A Telling SEC Whistleblower Award

Another week, another tantalizing whistleblower award from the Securities and Exchange Commission! This time around, the agency has doled out $20 million to some senior corporate officer who first tried to get the company to investigate a misconduct allegation internally, and then went to the SEC when the company took no action.

The SEC announced the whistleblower award on Monday, and as usual the details are shrouded in mystery. We do know that two whistleblowers were involved in this matter, and together they received a total of $24 million. The senior executive, however, received $20 million because his (or her?) information and cooperation “proved critical to the success” of the case — even though that senior executive was the second person to report the misconduct to the SEC, not the first.

The plot twists here get somewhat convoluted, so let’s take a close read of the whistleblower award notice from the SEC.

First we have Claimant 1, who seems to be a lower-level employee of the company in question. Claimant 1 was first to bring the misconduct allegations to the SEC, but “while Claimant 1’s information prompted the opening of the investigation, he/she had limited knowledge of the schemes and his/her information was general and/or incorrect in several respects,” the SEC said.

There’s more. Claimant 1 did first report his suspicions to the company’s internal compliance function, but then waited two years before approaching the SEC. Also, while Claimant 1 did talk with SEC enforcement lawyers, “he/she was not able to provide additional helpful information” beyond what was in the original tip — which, as we noted above, wasn’t 100 percent correct in the first place. 

The Mysterious Claimant 2

Much more interesting to compliance professionals is Claimant 2. Even though Claimant 2 was the second employee to report this matter to the SEC, he or she “provided important information about key witnesses and their roles in the schemes,” the agency said, and “staff relied heavily on Claimant 2’s information and assistance during the course of the investigation.”

OK, but what role did he or she have within the company, to be able to provide such help and detail to the SEC?

The whistleblower order doesn’t say. It does, however, offer one important clue in a footnote: that someone of Claimant 2’s status typically isn’t eligible for a whistleblower award, because he falls within the “officer exclusion” of the award program’s rules. 

That exclusion says certain executives aren’t eligible for an award, if the person is— 

An officer, director, trustee, or partner of an entity, and another person informed you of allegations of misconduct; or you learned the information in connection with the entity’s processes for identifying, reporting, and addressing possible violations of law.

In other words, Claimant 2 was some senior officer at the company, who somehow is involved in receiving or addressing reports of misconduct. 

Granted, lots of roles could fit that profile. Claimant 2 could be a member of the audit committee who received the allegation from an internal tipster and then forwarded the issue to the compliance team. He could be an internal auditor who found the issue and passed it along to the compliance officer. Claimant 2 could even be the chief compliance officer him- or herself, who opened an investigation and then management slow-rolled the issue. We don’t know.

Regardless, Claimant 2 did actually receive an award. Why? Because a corporate officer can still be eligible for a whistleblower award if:

• He or she first reports the matter internally to some proper office, such as the compliance team or the audit committee; and
• The officer then waits at least 120 days before reporting to the SEC.

That’s what happened here. Claimant 2, clearly someone with senior authority at the company, either discovered the issue directly or heard about it from someone else. He or she then reported the matter internally, and the company failed to make any timely progress. So Claimant 2 took their knowledge to the SEC, and ultimately received that $20 million award.

Whistleblower Points to Ponder

First, while we don’t know what company was involved here or what its misconduct was, remember that SEC whistleblower awards are typically 10 to 30 percent of the total sum the company paid as a result of the whistleblower’s tip. Since the SEC doled out $24 million here, that implies it relates to a corporate misconduct settlement with penalties of $80 million to $240 million.

Next, remember that Claimant 2 had to wait at least 120 days before he or she could bring the matter to the SEC seeking a whistleblower award. So what might have happened if the company had voluntarily self-disclosed its misconduct within that 120-day window? 

For starters, Claimant 2 would never have received that $20 million award; the company’s self-disclosure would mean the whistleblower’s tip was no longer “original information,” and therefore no award would be forthcoming. (Claimant 1 probably wouldn’t have received his $4 million award, either.)

More importantly, the company would have been eligible for a more favorable settlement with the SEC, since it would have received credit for the voluntary self-disclosure. 

We can only guess what that more favorable settlement might have looked like. For comparison purposes, however, remember that the Justice Department usually rewards voluntary self-disclosure with deep discounts on criminal penalties or no criminal penalties at all. Voluntary self-disclosure is worth a lot.

So, really, the lesson for compliance officers in this whistleblower award is that regulators are using the power of their awards programs to drive companies toward more voluntary self-disclosure. If you don’t do it — if you don’t take action to disclose a violation within roughly 120 days — you could stand to lose a lot more as your internal whistleblowers run to regulators looking for a payday. 

Not long ago I speculated that the Justice Department’s new whistleblower awards program might set up exactly such a dynamic. Now we have evidence that the SEC awards program is creating that dynamic. 

Compliance officers, plan accordingly.