In 2010, Congress realized they had to take significant action in response to the rise in corporate scandals that had caused irreparable harm to so many companies and individuals. As a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Securities and Exchange Commission (SEC) created the SEC Whistleblower Program – a program that has become the one of the greatest and most effective between public and private partnership in U.S. history.
The SEC Whistleblower Program has been a success thanks to numerous protections that have been put into place to ensure the people reporting are not at risk of losing their job, as well as substantial incentives that encourage people with information to come forward. The program has resulted in more than $1.7 billion in financial sanctions and payments of more than $326 million to SEC whistleblowers. This success relies on key aspects of the program.
Foundation of the SEC Whistleblower Program
For individuals and groups to feel safe in reporting violations of the federal securities laws in the workplace, they have to feel secure in the knowledge that they will not face retribution for their actions. In addition, people tend to react favorably to being rewarded for taking action against people who are breaking the law. As such, the SEC Whistleblower Program is set up to offer incentive to people and groups with information.
Individuals and groups reporting violations under the SEC Whistleblower Program can do so anonymously. This is the cornerstone of the program. All anonymous submissions of information must be done through an SEC Whistleblower attorney that ideally comes from an SEC Whistleblower law firm. This legal counsel must specialize in SEC Whistleblower cases.
With the significant protection awarded whistleblowers under the Dodd-Frank Act, employees who report violations under the SEC Whistleblower Program may not be subjected to any retaliatory information from their employer. This includes being fired, suspended, demoted, harassed, or threatened. The SEC Whistleblower Program protects all employees who provide information to the SEC and who assist an investigation in any way.
If a company retaliates against a whistleblower, that employee will have automatic private right of action and can immediately take their employer to federal court. In many courts, this protection applies to employees who do not go through SEC when reporting violations. Employees that sue their employer under the Dodd-Frank Act can be reinstated to their previous level of seniority, receive backpay, and have their litigation costs covered.
The SEC Whistleblower monetary award is significant at 10%-30% of monetary sanctions collected based on the information they provide. However, there are strict rules for qualification, which include:
- The information must be provided to SEC voluntarily
- The information must be original
- The information must result in enforcement action that is successful
- The monetary sanctions resulting from the information provided must be worth more than $1 million
How to File an SEC Whistleblower Submission
An SEC Whistleblower submission can be made online or by fax or mail, under penalty of perjury. The only way for the whistleblower to submit anonymously is to do so through an SEC Whistleblower attorney. The submission is highly detailed, consisting of as many as 100 pages, with supporting exhibits.
How to File an SEC Whistleblower Award Application
When monetary sanctions of more than $1 million result from successful enforcement, SEC will post a Notice of Covered Action on their website. It is up to the whistleblower and their SEC Whistleblower attorney to fax or mail the application to SEC within 90 days of the notice date. Whistleblowers are responsible for keeping an eye on the website, so they do not miss the deadline for filing their application.
The Investigative Process
The SEC is permitted to investigate cases with a significant amount of discretion. This includes determining the scope of the investigation and who will be subject to investigation. There is a strict procedure the SEC follows during an investigation, which is launched when a security violation is reported.
Types of Securities Violations
There are many types of security violations a whistleblower can report. The most common of these include:
- Offering fraud – misrepresentations and/or omissions are made to potential investors
- Market manipulation – interference with free and fair market operation
- Insider trading – buying/selling corporate security based on information that has not been made public
- Trading and pricing – a number of trading techniques that are illegal under securities laws
When any of these or other potential violations are reported, SEC will take action.
Matters Under Inquiry
When a securities violation is reported, the SEC will conduct a preliminary inquiry, known as a Matter Under Inquiry (MUI). Sources that precipitate a MUI include:
- Tips and complaints from the public
- Referrals from self-regulatory organizations
- Independent SEC reviews of company filings
- Examinations and inspections of broker-dealers and investment advisors and companies
- Referrals from state agencies
- Media stories
- Reviews of information acquired via the Bank Secrecy Act
The MUI will help the SEC determine if a more thorough investigation is warranted. Since there is generally a lack of information, a MUI allows the SEC to gather more information. When opening a MUI, the SEC will consider:
- Any rules or statutes that have been violated
- The seriousness and magnitude of the potential violation
- The potential losses and harm due to the violation
- Whether the individuals or groups subject to harm are vulnerable or at risk
- Whether the violation is ongoing
- Whether the violation can be efficiently investigated within the period of the statute of limitations
- Whether there are other agencies or authorities that are better suited to investigate the matter
The MUI will be an informal investigation and the cooperation of any individuals involved is voluntary. The SEC will request documents for review and may request interviews. When there is cause for concern, a formal investigation is launched.
When a matter warrants a formal investigation, the SEC will file a Formal Order. This document lays out the nature of the investigation and designates the SEC staff responsible for the investigation. These staff members can issue subpoenas for documents or witness testimony.
Any person who has been requested to supply documents or witness testimony must be shown a copy of the Formal Order. If a witness submits a written request for a copy of the formal order, it is at the discretion of the SEC staff whether to issue a copy. The formal investigation is non-public unless the SEC orders a public investigation.
There are certain privileges that apply during a formal investigation, including:
- Attorney-Client Privilege – protects against disclosure of certain communications while obtaining legal advice
- Work-Product Doctrine – protects against use of discovery documents and materials that are prepared when litigation is anticipated
- Self-Evaluation Privilege – protects against the use of self-evaluations and reports prepared by companies that may contain sensitive information
Attorney-client privileges and work-product privileges can be waived voluntarily. The SEC may see this as evidence of cooperation, causing them to be more favorable when it comes time to lay charges and enforce penalties. In addition, the SEC provides tools traditionally used by law enforcement agencies to encourage cooperation from individuals and companies. These tools include:
- Proffer Agreement – an agreement that says information provided by a witness cannot be used against that witness in future proceedings
- Cooperation Agreement – an agreement by which the Division of Enforcement will recommend to the SEC that an individual or company receive credit for cooperating in the investigation and enforcement actions
- Deferred Prosecution Agreement – an agreement by which the SEC not take any enforcement action against the individual or company, provided they cooperate fully with the investigation and enforcement actions
- Non-Prosecution Agreement – an agreement by which the SEC will at no time take enforcement action against the individual/company, provided they cooperate fully with the investigation and enforcement actions
Closing an Investigation
An investigation may or may not result in the need for enforcement action. If no enforcement action is required, the investigation can be closed immediately, and a Termination Letter will be sent to the individuals or companies involved. If enforcement action is required, the SEC will send a Wells Notice to the individuals or companies involved, informing them that enforcement action will be taken. The recipients of the Wells Notice may submit a Wells Submission, which includes their arguments as to why enforcement action should not be taken.
When enforcement action is required, it generally takes the form of civil actions or administrative proceedings. An investigation cannot be closed until all enforcement action has been taken, which in turn requires:
- A final judgement or Commission order
- All monetary penalties to be paid in full, be distributed to investors or paid into the Treasury, and be recorded properly
No investigation can be closed if there are debts in collections with the SEC or an entity on the SEC’s behalf. It’s important to keep in mind that a statute of limitations of five years from the date the claim was made will be applied to the investigation.
The SEC Whistleblower Program is a detailed and thorough program that allows individuals and groups to come forward with information on violations without fear of retribution. They can remain anonymous and can qualify for an award should their information lead to the recovery of more than $1 million in monetary sanctions. This has significantly altered securities enforcement for the foreseeable future, ensuring whistleblowers have the protection they deserve.