INSIGHT: SEC Whistleblower Program Turns Eight— Thousands of Tips, Trending Up

Dec. 20, 2018, 12:01 PM

The SEC received more whistleblower tips in fiscal 2018 than in any of its previous years and that trend, among others, is expected to grow in 2019.

In its 2018 Annual Report to Congress on the Whistleblower Program, the SEC highlighted tips received and awards paid, and noted other important legal developments affecting the SEC’s whistleblower program. To date, the SEC credits the whistleblower program as leading to more than $1.7 billion in total monetary sanctions, including more than $901 million in disgorgement and interest.

Touted by the SEC as one of the agency’s most successful endeavors, the eight-year-old whistleblower program encourages would-be whistleblowers to come forward in two ways:  anti-retaliation protections for whistleblowing activity; and  whistleblower awards for meritorious tips that lead to successful SEC enforcement actions, based on the percentage (10 percent to 30 percent) of the monetary sanctions imposed.

Two notable legal developments happened in fiscal year 2018. First, the U.S. Supreme Court in February 2018, in Digital Reality v. Somers (138 S. Ct. 767), struck down the SEC’s expansive definition of “whistleblower” as it relates to the anti-retaliation provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The high court found that an individual must make a complaint directly to the SEC to qualify for the Dodd-Frank Act’s anti-retaliation protections (Commission rules had allowed for protections for individuals who had reported wrongdoing internally only).

Second, in the summer of 2018, the SEC proposed new amendments to its whistleblower rules that would streamline the award review process and give the commission greater power to limit large awards.

Below are five key takeaways from the 2018 Report, as well as trends to expect in 2019.

Key Takeaways

1. Whistleblower Tips Continue to Pour in at Record Pace

Each year since the SEC’s Office of the Whistleblower was established in 2011, it has received more tips than the previous year, and in FY 2018, the trend held. The Office of the Whistleblower received 5,282 tips in FY 2018, an increase of 76 percent from FY 2012 (the first full year of the program) and 15 percent from FY 2017.

The Digital Reality decision may partially explain the acceleration in the number of tips reported to the SEC, as whistleblowers seeking the protections of the anti-retaliation provisions of the Dodd-Frank Act now must report suspected wrongdoing to the SEC.

2: Initial Coin Offering and Cryptocurrency Tips Are an SEC Focus

In the fourth quarter of FY 2018, the SEC staff added a new issue category to the tip reporting system to capture whistleblower tips concerning “Initial Coin Offerings and Cryptocurrencies.” The 2018 Report notes that the SEC received 39 tips related to this category by the end of FY 2018.

The addition of the category reflects an agency-wide focus on ICOs and digital assets, including as a stated priority for the SEC Examination Program in 2018, and as also reflected by the SEC’s Division of Enforcement’s creation of a Cyber Unit that became fully operational in 2018.

3: Global Tips Are on the Rise

In addition to receiving tips from every state domestically, in FY 2018, the SEC received more than 650 tips from 72 countries internationally (the most coming from Australia, Canada, China, and the U.K.), an increase of more than 15 percent from foreign tips received in FY 2017, and more than double the number received in FY 2012.

Indeed, the highest whistleblower award (before 2018) of $30 million went to a whistleblower living in a foreign country that provided information about an ongoing fraud.

4: Whistleblower Award Amounts Are Massive

The SEC awarded the top three largest awards ever in FY 2018 ($50 million, $39 million, and $33 million). A single action, in March 2018, led to $83 million in awards, the most ever from one action stemming from two investigations. Two individuals who had provided information leading to the opening of the first investigation, as well as ongoing assistance, split $50 million, and $30 million went to a third individual who had provided additional information leading to the opening of the second investigation.

In addition, in September 2018, the SEC issued a $54 million award, split between two individuals, $39 million and $15 million. Indeed, half of the ten largest awards since the inception of the award program occurred in FY 2018, resulting in a record $168 million paid to 13 individuals. Since the SEC is required by statute to keep whistleblower identities in strict confidence, the agency provides few details, beyond the size, about these significant awards or the enforcement actions that led to them.

5: Outsized Awards Will Likely Be Capped in the Future

In June 2018, the SEC proposed amendments to its whistleblower rules that may reduce award size in the future. Those proposed rules include a change that would allow the SEC to exercise its discretion to reduce large awards to an amount “reasonably necessary to reward the whistleblower and to incentivize other … whistleblowers” so long as the reward is not reduced below $30 million or the statutory minimum of 10 percent of the monetary penalty imposed. (See 2018 Report at 27).

Looking Forward

Looking to 2019, we expect the upward trend in whistleblower tips to continue, particularly if record-breaking awards continue to emerge from large actions that have spent years moving through the SEC’s enforcement pipeline.

If the SEC’s proposed rule changes are adopted, we may see a slight reduction in the overall size of awards, though future awards subject to a $30 million cap are arguably more than sufficient to generate headlines and incentivize employees to come forward with information.

As SEC whistleblower tips continue to rise at record pace, companies should take necessary steps to ensure that they have robust internal policies and procedures to encourage internal whistleblowing, and promptly investigate and respond to whistleblower’s complaints.

Where possible, companies should also communicate with internal whistleblowers during the investigative process, as appropriate, and inform whistleblowers of the outcome of any investigation. Companies should take care to avoid whistleblower retaliation and activity that directly or indirectly discourages whistleblowing to the SEC, including through the use of confidentiality agreements, as such action could lead to separate enforcement action.

Author Information

Arian M. June is litigation counsel based in Debevoise & Plimpton’s Washington, D.C., office and is a member of the White Collar & Regulatory Defense Group. Her practice focuses on securities enforcement defense, internal investigations, state attorneys general inquiries and white collar criminal defense.

Ryan M. Kusmin, an associate in Debevoise & Plimpton’s Washington, D.C., office, is a member of the White Collar & Regulatory Defense Group. His practice focuses on government and internal investigations, SEC enforcement actions, and securities-related compliance matters, as well as securities and white collar litigation.

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