Another SEC Award Favoring Compliance
The Securities and Exchange Commission handed out a $3 million whistleblower award on Monday to two whistleblowers who first tried to report and fix their firm’s misconduct internally — yet another sign that the SEC is at least trying to nudge whistleblowers to work with corporate compliance departments.
In another twist, the SEC also waived its standard rule that awards only go to tipsters who provide information “voluntarily,” since the whistleblowers apparently first triggered a separate investigation by some other regulatory agency without knowing that they did. The whole fact pattern is kinda weird, but still sheds light on how much the SEC wants to encourage internal reporting, so let’s discuss.
First, as usual with SEC whistleblower awards, we don’t know the name of the firm, what misconduct actually happened, when it happened, or what information the tipsters provided that landed them the award. SEC whistleblower award orders were doing redaction before Robert Mueller made redaction cool.
The whistleblower award does tell us the following. At some point, the two whistleblowers had “candid discussions” that prompted another agency to open an investigation into potential misconduct. We don’t know what that means, but the SEC did say that this misconduct was causing harm to retail investors — so the firm could, for example, be an investment fund that was running a Ponzi scheme, where Tipsters 1 and 2 blurted out an inconvenient truth to FINRA examiners. Something like that fits.
Whatever the candid discussions were, they prompted that other agency to send a document request to the firm. That inquiry didn’t name the two tipsters specifically, but did “request a response from the relevant employees” — and the tipsters were those relevant employees at the company.
Normally a request like that would end a whistleblowers’ right to seek an award later, because the tip would no longer be a “voluntary” submission. To qualify as voluntary, the tip must be submitted before the SEC or some other agency send an inquiry to the whistleblower’s company. In this case that other agency beat the tipsters to the punch.
Still, the SEC waived that rule in this instance because the two claimants didn’t know about the document request from the other agency until after they brought their tip to the SEC; and because they had suffered “undue hardship and unfairness as a their efforts in the circumstances described here.”
Which brings us to the good stuff.
Speaking Up First
The two whistleblowers had first reported the misconduct to the firm’s internal compliance function, and then argued vigorously for the company to address the problem, “including advocating for full disclosure of the violation and for compensation of harmed investors.”
A close reading of the SEC award order even suggests that the whistleblowers had reported the misconduct internally some time ago, suffered retaliation because of it, and gripes about the retaliation might have been the “candid discussions” that led to the first agency opening a probe. Take a look:
Claimants’ candid discussions … [REDACTED] … in turn prompted the other authority to open its investigation — thus, claimants’ own remedial efforts, in part, were an indirect cause of the investigation that resulted in the request for information from claimants.
That sounds to me like the two tipsters had already been trying to get the company to solve its problem, and vented their frustrations to the other regulator, which quietly made a note to follow up with the company. When the tipsters’ efforts to make their company do the right thing went nowhere, they went to the SEC with their allegations. And here we are, $3 million later.
The order also says the tipsters subsequently left the firm, so it’s possible that they got fired and were facing employment difficulties. That’s just a guess, but sadly, blacklisting is not an unreasonable guess to make.
Regardless, the SEC stressed that it was giving these two more money because they tried working with the compliance function first.
“These whistleblowers showed great tenacity by repeatedly reporting internally and advocating for the firm to disclose the violative conduct and remedy the attendant investor harm,” Jane Norberg, chief of the SEC’s Office of the Whistleblower, said in a statement. “Their critical information and assistance helped the SEC bring an important enforcement action aimed at protecting retail investors.”
That’s a step in the right direction. It telegraphs a message to would-be whistleblowers that the SEC and its awards program can act as an insurance policy should your efforts to speak up about misconduct lead to retaliation.
What We Really Need
What the corporate ethics and compliance community ultimately needs, however, is a systemic change to whistleblower awards.
First, Congress should amend the Dodd-Frank Act to reverse the Digital Realty Trust decision by the Supreme Court last year, which ruled that employees cannot claim the law’s anti-retaliation protections unless they first report misconduct to the SEC.
The House Financial Services Committee took the first step toward that goal last month, approving a bill that would extend the law’s anti-retaliation protections even to those who only report to their company’s internal compliance function. The bill still has a long road ahead, but it’s moving.
Second, the SEC should then clarify its own rules to create a larger “internal reporting premium” where whistleblowers are specifically told, “You can earn a few percentage points more if you first try to report your allegations internally.”
That internal reporting goal shouldn’t be a requirement, but it should be strongly encouraged. And with Digital Realty Trust rescinded, employees would still have a right of private litigation should the company retaliate against them.
Then, maybe, the SEC whistleblower awards program can support internal reporting, rather than be a quasi-competitor as it is now.
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