By Chad M. Kohler, Esq.
Our law firm is contacted periodically by people who believe that they have knowledge of potential securities law violations and would like our firm to represent them in submitting their information to the U.S. Securities & Exchange Commission (SEC). Under federal law, persons can receive financial awards if they provide original information about securities law violations that result in a successful SEC enforcement action against the wrongdoers. Whistleblowers might maximize their potential recovery with an understanding of the basic outlines of the whistleblower statute and SEC rules.
In the wake of the 2008 financial crisis, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank), a sweeping overhaul of the financial regulatory system. As part of these reforms, in an effort to elicit the public's help in policing the markets, Congress required the SEC to develop a whistleblower program as a way to incentivize people to report potential securities law violations. The SEC adopted the final rules governing this program in 2011.
Under SEC rules, to qualify for an award as a whistleblower, a person must satisfy four primary conditions.
First, the person must "voluntarily provide" the information at issue. This excludes any information provided in response to any formal demand or inquiry by the SEC or certain other regulatory or investigative authorities. It also excludes any information provided by a person who has a pre-existing legal duty to report potential misconduct (such as a contract employee who becomes aware of potential misconduct through their work with a regulator).
Second, the person must provide "original information." This means that the information must be derived from independent knowledge or analysis. The information cannot already be known by the SEC or derived from an allegation made in another legal proceeding or the media.
Third, the information must lead to a "successful enforcement action." A successful enforcement is deemed to occur when the information provided causes the SEC to open an investigation which leads to successful action based in whole or in part on the information provided. It also is deemed to occur when the SEC is already conducting an investigation and the information provided significantly contributes to the success of an enforcement action based on that conduct. It also applies when an employee reports misconduct through their employer's internal reporting procedures, and the employer then provides that information to the SEC, which in turn leads to a successful enforcement action.
Fourth and finally, the successful enforcement action must lead to "monetary sanctions exceeding $1,000,000" in a single judicial or administrative action, although the SEC may aggregate the sanctions collected in two or more proceedings if the proceedings arise out of a common nucleus of operative facts.
If all four conditions are met, then a whistleblower is entitled to an award. Under the law, the amount of the award can be anywhere between 10 and 30 percent of the sanctions collected. The award amount is in the sole discretion of the SEC. An award may be higher or lower depending on various factors, including the significance of the information, the degree of assistance provided, and the culpability of the whistleblower in the misconduct.
Importantly, all information provided to the SEC through the whistleblower program is deemed to be confidential. Persons seeking further protections are permitted to submit the information anonymously and may still be entitled to an award; however, all persons submitting anonymous tips who want to be considered for an award must hire an attorney to represent them in the matter. The SEC will not grant an award to anonymous tippers who are not represented by counsel.