Risk Management

SEC Whistleblower Award Sparks Employer Fears

&doublequot;I am concerned that the allure of rewards will cause whistleblowers to automatically take matters outside of the company,&doublequot; a...
Caroline McDonaldAugust 23, 2012

A $50,000 payment of  a first bounty, announced Aug. 21 by the Securities and Exchange Commission’s whistleblower program one year after the program’s inception, is triggering employer concerns that employees may turn to the SEC first rather than going to them.

The award represents over 30% of the amount collected in an SEC enforcement action against the perpetrators of the scheme—the maximum percentage of payout allowed by the whistleblower law. The award recipient, who, according to the SEC, does not wish to be identified, provided documents and other significant information that allowed the SEC’s fraud investigation to move at a faster pace, thus preventing the scam from claiming fewer victims. (A call to the SEC was not returned as of presstime.)

The whistleblower’s assistance led to a court order of more than $1 million in sanctions, of which about $150,000 has been collected from the erring company so far. According to the SEC, the court is considering whether to issue a final judgment against other defendants, adding that any increase in the sanctions ordered and collected will increase payments to the whistleblower.

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Richard Chambers, president and chief executive officer of the Institute of Internal Auditors, agrees that employees should have the ability to go as far as they need to in addressing fraud. But adds, “We’re concerned this could have a chilling effect, and this might become the preferred avenue for employees.”

He adds that internal auditors are committed “to always seeing fraud promptly and thoroughly investigated. We believe the way to ensure allegations are addressed most expeditiously is almost always to report them internally. I am concerned that the allure of rewards will cause whistleblowers to automatically take matters outside of the company, thereby slowing down the fraud investigative and resolution process.”

Chambers explains that where organizations do have strong effective governance and oversight, individuals should try to get their issues resolved through internal audit, compliance, or other oversight functions within the organization.

If those concerns are not addressed, or if “they see that the fraud is continuing to be perpetuated, then certainly I would think that taking an allegation outside the organization would be appropriate,” he says.

Chris Giovino, fraud expert and partner with Dempsey partners forensic accountants, believes the whistleblower program will have a positive impact, and gives organizations more incentive to do a good job. He notes, however, that the burden is now on companies to make sure their employees are comfortable coming forward and confident the company will take appropriate action.

Giovino observes that “the old days” are over, when whistleblowers lacked protection. He advises organizations to be open, transparent and available to employees and also to have hotlines available for employees to provide whistleblower tips.

Eugene Goldman, a partner in the white collar /securities defense practice at McDermott Will & Emery LLP in Washington, D.C. says, “Because of reports that there has been a significant response to the announcement of the whistleblower program, this award is no surprise.”

Since the rules were finalized, he notes that SEC staff members have reported a steady stream of reports and submissions of information in accordance with the final rules of the commission, but they have not specified the amount of bounty payments expected to be paid. 

Goldman, who served as an SEC prosecutor for six years during the late 1970s and early 1980s, notes that ever since the announcement of the bounty payment program last August, the SEC staff has “commented repeatedly that they have received high value information from whistleblowers, either directly or through their counsel.”

Sean McKessy, chief of the SEC’s Whistleblower Office, said in a press release that about eight tips a day are now flowing into the SEC since the August 2011 announcement. Goldman adds that the SEC has not indicated whether those numbers have escalated over the past year.

Will organizations be more diligent with their risk management going forward as a result? “From working with clients, I think businesses already were that way, but this award—at the high range of permissible percentages, 30%—will probably be a reminder that they should monitor and improve their procedures if they haven’t done so already,” Goldman says. He also adds that while the SEC’s whistleblower program may prevent some fraud, it won’t stop it altogether.

The 2010 Dodd-Frank Act authorized the whistleblower program to reward individuals who offer high-quality original information that leads to an SEC enforcement action in which more than $1 million in sanctions is ordered. Awards can range from 10% to 30% of the money collected. The Dodd-Frank Act included enhanced anti-retaliation employment protections for whistleblowers and provisions to protect their identity.

The law also specifies that the SEC cannot disclose any information, including information the whistleblower provided to the SEC, that could reasonably be expected to directly or indirectly reveal a whistleblower’s identity.

According to final rules, whistleblower information must:

• Relate to a possible violation of securities laws or bribe of a foreign official.

• Be voluntarily provided.

• Be based on independent knowledge or analysis rather than certain public sources.

• Cause the SEC to initiate a new investigation or contribute significantly to an ongoing investigation.

Informants also may qualify for a reward even if concerns were reported to the company internally, resulting in the company “self-reporting” the information to the SEC.