We received another glimpse into the Securities and Exchange Commission’s thinking about whistleblowers on Friday—although as usual with SEC, details are sketchy and the primary thought is “we support whistleblowers as expansively as possible.” Compliance officers, take note.
The glimpse came in the form of a $3.5 million whistleblower reward issued on Friday. To whom? We don’t know. Against what firm, or for what type of misconduct? Unclear. Apparently, the media had already reported on potential misconduct at the company (yay media!) and the SEC had already opened an investigation. That led the whistleblower to provide his own information about said misconduct.
This is where the case gets interesting—or, as interesting as possible for a situation where the SEC discloses so little. SEC whistleblower staff reviewed the whistleblowers claim and decided that yes, the information was credible; but no, the person was not eligible for a reward, because his tip did not lead the SEC to open an investigation or lead to the success of the probe the SEC had already launched.
Remember your SEC rules here. Under Rule 21f-4(c)(1), a whistleblower tip is eligible for a reward only if the information prompts the SEC to launch a new investigation, take an ongoing investigation in a substantially new direction, or reopen an old investigation. This person’s tip did none of these things, the SEC, so no reward for you.
That decision against the whistleblower came down in January 2016. In February, the whistleblower appealed that decision against him, arguing that his tip was actually governened by SEC Rule 21f-4(c)(2)—note the difference in that last number there. Under that second subsection of the rule, whistleblowers can also get a reward if their tip “significantly contributes” to the success of an investigation.
The whistleblower said his tip was a significant contribution. The SEC Whistleblower Office consulted with the SEC Division of Enforcement, which apparently supported the tipster’s claim, and his appeal was granted.
Those are the facts of the case disclosed by the SEC, which as I said, aren’t much. We can, however, make a few other reasonably plausible deductions based on how the SEC explained this case or what wasn’t said.
Lessons to Learn
First, this whistleblower received at least some of his $3.5 million reward because he suffered retaliation. The SEC announcement says, “As part of our assessment of the award criteria, we have considered certain unique hardships experienced by the Claimant as a result of the Claimant’s decision to report the wrongdoing to the Commission. Specifically, the record demonstrates that the Claimant has been unable to find employment since reporting the misconduct and that this is significantly due to Claimant’s whistleblowing activities.”
If compliance officers ever needed another reminder why anti-retaliation training is important, you have it in that language. The SEC gives larger whistleblower rewards to people who suffer retaliation, even if that retaliation comes from the industry as a whole rather than your specific company. Employees do see these rewards, and $3.5 million isn’t chump change even to senior executives. Strong anti-retaliation programs will lead to fewer outcomes like this for all companies.
Second, this decision is a rather nuanced interpretation of whistleblower reward rules. The SEC notice does mention that the whistleblower submitted his tip “through counsel,” and we can assume counsel assisted him with his appeal letter too. That’s not news per se, but it underlines just how savvy whistleblowers now can be when working with the SEC.
Third, what does “substantially strengthen” mean under whistleblower rules? SEC Enforcement Director Andrew Cereseny gave us one clue in the SEC statement, when he said the whistleblower’s information “increased our leverage during settlement negotiations with the company.” So the Enforcement Division already knew what misconduct the company had committed, and the company was already in settlement discussions. This tip may simply have been the SEC piling on the evidence in a matter already near disposition, either to increase sanctions or to get to closure more quickly.
Fourth, we did not see any reference to the third subsection of the Rule, which governs a whistleblower’s reward eligibility if he has already reported misconduct to a company’s internal whistleblower hotline. Does that mean the person never contacted the chief compliance officer at all? Or did he call the hotline and the company then did nothing? We may never know.
If you want to speculate on which company is at the root of this, remember that whistleblower rewards can range from 10 to 30 percent of the company’s total sanctions (when those sanctions exceed $1 million). That means the sanctions in this case were in the range of $11.7 million to $35 million. If the first decision against the whistleblower came down on Jan. 7, 2016, then the misconduct was exposed in 2015 or perhaps earlier, and the settlement with the company has happened since then.
Happy digging through SEC enforcement archives.