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Are culpable whistleblowers eligible to receive SEC whistleblower awards?

Yes. In many circumstances, culpable whistleblowers are eligible to receive SEC whistleblowers awards (see limitations below). The final rules of the SEC Whistleblower Program recognize that culpable whistleblowers enhance the SEC’s ability to detect violations of the federal securities laws, increase the effectiveness and efficiency of the SEC’s investigations, and provide critical evidence for the SEC’s enforcement actions. In fact, a speech by the former Director of the SEC’s Division of Enforcement highlighted the importance of culpable whistleblowers to the agency’s enforcement efforts:

Finally, I want to say a word about participants in wrongdoing and their ability to be whistleblowers. It is important for participants in misconduct to understand that, in many circumstances, they are eligible for awards and we would like to hear from them. Obviously, culpable insiders with first-hand knowledge of misconduct can provide valuable information and assistance in identifying participants in, transactions relating to, and proceeds of, fraudulent schemes. And, while there are safeguards built into the program to ensure that whistleblowers do not profit from their own misconduct…culpable whistleblowers can still get paid for eligible information they report that falls outside of these limitations.

Find out today if you might qualify for an SEC whistleblower award. Contact the Director of our SEC whistleblower practice at mstock@zuckermanlaw.com or call our leading SEC whistleblower lawyers at (202) 930-5901 or (202) 262-8959.

SEC Whistleblower Awards to Culpable Whistleblowers

The SEC Whistleblower Program’s decision to work with, and award, culpable whistleblowers has proven to be effective in enabling the SEC to discover fraud and protect investors. To date, the SEC has issued several awards to whistleblowers who had some culpability in the violations, including:

  • On April 21, 2022, the SEC issued an award to a culpable whistleblower and reduced the award percentage: “In reaching that determination, we considered that while Claimant’s information and assistance were significant in that they helped the staff to more efficiently and quickly conduct the investigation, Claimant was involved in a transaction that gave rise to the Redacted violations described in the Covered Action, Claimant financially benefited from that transaction, and Claimant delayed in reporting for over two years after that transaction, while investors continued to be harmed.” Release No. 34-94767, 2022 WL 1184530.
  • On September 24, 2021, the SEC announced a $36 million award to a whistleblower whose information and assistance significantly contributed to the success of an SEC enforcement action as well as actions by another federal agency.  The award percentage was reduced because the whistleblower was culpable in the underlying scheme. But the whistleblower was still eligible because the whistleblower did not direct, plan, or initiate the misconduct.
  • On August 30, 2016, the SEC announced a $22 million award to a whistleblower who helped the agency “halt a well-hidden fraud” at the company where the whistleblower worked. The accompanying order states that the Commission considered several factors mitigating the whistleblower’s culpability in determining the appropriate percentage, but the whistleblower did not financially benefit from the misconduct.
  • On December 18, 2020, the SEC awarded a whistleblower $1.2 million who voluntarily provided original information to the SEC that led to a successful enforcement action. The SEC negatively assessed that the whistleblower was culpable for actively participating in and financially benefitting from the fraudulent scheme.
  • On July 27, 2017, the SEC announced a $1.7 million award to a whistleblower who helped the Commission stop a “serious, multi-year fraud that would have otherwise been difficult to detect.” There were a few mitigating factors in the Commission’s determination of the whistleblower’s final award, including the fact that the whistleblower did not comply with one of the SEC’s rules, an omission which normally requires an award denial. The order stated that “certain unusual circumstances” governed this case, thus the Commission decided to waive that requirement. In determining the award amount, the Commission considered, too, the fact that the whistleblower unreasonably delayed in reporting and ultimately bore “some, albeit limited, culpability” in the fraud.
  • On September 14, 2018, the SEC announced it had reduced a whistleblower’s award to $1.5 million because the Commission found that the whistleblower unreasonably delayed in reporting the fraud, the whistleblower “received a significant and direct financial benefit,” and was culpable in the scheme. The order further details these determining factors, and explains that the whistleblower waited more than a year after learning of the facts to report the fraud and reported to the Commission only after learning of the ongoing investigation.

See additional SEC whistleblower cases that have resulted in multi-million dollar awards. Click below to hear SEC whistleblower lawyer Matt Stock’s tips for SEC whistleblowers:

SEC whistleblower lawyers

Limitations on SEC Whistleblower Awards to Culpable Whistleblowers

While the SEC has been clear that it welcomes information from culpable whistleblowers, the SEC Whistleblower Program has specific rules that could disqualify certain whistleblowers from receiving SEC whistleblower awards. In addition, the program has rules that could limit the size of a culpable whistleblower’s future SEC whistleblower award. Importantly, whistleblowers who are concerned about potential liability should consult with experienced SEC whistleblower attorneys before reporting information to the SEC Office of the Whistleblower. Once information is submitted to the SEC, it cannot be withdrawn.

Whistleblowers Cannot Be Convicted of a Criminal Violation

The SEC Office of the Whistleblower will not issue awards to whistleblowers who are convicted of a criminal violation in relation to an action for which they would otherwise be eligible for an award. Moreover, the SEC Whistleblower Program does not provide amnesty to whistleblowers who provide information to the SEC. The fact that a whistleblower reports information to the SEC and assists in an SEC investigation and enforcement action does not preclude the SEC from bringing an action against the whistleblower based upon their own conduct in connection with violations of the federal securities laws. If such an action is determined to be appropriate, however, the SEC will take the whistleblower’s cooperation into consideration. As noted in the speech of the former Director of the SEC’s Division of Enforcement: “There are also other potential benefits for culpable whistleblowers — in appropriate circumstances, we will take their cooperation under the whistleblower program and in our investigation into consideration in deciding what remedies, if any, are appropriate in any action we determine should be brought against the whistleblowers for their role in the scheme.”

Culpable Whistleblowers Cannot Benefit from Their Own Misconduct

Under the SEC Whistleblower Program, the SEC will issue awards to whistleblowers who provide original information that leads to enforcement actions with total monetary sanctions in excess of $1 million. A whistleblower may receive an award of between 10-30 percent of the monetary sanctions collected. Since 2011, the SEC Whistleblower Office has issued $1.2 billion in awards to whistleblowers. The largest SEC whistleblower awards to date are $114 million and $50 million.

While the SEC is permitted to issue awards to culpable whistleblowers, the rules of the SEC Whistleblower Program do not allow whistleblowers to benefit from their own misconduct. Specifically, for purposes of determining whether the $1 million threshold has been satisfied or calculating the amount of an award, the SEC will not count any monetary sanctions that the whistleblower is ordered to pay or that are ordered to be paid against any entity whose liability is based substantially on conduct that the whistleblower directed, planned, or initiated.

Culpability May Decrease the Size of an Award

In determining the percentage of monetary sanctions to award a whistleblower, the SEC considers various factors that may increase or decrease the size of a whistleblower’s award. One of the factors that may decrease the size of an award is the whistleblower’s culpability in the securities law violation. When making this determination, the SEC may consider the following factors:

  • the whistleblower’s position or responsibility at the time the violations occurred;
  • if the whistleblower acted with scienter, both generally and in relation to others who participated in the violations;
  • if the whistleblower is a recidivist;
  • the egregiousness of the fraud committed by the whistleblower;
  • whether the whistleblower financially benefitted from the scheme; and
  • whether the whistleblower knowingly interfered with the SEC’s investigation.

Notably, while culpability may reduce a whistleblower’s award percentage, any whistleblower who qualifies for an award under the SEC Whistleblower Program – including culpable whistleblowers – will receive at least 10% of the monetary sanctions collected in the enforcement action. To learn more about the SEC Whistleblower Program, download the eBook SEC Whistleblower Program: Tips from SEC Whistleblower Attorneys to Maximize an SEC Whistleblower Award.

A Culpable Whistleblower’s Submission Must be Voluntary

A disclosure made by an individual who has entered into a cooperation or similar agreement with another authority, such as the Department of Justice, which requires the individual to cooperate with or provide information to the SEC, or more generally to government agencies, would not be deemed a “voluntary” disclosure.

If SEC staff subsequently contact a whistleblower and requests additional information after a whistleblower made an initial voluntary submission, there may be circumstances where the whistleblower’s additional provision of information would not be deemed voluntary. For example, if the whistleblower only provides the SEC with more detailed information pursuant to a cooperation agreement with the Department of Justice, the SEC would not view the whistleblower as having “voluntarily” provided all of the subsequent information. Moreover, Rule 21F-8(b) requires, as a condition of award eligibility, that a whistleblower provide the staff with all additional information in the whistleblower’s possession that is related to the subject matter of the whistleblower’s submission in a complete and truthful manner.

SEC Whistleblower Law Firm

If you are seeking representation in an SEC whistleblower matter, click here, or call us at 202-930-5901 to schedule a free, confidential consultation. Washingtonian magazine named two of our attorneys top SEC whistleblower lawyers, and U.S. News and Best Lawyers® have named Zuckerman Law a Tier 1 law firm in the Washington DC metropolitan area.

Recently the Association of Certified Fraud Examiners published a profile of Matt Stock’s success working with whistleblowers to fight fraud:

SEC whistleblower lawyers

 

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Rationale for Permitting Awards to Culpable Whistleblowers

The May 2011 SEC release (Release No. 34-64545) adopting the rules governing the SEC Whistleblower Program explains the rationale for rejecting a categorical exclusion for culpable whistleblowers:

After carefully considering the comments, we believe that the final rule appropriately incentivizes culpable whistleblowers to report securities violations while preventing culpable whistleblowers from financially benefiting from their own misconduct or misconduct for which they are substantially responsible.

As a preliminary matter, we do not believe that a per se exclusion for culpable whistleblowers is consistent with Section 21F of the Exchange Act. As commenters noted, the original Federal whistleblower statute—the False Claims Act—was premised on the notion that one effective way to bring about justice is to use a rogue to catch a rogue.  This basic law enforcement principle is especially true for sophisticated securities fraud schemes which can be difficult for law enforcement authorities to detect and prosecute without insider information and assistance from participants in the scheme or their coconspirators. Insiders regularly provide law enforcement authorities with early and invaluable assistance in identifying the scope, participants, victims, and ill-gotten gains from these fraudulent schemes. Accordingly, culpable whistleblowers can enhance the Commission’s ability to detect violations of the Federal securities laws, increase the effectiveness and efficiency of the Commission’s investigations, and provide important evidence for the Commission’s enforcement actions.

Nevertheless, we share commenters’ concern that failing to limit culpable whistleblowers’ eligibility for awards could create incentives that are contrary to public policy. Accordingly, for purposes of determining whether the $1,000,000 threshold has been satisfied or calculating the amount of an award, the Commission will not count any monetary sanctions that the whistleblower is ordered to pay or that are ordered to be paid against any entity whose liability is based substantially on conduct that the whistleblower directed, planned, or initiated. This final rule provides an incentive for less culpable individuals to come forward and disclose illegal conduct involving others. At the same time, the rule limits awards based on the conduct attributable to the culpable whistleblower. The rationale for this limitation is that the common understanding of a whistleblower is one who reports misconduct by another person and it would be contrary to public policy for whistleblowers to benefit from their own misconduct. As for the suggestion that a partial exclusion for culpable whistleblowers should be adopted by the Commission, we believe that it would be inappropriate to treat culpable whistleblowers more favorably than other less or non-culpable whistleblowers, even if such differential treatment could result in additional submissions from culpable whistleblowers. Accordingly, we do not believe that the monetary sanctions of an entity associated with misconduct that the whistleblower substantially directed, planned, or initiated the reported misconduct should be considered when determining whether the culpable whistleblower met the $1,000,000 threshold. Finally, to minimize any incentive for whistleblowers to conceal misconduct or to delay reporting it, we have included in Rule 21F-6 a provision that requires the Commission to consider whether it would be appropriate to decrease a whistleblower’s award percentage because of the culpability of the whistleblower or any substantial and unreasonable reporting delay by the whistleblower.

Resources for SEC Whistleblowers

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Jason Zuckerman, Principal of Zuckerman Law, litigates whistleblower retaliation, qui tam, wrongful discharge, and other employment-related claims. He is rated 10 out of 10 by Avvo, was recognized by Washingtonian magazine as a “Top Whistleblower Lawyer” in 2015 and selected by his peers to be included in The Best Lawyers in America® and in SuperLawyers.

Matthew Stock is the Director of the Whistleblower Rewards Practice at Zuckerman Law. He represents whistleblowers around the world in SEC, CFTC and IRS whistleblower claims. He is also a Certified Public Accountant, Certified Fraud Examiner and former KPMG external auditor.