The U.S. Securities and Exchange Commission was hard-pressed before 2012 to get corporate whistleblowers to come forward. Anyone who did blow the whistle faced retaliation, job loss and the possibility of being blackballed in their industry.
The Dodd-Frank Act, passed by Congress in 2010, created the SEC Whistleblower Program to protect the confidentiality of whistleblowers. It also rewards them for their efforts and moxie. They now can walk away with back pay, plus a percentage of fines imposed on companies accused of fraud. That makes it more worth their while to step forward. The first award was made in 2012.
Just last week, the SEC awarded $2.5 million to whistleblowers who aided in an investigation that led to the agency’s successful enforcement action.
Because of confidentiality rules, the SEC releases few details about whistleblower cases. That protects the identity of those who step forward with detailed information that not only can lead to prosecution at one firm, but could also tip off the federal agency on individuals and even other businesses in the same realm who may be committing fraud.
“Research made it absolutely clear there needs to be incentives for people to jeopardize their careers, or get demoted, fired or blackballed,” said John Kostyack, CEO of the National Whistleblower Center. The center provides free legal counseling and assistance to potential whistleblowers. It also puts them in touch with whistleblower lawyers who can walk them through the process.
“People need a confidential reporting channel because of the risk of retaliation,” he said. “Second, it needs to be outside their company and third, the award is a mandatory amount as a percentage of the monetary sanctions recovered, usually 10-30%.”
Incentive is needed
There are very few cases where people reap gigantic awards, but the incentive needs to be out there, he said. “It is a way to gracefully exit from their company.”
The National Whistleblowers Center points to the SEC Awards program as a key model, Kostyack said. “They have been very good and it is extremely rare they have someone who loses the protection of confidentiality.”
The SEC declined to give details of the recent cases, but did issue a news release.
“The Securities and Exchange Commission today announced an award of over $2.5 million to joint whistleblowers whose tip … led to several successful enforcement actions,” the release stated. “In addition to their tip, the whistleblowers provided helpful assistance early in the investigation, which helped save the Commission time and resources.”
Jane Norberg, chief of the Office of the Whistleblower, said detailed analysis like that provided by the whistleblowers in the recent case have an impact on the SEC’s ability to enforce federal security laws.
“Today’s award demonstrates the Commission’s commitment to awarding individuals who provide high quality independent analysis that leads to successful enforcement actions,” she said.
More than $500 million awarded
To date, the SEC’s program has awarded approximately $510 million to 92 individuals since issuing its first award in 2012. That includes awarding 25 individuals in this fiscal year, totaling approximately $123 million. All payments come from the investor protection fund established by Congress, financed through monetary sanctions paid to the Commission by securities law violators. The money does not come from harmed investors.
“Whistleblowers may be eligible for an award when they voluntarily provide the Commission with original, timely, and credible information that leads to a successful enforcement action,” the news release stated. “Whistleblower awards can range from 10 percent to 30 percent of the money collected when the monetary sanctions exceed $1 million.”
This is all possible because of the Dodd-Frank Wall Street Reform and Consumer Protection Act, passed by Congress during the Obama administration. It was created in response to the 2008 financial crisis and named for sponsors Sen. Christopher J. Dodd (D-CT) and Rep. Barney Frank (D-MA).
In 2,300 pages, the Dodd-Frank Act contains provisions implemented over several years, including the SEC’s Office of the Whistleblower.
Before the Dodd-Frank Act, there were the core laws of the SEC, including the Securities Act and the Securities Exchange Act, which established the obligation not to commit fraud as a public company. After that, the country relied on the 1986 False Claims Act, which helped whistleblowers receive a portion of monetary sanctions, Kostyack said.
Awards are newer
“The SEC whistleblower programs are used to prosecute for illegal bribery and illegal fraud,” Kostyack said. “Remember the Enron and WorldCom crises in 2000. Corporate governance was put into place and among them was the first explicit whistleblower protections for people reporting corporate misbehavior. At that time, it did not include any awards.”
For those who don’t recall, “after Enron and then WorldCom foundered amid multibillion-dollar accounting scandals, exposing layers of corporate malfeasance … Washington moved belatedly but forcefully to stiffen regulations, toughen enforcement and improve corporate audits,” the New York Times reported in 2006. “The goal was to shore up confidence in Wall Street, particularly among individual investors who had been pushed more than ever into the stock and bond markets by the decline of company pension and health-insurance plans, along with soaring college costs.”
Thousands of investors lost their life savings, a powerful indictment of lax government oversight.
Still, Kostyack said, there were legal protections only against retaliation that did not always work. They required public companies to set up internal channels for whistleblowing.
“Fast forward to 2008-09, the next financial crisis, subprime real estate and mortgage fraud. At that point Congress realized anti -retaliation revisions were not enough,’’ he said. “Many people were well aware of these frauds but did not report them and there remained a long track record of retaliation. That is perhaps the most important thing to do about whistleblowing. There is a well-known retaliation against those who speak up against the powerful.”
Executives were well aware of the risks and not likely to make a choice that could end their livelihoods.
“In passing the Dodd-Frank Act in 2010, Congress recognized it needed to do more than promise to award you back pay. That is how the whistleblower provisions made it into the law,” Kostyack said. “In 2011, the Office of the Whistleblower was established at the SEC and it has proven to be quite good at what it does.”