Take a moment to be dazzled by the $83 million whistleblower award the Securities and Exchange Commission announced on Monday, but spend more time poring over the details and footnotes the SEC included in its award order. Compliance officers may not like the implications of what you find there.
The $83 million award was divided among three whistleblowers who all hail from Merrill Lynch, a subsidiary of Bank of America. They helped the SEC unravel a scheme Bank of America ran from 2009 to 2012 to reduce the amount of client money it needed to hold in reserves. That violates the SEC’s customer protection rule, and in 2016 Bank of America paid $415 million to the SEC to settle the dispute.
Two of the three whistleblowers split $50 million of the total award, for $25 million each. The third whistleblower won $33 million. Altogether, the $83 million award dwarfs the agency’s previous record for an award, which was $30 million given in 2016.
Those are the headlines of the case. The footnotes, however, offer compliance officers plenty of food for thought — especially when you consider the details in light of the Supreme Court ruling last month that curbs Dodd-Frank whistleblower protections unless you first bring your complaint to the SEC.
First is the detail that claimants 1 and 2, who split the $50 million, could have received even more money, except that they “unreasonably delayed in reporting their information” to the SEC.
“We believe it important to recognize, through our discretion to determine an appropriate award percentage, that Claimant No. 1 and Claimant No. 2 unreasonably delayed reporting the relevant facts to the Commission for an extended period of time,” the SEC’s award order said. (Eventually the pair did discover additional facts related to the case, and passed them along to the SEC promptly. That helped them stay in the SEC’s good graces and waltz off into early retirement.)
Claimant No. 3, who got the $33 million, seems like a clear-cut case. That person provided separate information to the SEC that opened a second investigation into Bank of America, and became a “cornerstone” of the SEC’s whole action against BofA.
Timing Is All
The crucial point for Claimants 1 and 2 is that they didn’t approach the SEC as soon as they learned of the misconduct. They waited for some period of time; we don’t know how long. Because of that, they received less money than they might otherwise have won.
How much less? We may never know. But under Dodd-Frank, whistleblowers can receive 10 to 30 percent of the total settlement the SEC wrangles from the offending company. In this case, $83 million is only 20 percent of the $415 million that Bank of America paid.
Well, 30 percent of $415 million is $124.5 million — an extra $41.5 million. That’s how much more money our three whistleblowers might have received, in some perfect world where they provided exactly the right information at precisely the right time.
Obviously the SEC considers numerous factors when deciding how much money to award whistleblowers: quality of information, amount of information, extent of cooperation, and so forth. Any of those factors could be why the SEC whittled down the award from the theoretical maximum of $124.5 million to the actual $83 million.
But timeliness of information is one of those factors, too; and the SEC clearly suggested lack of timeliness is one reason why Claimants 1 and 2 didn’t get as much as they might have. What’s more, they did provide lots of high-quality information and cooperation along the way: in-person meetings, conference calls, supplemental documents, and identification of other key witnesses. So as other factors become less relevant in why Claimants 1 and 2 missed out on more millions, lack of timeliness becomes more relevant.
The crucial point for Claimants 1 and 2 is that they didn’t approach the SEC as soon as they learned of the misconduct. Because of that, they received less money than they might otherwise have won.
Enter Digital Realty Ruling
One fair point to raise is that this is all speculation — but it’s reasonable speculation to make, given the facts at hand. And if we’re making that speculation here, others are making that same speculation elsewhere.
Others like, say, potential whistleblowers in your own organization.
Last month’s Supreme Court ruling, Digital Realty Trust v. Somers, found that anti-retaliation provisions of Dodd-Frank only apply to those whistleblowers who report misconduct to the SEC. Right away, we saw Bio-Rad Labs, already involved in litigation with its ex-general counsel over whistleblower retaliation, use the ruling to argue that an $11 million judgment that man won should be cut by $3 million, because he failed to report his concerns to the SEC and therefore had no claims under the Dodd-Frank Act.
Now we have this whistleblower award, which clearly states that the whistleblowers could have received more money had they gone to the SEC not just first, but immediately.
Employees aren’t dumb. They will look at these examples and draw the reasonable conclusion: to get the most protection from retaliation, and to stand the best chance at winning the largest award for whistleblowing — go directly to the SEC, go quickly, and tell them everything you know.
Not news that compliance officers in charge of internal reporting want to hear. But once you read beyond that big $83 million headline, that’s what this news really means.