with co-author Sam Kramer
On June 9, 2016, the Securities and Exchange Commission (SEC) announced a $17 million award for a whistleblower whose tip allowed the government to recover a significant sum of money from a company that violated securities law.[1] The award, which is the second-largest in the history of the SEC whistleblower program, capped off a month in which five whistleblowers received more than $26 million in rewards from the SEC. This flurry of awards illustrates the rapid expansion and increased prominence of so-called “bounty programs” that provide financial rewards to whistleblowers who come forward with information that allows the government to recover funds stolen from investors through fraud.
Although bounty programs for whistleblowers reporting financial fraud are a relatively new creation, they have quickly become an effective and invaluable one. In just the past five years, these programs have become critical tools for the government agencies that regulate the trading of securities and commodities and prominent parts of the system of American whistleblower law.
In the aftermath of the 2008 financial crisis, Congress passed the Wall Street Reform and Consumer Protection Act, better known as the Dodd-Frank Act, to better regulate the financial industry and prevent future crises. One of the goals behind Dodd-Frank was to root out fraudulent schemes like the one infamously perpetrated by Bernie Madoff. To achieve that goal, Dodd-Frank included several provisions related to whistleblowers in an effort to encourage employees to report corrupt business practices before they spiral out of control and cost investors and consumers money. Among the changes Dodd-Frank made in this area was the creation of two whistleblower incentive programs, one for the SEC and one for the Commodities Futures Trading Commission (CFTC).[2]
The SEC and CFTC programs have essentially the same structure: They allow whistleblowers who have information on violations of the laws and regulations enforced by each agency to submit that information to the agency through an online portal. The forms are typically referred to as “tips.” Whistleblowers who retain counsel can submit tips anonymously in order to protect themselves against potential retaliation. Once tips are submitted, the agencies review them and identify potential violations. If a tip leads to an investigation that results in an enforcement action generating sanctions of more than $1 million, the whistleblower who submitted the tip is eligible for an award. The amount of an award ranges from 10 to 30 percent of the monetary sanctions the agency recovers, depending on a number of factors, including the significance of the information the whistleblower submitted in the tip and the degree of assistance the whistleblower provided in the investigation. Importantly, the awards are not taken from the monetary sanctions that go to harmed investors, but instead are drawn from Consumer Protection Funds created by both agencies.
Both programs have grown significantly in recent years. The SEC began accepting tips in 2011, while the CFTC program got started in 2012. Because the SEC has a broader mandate and has historically taken more enforcement actions than the CFTC, its program is significantly larger. By the end of fiscal year 2015 on September 30, 2015, the SEC had received 14,116 tips from whistleblowers.[3] As of June 9, 2016, the SEC had awarded more than $85 million to 32 whistleblowers, including a $30 million award in September 2014.[4] The pace at which awards have been handed out has increased significantly in recent months, with six awards totaling nearly $30 million going to nine whistleblowers in 2016 alone.[5] With more than $400 million set aside for awarding whistleblowers at the end of fiscal year 2015[6] and an increasing number of tips to work with, the SEC appears poised to continue awarding whistleblowers with increasing regularity.
The CFTC received a total of 655 tips between 2012 and the end of fiscal year 2015.[7] To date, it has awarded nearly $11 million to three whistleblowers.[8] Although the CFTC’s program is smaller than the SEC’s, the agency has shown a willingness to issue significant awards. Most notably, in April 2016, the CFTC issued its largest whistleblower award to date when it announced a $10 million award.[9] In announcing this award, Christopher Ehrman, the director of the CFTC’s Whistleblower Office, expressed optimism that such a large award would encourage other whistleblowers to come forward with new tips. With more than $267 million set aside for whistleblower awards as of the end of fiscal year 2015, the CFTC is well-positioned to issue significant awards going forward.[10]
As the SEC and CFTC continue to demonstrate a willingness to utilize their bounty programs to provide significant financial awards to whistleblowers, it is fair to expect that more and more whistleblowers will come forward with tips. This has significant ramifications for the SEC and CFTC, companies and the whistleblowers themselves. Thus, these bounty programs have become an increasingly important part of whistleblower law and must be understood by companies, their attorneys and whistleblower advocates.
[1] See Press Release No. 2016-114, with a link to the Commission’s order, available at https://www.sec.gov/news/pressrelease/2016-114.html.
[2] 7 U.S.C.A. § 26.
[3] See U.S. Securities and Exchange Commission, 2015 Annual Report to Congress on the Dodd-Frank Whistleblower Program (“2015 Annual Report”), at 21. The 2015 Annual Report is available at https://www.sec.gov/whistleblower/reportspubs/annual-reports/owb-annual-report-2015.pdf.
[4] See Press Release No. 2016-114, with a link to the Commission’s order, available at https://www.sec.gov/news/pressrelease/2016-114.html.
[5] See U.S. Securities and Exchange Commission, Office of the Whistleblower, Final Orders of the Commission, https://www.sec.gov/about/offices/owb/owb-final-orders.shtml.
[6] See U.S. Securities and Exchange Commission, 2015 Annual Report to Congress on the Dodd-Frank Whistleblower Program (“2015 Annual Report”), at 27. The 2015 Annual Report is available at https://www.sec.gov/whistleblower/reportspubs/annual-reports/owb-annual-report-2015.pdf.
[7] See CFTC Annual Report on the Whistleblower and Consumer Education Initiatives (Oct. 2013), at 2, https://www.whistleblower.gov/files/Reports/wb_fy2013reporttocongress.pdf; CFTC Annual Report on the Whistleblower and Consumer Education Initiatives (Oct. 2014), at 2, https://www.whistleblower.gov/files/Reports/wb_fy2014reporttocongress.pdf; CFTC Annual Report on the Whistleblower and Consumer Education Initiatives (Oct. 2015), at 3, https://www.whistleblower.gov/files/Reports/wb_fy2015reporttocongress.pdf.
[8] See Press Release PR7351-16, with a link to the Commission’s order, available at http://www.cftc.gov/PressRoom/PressReleases/pr7351-16; Press Release PR7254-14, available at http://www.cftc.gov/PressRoom/PressReleases/pr7351-16.
[9] Press Release PR7351-16, with a link to the Commission’s order, available at http://www.cftc.gov/PressRoom/PressReleases/pr7351-16.
[10] CFTC Annual Report on the Whistleblower and Consumer Education Initiatives (Oct. 2015), at 6, https://www.whistleblower.gov/files/Reports/wb_fy2015reporttocongress.pdf.
Lisa J. Banks is a founding partner with the whistleblower and employment law firm 
