The Securities and Exchange Commission, or "SEC," is an independent agency of the United States federal government that has the power to enforce the federal securities laws, regulate the securities industry, and oversee publicly traded companies. The SEC's primary mission is to protect investors by maintaining fair, orderly, and efficient markets. Its whistleblower program is designed to encourage people who have knowledge of possible securities law violations to voluntarily come forward.
The SEC Whistleblower Program requires the agency to pay awards to eligible whistleblowers who voluntarily provide original information to the SEC that result in an enforcement action with over $1 million in fines. Under the program, eligible whistleblowers are eligible for a 10% to 30% share of the recovery resulting from lawsuits or settlements by the SEC and related actions filed by other regulatory and law enforcement agencies.
The original information can be derived from independent knowledge (facts known to the whistleblower that are not derived from publicly available sources) or independent analysis (evaluation of information that may be publicly available, but which reveals information that is not generally known).
A reward-eligible whistleblower may be any person whose tip significantly contributes to the success of an SEC enforcement action, including where the information causes the staff to (i) commence an examination, (ii) open or reopen an investigation, or (iii) inquire into different conduct as part of a current SEC examination or investigation, and the SEC brings a successful judicial or administrative action based in whole or in part on conduct that was the subject of the individual's original information.
In determining whether an individual’s information significantly contributed to an enforcement action, the SEC considers factors such as whether the information allowed the SEC to bring the action in significantly less time or with significantly fewer resources, additional successful claims, or successful claims against additional individuals or entities
Now, as some say, “the early bird gets the worm,” but this may not be the case when it comes to reporting violations to the SEC. The fact that the SEC has already commenced an investigation should not cause a prospective whistleblower to forego providing a tip to the SEC. That result underscores how the SEC’s whistleblower rules permit the SEC to pay awards to whistleblowers that provide information in an existing investigation if the information is new and materially adds to the SEC's recovery of money from the wrongdoer.
Suppose, for example, that the first whistleblower knew only about part of the violations and illegal trade. Even though a second whistleblower may be delayed a few years in reporting the violation to the SEC and came forward after the SEC already commenced an investigation, these whistleblowers may receive an award for providing information and documents, participating in staff interviews, and providing the staff a more complete picture of how events from an earlier period impacted the company’s practices.
On October 15, 2021, the SEC awarded $40 Million to two whistleblowers whose information and assistance contributed to the success of an SEC enforcement action. The first whistleblower, whose information caused the opening of the investigation and exposed difficult-to-detect violations, will receive an award of approximately $32 million. The first whistleblower also provided substantial assistance to the staff, including identifying witnesses and helping the staff to understand complex fact patterns. The second whistleblower, who submitted important new information during the investigation but waited several years to report to the Commission, will receive an award of approximately $8 million.
You may ask, why did one whistleblower receive an award that is four times greater than the award provided to the second whistleblower. Well, the first whistleblower reported promptly and provided the tip that opened the investigation while the second whistleblower provided important information during the course of the investigation and was a valuable first-hand witness, but due to the unreasonable delay in reporting the violations, the SEC reduced the second whistleblower's award percentage.
Other circumstances, for example, (i) whether violations identified by the whistleblower were continuing during the period of delay, (ii) whether investors were being harmed during that time, and (iii) whether the whistleblower might profit from the delay by ultimately obtaining a larger award because the failure to report permitted the misconduct to continue, resulting in larger monetary sanctions, in the absence of significant mitigating factors, would likely cause the SEC's whistleblower office to recommend a substantially lower award amount.
SEC whistleblowers have been instrumental to the success of many SEC investigations by providing our investigators with valuable evidence and information. As of September 15, 2021, the SEC's whistleblower program announced that it has paid more than $1 billion in awards to 207 whistleblowers, including over $500 million in fiscal year 2021 alone. All of these payments are made out of an investor protection fund established by Congress that is financed entirely through monetary sanctions paid to the SEC by securities law violators.