The Securities and Exchange Commission (SEC) recently announced an award of more than $4 million to a whistleblower in connection with a fraud case. It is the latest award given out by the SEC—and more are expected.
Since 2011, the whistleblower program has awarded more than $111 million to 34 whistleblowers.
“The SEC’s whistleblower program is beginning to hit its stride,” Jordan Thomas, an attorney at Labaton Sucharow, told InsideCounsel.
He says that the number and size of awards are increasing, as well. “I expect that trend to continue over the next several years,” Thomas predicts. “The ones in the pipeline are just now maturing. We’re just starting to see the first cases because people didn’t know about the program.”
Now as awareness builds, more people are submitting tips, too. On top of that, it takes some two to four years for the SEC to complete an investigation, according to Thomas. Moreover, it takes another 1 to 1-and-a-half years to get through the award process, he said.
Similarly, Greg Keating, an attorney at Choate Hall & Stewart, notes that whistleblower awards “have increased in frequency and size in recent months and show no signs of abating.”
“Since May, we have seen a steady stream of seven bounty awards totaling over $60 million—more than half of the total amount distributed since the inception of the Office five years ago,” he says. “This has mobilized the plaintiff’s bar as evidenced by the fact that in August, Sean McKessy, the former head of the SEC Office of the Whistleblower, left and announced he was joining a prominent plaintiff side whistleblower firm.”
He adds that another “disturbing trend is the recent call for expanded liability.”
“In August, a whistleblower refused a bounty award of $8 million because he felt that individual executives who made the decision, which allegedly led to fraud, should be punished rather than the institution simply writing a check,” he explains. “Even more recently, the attorney for a whistleblower who cashed a check for $22 million publicly stated that the SEC prosecution did not go far enough and insisted that the auditors of the institution should have faced prosecution. In short, the net of liability appears to be extending.”
On top of this, the latest SEC award comes in the midst of a Congressional inquiry on wrongdoing at Wells Fargo—which provides lessons for the whistleblower sector. “The Wells Fargo case is a cautionary tale of what happens when you don’t have corporate whistleblowers speaking up,” Thomas said. Some 5,000 employees at the company were allegedly engaged in wrongdoing; people had to know about the practices but they didn’t speak up, he said.
Moreover, Thomas advises general counsel to evaluate internal reporting procedures and ensure they are responding appropriately, internally. If there is an issue, they should also consider self-reporting to the SEC.
He says that the top factor that has led employees to report externally to the SEC rather than internally is that employees perceive they will be retaliated against for reporting. This is the case, even though many companies try to make it part of their culture to encourage reporting of wrongdoing.
Thomas encourages companies to undertake a survey of employees to find out if they feel comfortable reporting wrongdoing internally. Even if reporting is encouraged in policies, do employees believe you? If employees do not feel comfortable reporting—what is the reason? There could be need for additional training, too, on how to handle internal whistleblowing complaints.
“The time is now to engage in meaningful improvements to compliance programs in order to invest in transparency and foster a culture which does not condone retaliation,” Keating says. “Training is critical, from the top down. Boards of Directors should receive training and the C-suite should be held accountable to demonstrate their genuine commitment to compliance. Similarly, frontline managers and HR specialists must be trained to recognize when an individual has flagged an issue and to take action to investigate appropriately and to ensure that no retaliation occurs.”
Furthermore, he says there is insufficient understanding of the process regarding retaliation against whistleblowers. “In particular, in just the last three or four years, the legal definition of what is retaliation has expanded dramatically,” Keating says. “This underscores the need for training to enhance awareness and understand the implications of the expansion of liability in this area.”
Also, Todd Cipperman, principal of Cipperman Compliance Services and the former general counsel of SEI Investments, warns that “whistleblowers need not be employees. They can also be outsiders. Consequently, firms must be concerned about competitive whistleblowers i.e. firms that report competitors to the SEC in order to gain a competitive advantage.” Beyond that, he notes that whistleblower lawyers may take whistleblower cases on contingency fees.