A Primer For Gathering Financial Intelligence pronounces “Human intelligence can be the only practical way to uncover some sophisticated asset concealment schemes.”   The SEC Whistleblower Program sniffs out human intelligence by offering rewards for tips regarding securities fraudsters.  A November 2011 report shows the Whistleblower Program generated 334 tips during the seven week period from August 12, 2011 to September 30, 2011.

Jordan A. Thomas, (once an assistant director and senior attorney at the SEC), had a leadership role in developing this program.  Mr. Thomas drafted the proposed whistleblower legislation and briefed House and Senate staffs on it.  He is a partner at Labaton Sucharow LLP and chairs its Whistleblower Representation Practice.

His guest post featured below, notes that financial incentives and retaliation protections will cause the whistleblowers to come forward.  It also recognizes “the locating of hidden assets will play a major role in these whistleblower actions.”

The SEC Whistleblower Program: A Revolution in Law Enforcement?

Jordan A. Thomas

While the Securities and Exchange Commission (SEC) has just released its 2011 annual report touting a record number of enforcement actions, the $2.8 billion in monetary sanctions recovered seems a drop in the bucket against what the serial schemers have stolen.  But the game is changing, and the recovery of concealed assets will play a role in this revolution.

Under the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, the SEC established a new and, in many ways, revolutionary whistleblower program, which was finalized and implemented in August.  With the specter of major financial awards and protection from workplace retaliation, individuals now have powerful incentives to speak out against misconduct and report possible violations of the US securities laws. The eligibility requirements are broad and relatively straightforward.

The program offers a material financial bounty, 10-30% of monetary sanctions collected, to a whistleblower who provides original information that leads to a successful enforcement action by the SEC.  Significantly, one of the factors considered by the SEC in determining the size of the award is the whistleblower’s efforts to assist the authorities in recovering the fruits and instrumentalities of the violations.  Thus, a whistleblower with both the knowledge of the violation and the ability to help locate hidden assets will be in a position to maximize his or her recovery.

In addition, for employee whistleblowers, the program’s anti-retaliation provisions are compelling, protecting a qualified whistleblower for up to 10 years, regardless of whether the information is ultimately verified, if it was provided in good faith.  Moreover, if represented by counsel, a whistleblower may maintain anonymity until he or she claims a reward.

But a whistleblower need not be an employee of an alleged violator.  With few exceptions, any individual, or group of individuals, with original information derived from independent knowledge and not already known to the SEC or solely derived from public sources, qualifies.  In addition, this intelligence must either (i) cause the SEC to commence a new investigation, which leads to a successful enforcement action, or (ii) significantly contribute to the success of an existing action.  Any violation of the U.S. federal securities laws qualifies, and any international organization (public or private) or individual that does business in or has personal contacts with the US can be subject to the program’s jurisdiction.

Considering that the SEC secured almost $3 billion in sanctions last year alone, including several cases in which sanctions exceeded $100 million, the financial incentive to a potential whistleblower is great.  Awards are likely to be even greater when reported conduct becomes the subject of a parallel proceeding by another law enforcement or regulatory body, such as the  Department of Justice or a state Attorney General.  In that case, the whistleblower would receive, subject to agency discretion, a percentage of the sanctions collected in both actions.  To illustrate the significance of the multi-agency bounty, consider the April 2011 FCPA settlement with Johnson & Johnson.  Under the terms of the settlement, the company agreed to pay more than $48.6 million to the SEC and an additional $21.4 million to the Department of Justice to settle criminal charges.  A qualified whistleblower in such a case, meeting the various eligibility requirements, and subject to the agencies’ discretion, could have received up to $21 million under the new whistleblower program.

Companies are on notice.  A November 2011 survey by Littler Mendelson reported that 96% of executives, many from S&P 500 companies, are concerned about whistleblower claims; 73% identified whistleblowing and retaliation as emerging risk areas; 45% said their companies had received a whistleblower claim in the last 12-24 months;  and 67% anticipate whistleblower reports will increase in the next 12-24 months.

But are they ready? That remains to be seen.  Given the duration of an SEC investigation, we likely will not see the program’s results for a few years.  Nevertheless, in light of the major financial incentives and significant retaliation protections offered by this new program, whistleblowers will come forward in increasing numbers to report potential violations.  Already the SEC has disclosed a significant increase in high-quality tips, and in my law practice, I am seeing a great deal of activity from potential whistleblowers, both domestic and internationally.  And with the consideration given to asset recovery in determining financial rewards, the locating of hidden assets will play a major role in these whistleblower actions.  In the coming years, many of the SEC’s most significant cases will involve whistleblowers. Corporate entities must reckon with this new enforcement reality by, among other things, encouraging the detection of misconduct, protecting whistleblowers who come forward, shoring up their compliance frameworks and creating a paradigm for commercial integrity.


Copyright 2011 Fred L. Abrams