SEC Awards $14 Million to Whistleblower
On October 1, 2013 the U.S. Securities and Exchange Commission announced an award of more than $14 million to an unidentified whistleblower whose information led to an SEC enforcement that recovered substantial investor funds. The whistleblower provided original information and assistance that enabled the SEC to bring an enforcement action more quickly than it could have otherwise – less than six months after receiving the whistleblower’s tip. This is the largest award made by the SEC’s whistleblower program to date. The $14 million award is expected to draw increased attention to the whistleblower program and will likely increase the number of whistleblower tips.
The award is the largest of three announced since the program’s inception two years ago, and signals the SEC’s continuing emphasis on its whistleblower program. Since whistleblower activity is likely to increase, public companies should take steps to leverage the incentives provided in the Dodd-Frank Act and implement procedures that encourage internal reporting. By designing a system of internal controls and processes to handle internal complaints, companies can quickly discover and stop ongoing violations, avoid external reporting of frivolous complaints through an effective investigation and feedback system, and benefit from SEC rules that give credit to companies with effective compliance procedures.
- Regular training of employees on pertinent regulatory requirements.
- Adoption of appropriate corporate codes of conduct and whistleblower policies that encourage internal reporting of issues or concerns.
- Procedures that facilitate conducting appropriate investigation of complaints.
- Clearly communicating that intentional misconduct is not tolerated through appropriate discipline upon discovery of violations.
While the Dodd-Frank Act does not require internal reporting, it encourages potential whistleblowers to first report internally. The rules make it clear that the SEC will consider, in determining the amount of an award, whether the whistleblower first assisted with any company investigation. Whistleblowers who report internally can maintain their priority status over other whistleblowers for 120 days to permit a company to conduct an internal investigation. Finally, a whistleblower who reports internally can receive credit for all information that is subsequently self-reported by the company.
Given these incentives for internal reporting and the rewards to employees for external reporting, companies should be prepared to quickly and effectively respond to any internal reports of a potential securities violation. A successful response plan should include:
- Protocols for delegating responsibility to quickly assess the seriousness of alleged violations.
- Identified outside experts in appropriate fields, including outside counsel, forensic accountants, or electronic evidence experts as needed.
- Investigation protocols that enable:
- A highly-focused initial inquiry with procedures to assist in making a determination whether investigation is required.
- Preservation of all appropriate electronic evidence.
- A procedure for selecting an investigation timeframe that permits the company an opportunity to consider self-reporting within the 120-day whistleblower look-back period.
- A plan for making a determination whether to self-report a violation to the SEC.
Companies should also consider establishing procedures for communicating with whistleblowers during an investigation. In addition to policing compliance with anti-retaliation rules, communication with a whistleblower can provide a company with an opportunity to mitigate the risk that the whistleblower will prematurely report to the SEC before learning about the seriousness of the company’s response, any conclusion the company reaches about wrongdoing or materiality, and any remedial or disciplinary action taken by the company.
By following a clear set of procedures after an internal report of a potential violation, it will benefit a company whether or not the report turns out to be frivolous. Where there has been a frivolous complaint, comprehensive procedures will lead to a full investigation and report of the relevant conduct that will assist the company in later addressing any external inquiry or legal action. If the complaint proves legitimate, the company can stop the offending conduct quickly, take appropriate discipline, modify internal systems to prevent future violations, and potentially benefit from self-reporting under the new cooperation rules.