with contributing author Donald Davidson
This piece was previously published in Westlaw Securities Litigation & Regulation. Read Part 1 here.
Momentum Will Likely Continue
In the program’s first two fiscal years, the SEC received a total of 6,573 whistleblower tips.12 Although tips flowed to the SEC at the rate of nearly a dozen each business day, whistleblower awards were both rare and insubstantial for most of the first two years of the program. Yet, in the last few weeks of the program’s second full year in existence, the SEC awarded bounties in two cases within a month of each other, and the awards were much larger: $14 million and $150,000.
Soon after paying the $14 million award, the SEC staff suggested it might be making awards more frequently and in larger amounts. In the words of SEC chief Mary Jo White, “Our whistleblower program already has had a big impact on our investigations by providing us with high-quality, meaningful tips. We hope an award like this encourages more individuals with information to come forward.”13
The head of the SEC’s Office of the Whistleblower, Sean McKessy, recognized a month later that the whistleblower program might be gaining momentum. ”This [the Oct. 30 bounty] is continued momentum and success for the SEC’s whistleblower program that is bringing our investigators valuable and timely information,” he said.14
The enforcement officials’ comments suggest that the agency believes an increase in public awareness of and participation in the whistleblower bounty program, due to the recent awards, will continue the program’s recent momentum.
The enforcement officials’ predictions may well prove accurate. The lucrative size of the most recent awards provides a substantial incentive for more whistleblowers to come forward. Furthermore, the time lag associated with receipt, investigation and enforcement of bounty qualified tips, a process that takes years, may be ending for many of the thousands of tips the SEC received during the program’s first two years.
For comparison, other longer-standing whistleblower programs have experienced lengthy delays between the receipt of a tip and the grant of an award. For example, the False Claims Act bounty program experienced a statutory increase in the size of awards in 1986. The act recently paid whistleblowers more than $167 million as part of a $2.2 billion settlement with Johnson & Johnson to resolve allegations of off-label promotion and kickbacks. The settlement related to conduct allegedly occurring in 2002 and 2003, but the whistleblower awards were paid 10 years later.
Similarly, the Internal Revenue Service bounty program, which experienced a statutory increase in the size of its awards in 2006, recently awarded $104 million to a former UBS AG employee for information pertaining to Swiss bank accounts. The government originally received the tip in 2007, but did not issue the award until 2012.
Given the complex nature of investigations, particularly those involving overseas transfers or complicated and potentially concealed financial transactions, it is not surprising that the frequency and amount of paid bounties lag behind the program’s enactment.15 With the bounty program now in its third year, many of the original whistleblower tips might now be working their way through the enforcement process. In the last month of its second fiscal year, the program awarded the same number of bounties (two) as were awarded in the prior two years. Given the increased frequency and amount of awards, the explicit commitment by enforcement officials to award bounties, and the likelihood that many tips are finishing the enforcement process, there will likely be more investigations based on whistleblower tips.
Bounty Program Hot Spots
Of the 6,573 whistleblower tips received by the Office of the Whistleblower over its last two fiscal years, it received 3,001 in 2012 and 3,238 in 2013.16 The most common subjects of whistleblower tips remained constant and fell within the same categories: corporate disclosures and financials (18.2 percent in 2012 versus 17.2 percent in 2013), offering fraud (15.5 percent to 17.1 percent) and manipulation (15.2 percent to 16.2 percent).17 Additionally, the OWB categorized the largest number of tips, about 23 percent of the total, as pertaining to “other” allegations that could relate to a variety of securities-related misconduct.18 Only one substantive complaint category — misconduct related to municipal securities and public pensions — experienced a significant decrease in the number of whistleblower tips received between 2012 and 2013.19
Whistleblower tips related to the Foreign Corrupt Practices Act represented the highest year-to-year growth (29 percent increase) in tips to the OWB, followed by tips related to offering fraud (18 percent increase) and trading and pricing misconduct (16 percent increase).20
Domestic whistleblower tips continued to originate primarily from California, New York, Florida and Texas in 2013.21 The OWB also continued to receive a significant number of tips from abroad. Over 12.4 percent (403) of the total tips received in 2013 originated from an international source, compared to 10.8 percent (324) in 2012.22 As in 2012, international whistleblower tips continued to originate primarily from the United Kingdom, Canada and China.23 Tips from India decreased dramatically from 33 tips in 2012 to 18 in 2013, while tips from Russia jumped from two in 2012 to 20 in 2013.24
The year-over-year statistical comparison suggests the usual whistleblower hot spots — financial disclosure, offering fraud and manipulation of the market allegations — remain the most likely areas of concern for companies faced with the possibility of external whistleblowers. It also suggests that companies operating abroad might face increased scrutiny due to whistleblower tips regarding anti-bribery and related accounting provisions set forth in the Foreign Corrupt Practices Act. A successful FCPA enforcement action can result in substantial monetary sanctions, thereby making it attractive to bounty-seeking tipsters.
Prepare for Increased Scrutiny
While nothing can prevent a company from becoming the subject of a whistleblower report, a robust compliance and reporting system can help a company build a foundation to address issues in a non-retaliatory, problem-solving manner. This is the single most effective means of shielding companies from regulatory actions. An important part of any compliance program is a strong internal reporting structure, including a whistleblower policy and anonymous complaint line. This can reduce the risk of a whistleblower raising an issue for the first time with the authorities rather than internally at the company.
Indeed, companies might consider implementing their own internal whistleblower bounty programs to encourage employees with knowledge of problems to report “up” rather than “out.” The prospect of a cash award or extra vacation time may encourage internal reporting. An effective internal reporting system can root out potential compliance headaches before they become legal migraines.
Under Dodd-Frank, the whistleblower program does not require individuals to first blow the whistle internally before informing the SEC of the information. The program does, however, contain incentives to encourage internal reporting. A whistleblower who reports internally preserves the timing of the report for 120 days, gains extra “credit” in determining an award and gets credit for everything the company’s internal investigation turns up after the report. The SEC suggests those incentives work, and the majority of whistleblowers report their tips internally before going to the SEC.
Neither SEC-issued incentives nor anecdotal evidence ease the fear or frustration felt by many companies whose employees report directly to the enforcement authorities without allowing the companies to investigate the alleged misconduct. A corporate environment instilling confidence that the company will evaluate employees’ concerns in a fair, balanced and non-retaliatory manner, coupled with an effective internal reporting process, can help decrease the number of employees who decide to report outside the company.
Companies seeking to reduce their risks should consider the following options:
- Reporting policies: Confirm that reporting policies are up-to-date and understandable and that sufficient internal mechanisms are in place to make them effective.
- Reporting systems: Make sure the reporting systems are well-publicized, easy-to-use and provide for anonymous submissions. Consider utilizing several different methods of internal reporting.
- Employees’ role: Send a clear message to employees that reporting potential misconduct is an important part of their role.
- Even-handed policies/procedures: Encourage good-faith reporting, even if the report is mistaken or the underlying conduct is not illegal or inappropriate. Inform employees that maliciously filing false reports constitutes a serious violation of company policy.
- Corporate culture: Develop a corporate culture that fosters reporting of genuine concerns.
Management should consider emphasizing the internal reporting functions in presentations, trainings and other employee-focused events and distributions.
- Internal accountability: Build internal accountability for investigating the reports in a timely and balanced manner.
- Transparent process: Explain to employees how the company will handle their reports.
Consider providing the reporter with general information regarding the investigation and resolution process, as well as using an independent ethics officer or similar employee — rather than the reporter’s supervisors — to follow up on the report.
The most important part of encouraging employees to report internally is unequivocally conveying to them that retaliation will not be tolerated and, in the unfortunate event that retaliation occurs, it will be remedied. Companies should explicitly prohibit retaliation against employees who make reports in good faith and provide employees with instructions about how to internally report allegations of retaliation. Although there is no guarantee employees will follow internal reporting guidelines, companies should consider including the above options in their policies and procedures to maximize their chance of first learning of potential misconduct from an employee, not a government subpoena.
12 Id. at 1.
13 See Sec. & Exch. Comm’n, Press Release, supra note 5
14 See Sec. & Exch. Comm’n, Press Release, SEC Rewards Whistleblower with $150,000 Payout (Oct. 30,2013).
15 The lack of whistleblower bounty awards might also be due in part to the qualifications for an award and the willingness of whistleblowers to continue to pursue bounties following their initial report. The OWB posts on its website a notice of every SEC action resulting in monetary sanctions over $1 million. This is called a notice of covered action and lists actions for which eligible whistleblowers may seek an award. Whistleblowers have 90 calendar days to apply for an award by submitting a form request to be considered for a bounty award. According to the OWB’s 2013 annual report, it posted 431 notices over the course of its first two fiscal years.
16 See 2013 annual report, supra note 11, at 1.
18 Compare id. at 20 with Sec. & Exch. Comm’n, Office of the Whistleblower, 2012 Annual Report to Congress on the Dodd-Frank Whistleblower Program (November 2012), at Appendix A, available at http://www.sec.gov/about/offices/owb/annual-report-2012.pdf.
19 See 2013 annual report, at 20.
21 Compare id. with 2012 annual report, supra note 18.
About the Authors
Benjamin Kimberley is an attorney in Winston & Strawn’s San Francisco office. He focuses his practice on Foreign Corrupt Practice Act (FCPA) issues, white collar and internal investigations, complex civil litigation, financial regulation and litigation, and government ethics compliance. Mr. Kimberley also has significant experience coordinating domestic and international forensic examinations and collections of data, as well as using existing collection, processing and review processes and technologies to reduce clients’ eDiscovery costs.
Donald Davidson is a partner with Winston & Strawn in San Francisco. He is an experienced securities lawyer who has represented clients in litigation and in regulatory inquiries involving the SEC , FINRA and its predecessors, Justice Department, state securities regulators, and foreign securities regulators. He also advises clients on compliance and risk management issues.
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