded with respect to securities.

Scope of SEC Authority

The SEC has the authority to investigate and enforce securities law across the United States for any security or trade of any securities. The SEC has broad authority and they add the authority to the whistleblower program to follow up on information submitted to the SEC and investigate those allegations. Once they do all that, they have the authority to determine if an award should be provided or not based on whether or not they are successful in collecting anything.

The Role of the Securities and Exchange Commission in FCA Cases

Fraud against any government agency is more properly the province of the Federal False Claims Act. In the case of state pension funds, many states have their own State False Claims Acts, and in many of those states, the False Claims Act would cover fraud committed against the state pension fund. It is certainly possible that a fraud committed by a corporation could involve many or all of these laws.

The Securities and Exchange Commission is not an appropriate forum to bring a matter of a grievance against the government itself. While the SEC whistleblower program has had some great success, it has not had the type of publicity attendant with such success. Attorneys have not been able to promote individual whistleblowers and their heroism because they have been able to remain anonymous.

Their ability to remain anonymous, however, is often more than worth it, since that anonymity can, of course, protect a career. Anybody who is nervous about making reports for fear of their career, especially against a major company committing securities fraud, should appreciate that this law and this agency has done their very best to protect their position.