Reporting Tips Directly to the SEC
One development which may have the effect of increasing the number of tips provided to the SEC is the Supreme Court’s decision in Digital Realty, which held that whistleblower protections under the SEC whistleblower law, do not extend to employees unless they have in fact reported to the SEC.
Other whistleblower protections may apply, but the SEC protections now only do if a whistleblower has reported to the SEC. This may be provided even more incentive beyond attempting to obtain a reward to report to the SEC. The whistleblower protections, which give the people the right to sue for retaliation, are strong under the SEC whistleblower law.
This may cause an increase in the workload of the SEC, and it may also increase collections under the Act. It is doubtful those who wanted to limit the protections of the law only to circumstances in which a Whistleblower reports to the SEC wanted also to increase SEC collections, but that may be the ultimate result of the Supreme Court’s decision.
As of 2017, the program it has issued awards of approximately $160 million. They granted those awards to 46 whistleblowers. Again, the program is relatively young – 46 whistleblower awards and $160 million is a fair amount of money and quite a few whistleblowers. On the other hand, one could certainly argue that it is a big country, with a large number of securities being traded every day under all kinds of circumstances. We are only now starting to see the rewards and prosecutions based on the first couple of years of reports, as it takes some time for any such reports to work their way through the Agency to the point that prosecutions become public.
It is difficult to believe that the program has exhausted the extent of information available regarding securities fraud at this point. It is probably fair to say and most would agree, that there is plenty more fraud out there to be assessed by whistleblowers or to be reported by whistleblowers and hopefully prosecuted by appropriate authorities. However, the volume of tips provided to the SEC indicates that for a case to be successful, it must stand out in terms of the fraud committed and the harm to investors.
The process for a whistleblower to obtain a reward is extensive as you may expect. First, the whistleblower must have reported original information to the Securities and Exchange Commission, either anonymously through an attorney, or more directly, and then to cooperate with the SEC if more information is required. The whistleblower may supplement any initial allegations with additional information, but mostly it is up to the agents of the SEC commission itself to prosecute the claims or not.
There is no way to make the commission do that. The Commission has the right to determine whether or not they will prosecute such an action. If they do prosecute, they publish on their website when there is a collection of more than $1 million, and when they think that there is a potential whistleblower award attendant to that collection. The commission will publish a list of what is called covered actions, which means there has been more than $1 million collected, and they think a whistleblower may be entitled to such an award.
From the moment they do publish that information, a whistleblower has 90 days to file and claim their award. Then the SEC evaluates whether or not they believe an award should be provided and what percentage should be appropriate to award the whistleblower, of between 10% and 30% of the amount collected.
There may be instances where two or more whistleblowers provide information against the same defendant, which may be useful to the SEC and which may not entirely encompass each other’s information. The SEC might award multiple awards. There is no prohibition against multiple whistleblowers joining forces in filing a TCR with the commission in order to share in any potential award in the future.
Overall, this is an extremely powerful tool that allows whistleblowers to come forward, to report fraud, have the appropriate agency investigate fraud, and to pursue fraud in the area of securities law, while keeping the whistleblower safe as they make such reports. While many of us would appreciate the idea of being able to have a private right of action under this law as well, the anonymity that a whistleblower may enjoy while reporting massive fraud against a major corporation is an important aspect of this law – one that makes it possible for whistleblowers to come forward and report important fraudulent activity in relative safety.