When the SEC proposed regulations implementing the Dodd-Frank Act SEC whistleblower reward provisions, many companies and the Chamber of Commerce strenuously urged the SEC to require whistleblowers to report internally prior to making a disclosure to the SEC Office of the Whistleblower. The main justification for this proposal was that companies had established effective internal reporting mechanisms and robust anti-retaliation policies. Proponents of this internal reporting requirement asserted that a program permitting whistleblowers to report directly to the SEC would undermine compliance programs and create a perverse financial incentive for employees who are responsible for identifying and investigating misconduct.
Ultimately, the SEC rejected this proposed internal reporting requirement but adopted rules that encourage and incentivize internal reporting. In particular, the SEC whistleblower rules increase the award percentage where a whistleblower “report[s] the violation internally through his or her firm’s internal reporting channels or mechanisms” prior to reporting to the SEC. The largest SEC whistleblower awards to date are $50 million, $39 million, and $37 million.
Recent SEC whistleblower awards confirm the wisdom of the SEC’s rejection of a proposed internal reporting requirement. They also call into question the Chamber of Commerce’s assertions that internal reporting mechanisms are effective at detecting and halting fraud and that whistleblowers are protected against retaliation. In particular, the 2020 orders announcing awards to whistleblowers reveal that most of the whistleblowers suffered employment retaliation or other hardship and many of them raised concerns internally before making a disclosure to the SEC:
On April 20, 2020, the SEC awarded approximately $5 million to a whistleblower. The order notes the following factor warranting an upward adjustment: “Claimant suffered a unique hardship as Claimant was terminated soon after raising concerns internally about the conduct in question with Claimant’s supervisor.”
On April 3, 2020, the SEC awarded approximately $2 million to a whistleblower who provided significant new information during the course of an ongoing investigation. This information would have been difficult for the SEC to ascertain in the absence of the whistleblower’s tip. The order cites the following two award factors: “Claimant assisted with the Commission’s investigation despite implied threats made to Claimant” and “Claimant suffered hardships as a result of Claimant’s whistleblowing.”
On March 30, 2020, the SEC awarded approximately $450,000 to a whistleblower who worked in a compliance role. One of the positively assessed facts the order cites is that the “Claimant suffered unique hardships as a result of Claimant’s internal reporting.”
On February 28, 2020, the SEC awarded approximately $7 million to a whistleblower whose disclosures enabled the SEC to devise an investigative plan and craft its initial document requests. The order recognizes “Claimant’s persistent efforts to remedy the issues, while suffering hardships.”
On April 16, 2020 the SEC awarded approximately $27 million to a whistleblower who disclosed information that was significant in enabling the SEC to uncover hidden conduct occurring, in part, overseas. One of the positive factors warranting an upward adjustment in the award is that “Claimant repeatedly and strenuously raised Claimant’s concerns internally.”
These recent whistleblower awards suggest that companies are not responding effectively, if at all, to internal whistleblower disclosures and that an all-too-common response is to retaliate against the whistleblower. Indeed, one of the orders suggests witness intimidation, i.e., the company was making threats against a whistleblower during an ongoing investigation.
As the Dodd-Frank Act approaches its 10th anniversary and as the SEC whistleblower program reaches the important milestone of paying more than $400 million to whistleblowers, these recent awards underscore the importance of the program and they suggest that Congress and the SEC should take further actions to ensure that whistleblowers can come forward without fear of retaliation.
The prevalence of retaliation underscores the importance of the SEC continuing to take steps to maintain the confidentiality of a whistleblower’s identity and to enable whistleblowers to file anonymously.
The prevalence of retaliation against SEC whistleblowers is consistent with the results of a Global Business Ethics Survey (GBES) released by the Ethics & Compliance Initiative, which found that:
The GBES also found that 72 percent of employees who experienced retaliation said it happened within three weeks of them first filing their report.
Therefore, it is important for SEC whistleblowers to be informed of federal and state law remedies to combat retaliation and to select the optimal remedies to maximize a recovery in a whistleblower retaliation case. And it is critical to understand the scope of and limitations of certain whistleblower retaliation laws. For example, the whistleblower protection provision of the Sarbanes-Oxley Act protects disclosures to a supervisor and other internal disclosures. However, internal disclosures are not protected under the Dodd-Frank Wall Street Reform and Consumer Protection Act, unless the whistleblower has already provided the information to the SEC.
Importantly, whistleblowers can submit a tip anonymously to the SEC if represented by an SEC whistleblower lawyer in connection with their tip. For information on the SOX whistleblower law, see our guide: Sarbanes-Oxley Whistleblower Protection: Robust Protection for Corporate Whistleblowers. And for a comparison of Sarbanes-Oxley whistleblower protection and Dodd-Frank Act whistleblower protection, see our article: Dodd-Frank Whistleblower Protection Post-Digital Realty.
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