Achievements, Challenges and Change: The SEC Whistleblower Program Year in Review via
Labaton Sucharow
By Labaton Sucharow
July 2014
The SEC Whistleblower Program Year in Review – Introduction
Four years ago this month, with the country still reeling from financial crisis, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act–the most sweeping financial reform effort since the Great Depression. The goal of Dodd-Frank was as ambitious as its scope; as President Barack Obama remarked, the legislation would “restore markets in which we reward hard work and responsibility and innovation, not recklessness and greed.”
For the Securities and Exchange Commission (SEC) and the citizens whom the Commission protects, one of the key innovations of Dodd-Frank was the creation of a new and game-changing whistleblower program. Understanding the many risks that underpin a report of misconduct, Congress developed three key counter-incentives to encourage individuals to come forward: (1) enhanced protections from employment-related retaliation; (2) the ability to report securities violations anonymously; and (3) the opportunity to obtain significant monetary awards when the information provided results in a successful enforcement action. Together, these incentives embodied a simple idea: rewarding integrity can help uncover wrongdoing in the securities markets more quickly, more easily and more effectively – potentially stopping misconduct before it wreaks substantial harm on investors.
Today, the SEC Whistleblower Program is well underway. While we have witnessed the Program’s enormous potential as a law enforcement tool, we also see that more work must be done to stop fraud in the securities markets, bring transparency to investors and protect whistleblowers. In this report, we examine the major developments – landmark cases, significant awards, SEC statistics and hot button issues-related to the SEC Whistleblower Program over the past 12 months and how these developments may impact the future of corporate whistleblowing.
The SEC Whistleblower Program Picks Up Steam
Growth was a central theme over the last year, as awareness of the program continued to build and cases based on early whistleblower tips began to make their way through the SEC’s investigative pipeline. It was also a period of notable firsts. In September 2013, the SEC made its first major award-more than $14 million to an anonymous whistleblower. And in June 2014, it brought its first retaliation claim against the investment advisor Paradigm Capital Management.
Equally significant, the program continued to generate a substantial number of tips. According to its Annual Report to Congress, the Office of the Whistleblower received 3,238 tips in fiscal year 2013, a 9.3% increase over the prior year. These tips came from all corners of the country and around the globe, signaling an increased domestic and international awareness of the program. Notably, the tips were not only high quantity, but also high quality. According to SEC Chair Mary Jo White, “the SEC’s whistleblower program, which has been fully operational for three years, has already had a significant impact on our investigations. The tips have helped the Enforcement Division identify more possible fraud and other violations and earlier than would otherwise have been possible.” These remarks echoed similar comments by other SEC officials, including Enforcement Director Andrew Ceresney, who stated in November 2013 that “our whistleblower program continues to pick up steam” and that “[w]e are increasingly sourcing our own cases through whistleblower tips.” Associate Director of Enforcement Steve Cohen also reported that many SEC investigations have been “turbocharge[d].”
Given that the typical life cycle of an SEC investigation is two to four years, these reports suggest that in the months (and years) ahead, we are likely to see many more major cases built on whistleblower intelligence. Success tends to build upon itself, so the uptick in major SEC awards is likely to motivate even more whistleblowers to come forward in the future. Momentum is only part of the story. The past 12 months have also revealed persistent challenges, for both whistleblowers and the securities markets as a whole. Misconduct is still prevalent on Wall Street and the forces that often cause financial calamities remain very concerning.
While it is not clear when or where the next major corporate scandal will arise, statistics like those referenced below suggest it’s almost inevitable.
