Three Thousand Whistleblowers Alert SEC to Wrongdoing

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Annual report reviews first year of a securities whistleblower program.

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The U.S. Securities and Exchange Commission (SEC) received more than three thousand whistleblower tips between November 2011 and November 2012, the first full year of a program created by the Dodd-Frank Wall Street Reform and Consumer Protection Act.

According to the SEC’s annual report on the program, the tips came from individuals in all 50 states as well as from 49 countries outside the United States.

To encourage corporate employees to come forward with complaints without fear of retribution by their managers, the SEC established rules that provide for whistleblowers to become eligible for certain financial rewards—between 10 and 30 percent of the total sanction—if the information they provide the SEC leads to successful monetary sanctions of more than $1 million. The Dodd-Frank Act also affords whistleblowers expanded legal protection, giving them the right to sue their employer for retaliating against them.

The SEC report also notes that the agency has issued its first cash award under the new program. A whistleblower tipped off the agency to an ongoing fraud and provided documents to expedite the investigation. Sanctions against the company reached more than $1 million, with the whistleblower receiving 30 percent of the $150,000 in damages actually collected.

The report also outlines the activities of the new Office of the Whistleblower created under the Dodd-Frank Act. Among its responsibilities, the office manages SEC communications with whistleblowers and their counsel, processes awards, maintains a website to guide potential whistleblowers, and provides internal guidance to other SEC offices in their interaction with whistleblowers.

Former SEC Chairman Mary Schapiro has heralded the whistleblower program as a cost-saving success. “When insiders provide us with high-quality road maps of fraudulent wrongdoing,” she explained, “it reduces the length of time we spend investigating and saves the agency substantial resources.”

According to recent remarks by SEC Commissioner Luis Aguilar, the whistleblower program produced a “noticeable difference in the quality of the information” available to SEC investigators.

Critics of the program have feared that it would discourage the use of internal compliance mechanisms. With the cash incentive, employees are more likely to take a problem to the government than to try to solve it through company channels. SEC Commissioner Troy Paredes expressed this concern at the program’s outset, stating that “the Commission should have underpinned the integrity of internal compliance programs by requiring a whistleblower, in order to receive a bounty, to have internally reported the same information as . . . provide[d] to the SEC.”

It may be too early in the life of the whistleblower program to determine its success. For example, while the report gives a figure for total tips, it does not indicate how many tips translated into enforcement actions. Nor, for that matter, does it indicate how many tips led to investigations.

In addition, the first cash award paid to a whistleblower has been, in fact, the only cash award during the reporting period. The report includes a balance sheet, noting that the agency paid only $45,739 in awards. That amount represents 30% of the roughly $150,000 collected from the first successful enforcement under the program.

It does appear that the rate of complaints may be increasing, which is a stated goal of the program. Over the last three months of the 2012 reporting period, the SEC received a monthly average of 271 complaints, compared with an average of 197 during the first three months of 2012. The difference could indicate that whistleblowers are becoming gradually more comfortable with the new incentives and protections.

The SEC did not report, though, the total number of annual whistleblower complaints before Dodd-Frank.