An Intriguing Whistleblower Award Case
We haven’t talked about whistleblower awards in a while, but a recent spat over one such award from the Securities and Exchange Commission might be worth our attention. It raises some interesting questions about whether the SEC’s whistleblower award policies might squelch employees’ incentives to first report misconduct concerns on internal hotlines.
The SEC issued the award on Sept. 30, and as usual with these awards, we don’t have many specifics. We only know the whistleblower received an award of $3.36 million for reporting misconduct that happened sometime in the 2010s, since the whistleblower submitted his or her tip “early in the covid-19 pandemic.” But we don’t know the company involved or what the misconduct actually was.
In absolute numbers, the $3.36 million is a nice piece of change. What caught my eye, however, is that the whistleblower argued for even more money because he first raised his concerns to his employer internally, and that prompted the company to reimburse the harmed parties. (This makes me suspect the misconduct was some sort of investor scam or Ponzi scheme, but we can’t be sure.)
So the company voluntarily reimbursed the victims of the misconduct. Then the whistleblower went to the SEC and reported the misconduct, which eventually led the company to a settlement with the SEC. We don’t know the total settlement amount, but since the whistleblower received $3.36 million and SEC rules say the award should be 10 to 30 percent of the final settlement, that implies a settlement of $11.2 million to $33.6 million.
The whistleblower’s contention: that the calculations for his award should have included those voluntary reimbursements the company made before the matter reached the SEC, since his original report put those reimbursements into motion.
The whistleblower argued that if the SEC doesn’t count voluntary reimbursements like that, then whistleblowers will have less incentive to raise misconduct concerns internally. Instead, just take the information you have directly to the SEC first. Then the company would need to make those reimbursements anyway and the amounts would be included in the award calculations. You’d get more money.
SEC: Nope, Not Buying It
The SEC shot down the whistleblower’s arguments pretty hard. Citing whistleblower award program rules that have been in place for years, the agency noted that awards are supposed to be based on monetary sanctions, and…
Under the rules, “monetary sanctions” means “[a]n order to pay money that results from a Commission action” and which is either (i) “[e]xpressly designated as a penalty, disgorgement, or interest” or “[o]therwise ordered as relief for the violations that are the subject of the covered action.”
Well, the SEC didn’t order the company to make those reimbursements, the agency said. It went on to cite several prior whistleblower awards where claimants made similar arguments for larger awards, and the SEC had ruled that awards are “based on the amount actually collected in connection with the covered action.” The SEC didn’t collect those covered amounts, so they don’t count toward award calculations.
Fine; we should respect the SEC’s rules for whistleblower awards and how it enforces them. At the same time, however, the SEC should appreciate the consequences of its stance. If whistleblower awards are “based on the amount actually collected in connection with the covered action,” as the agency itself says — then whistleblowers have a natural incentive to make that actually collected amount as large as possible. Which would mean not putting that amount at risk by reporting your concerns internally first.
A Slow Burn for Whistleblowers
None of this is to say that your whistleblower hotline will now fall silent because of this single SEC whistleblower award. It’s always been the case that most people first report their misconduct concerns internally before running to the SEC (or any other regulator) and that’s not likely to change any time soon.
As one whistleblower lawyer told me while we chatted about this case, “Most people at the beginning, when they report something internally, they don’t even see themselves as whistleblowers. They just see themselves as bringing up an issue to management. Only later when they realize nothing is getting done or they’re suffering retaliation do they decide that they want to ‘turn whistleblower’.”
I think there’s a lot of sense in that. Still, we should appreciate the larger picture here: that the Trump 2.0 Administration’s default position is to go easy on corporations rather than hold them accountable for wrongdoing. Meanwhile, whistleblowers are still gambling with their career security and financial comfort by speaking up.
So if the potential for a payout declines, whistleblowers will take that shift into consideration.
For example, imagine that SEC chairman Paul Atkins or some bureaucrat from the Justice Department declares: “If a company voluntarily reimburses harmed victims before we hear about a case, then there will be no ill-gotten gains to disgorge.” So that’s one potential source of reward money knocked out of the equation. Then Atkins or the Justice Department also say, “We just don’t believe in punitive damages either since that only harms shareholders, so we won’t impose those either.” There goes another.
Neither statement is hard to imagine coming from this Trump 2.0 gang. But if regulators don’t require disgorgement or impose other penalties, then where does a whistleblower’s award come from? Ten to 30 percent of zero is still zero.
If such circumstances come to pass, what’s an employee who knows about corporate misconduct supposed to do? Stay silent and quit? Leak something to the media? Wait for the problem to become so bad that regulators would have to act?
I don’t know. But my fear is that reporting concerns via the internal hotline will get squeezed out of the equation.