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Despite Successful Enforcement Proceedings, Many Believe the SEC and CFTC Whistleblower Programs Need Improvement

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  • Posted on: Oct 31 2018

Recently, this Blog wrote about the success of the Commodity Futures Trading Commission’s (“CFTC”) Whistleblower Program (here).  As noted in that post, over the course of a few weeks, the CFTC had paid whistleblowers more than $45 million in awards. (The CFTC press release announcing the award can be found here.)

Despite the positive direction in which the CFTC Whistleblower Program has been moving, many believe the whistleblower programs run by the CFTC and the Securities and Exchange Commission (“SEC”) could be improved. Indeed, whistleblowers who have provided information that resulted in a successful enforcement action have walked away with the feeling that the award-determination process could be better; they believe the process was cumbersome, exhausting, and, as noted in a recent Forbes article, “far too slow.” (here) Statistics appear to back up those sentiments.

According to the SEC, as of September 2018, over $326 million has been awarded to 59 individuals since it issued its first award in 2012.  During that time, more than $1.7 billion in monetary sanctions have been ordered against wrongdoers based on actionable information received by whistleblowers. By contrast, the CFTC awarded only $85.6 million to whistleblowers since the CFTC whistleblower program was established in 2011.

SEC Overwhelmed with Whistleblower Submissions

A recent story in The Wall Street Journal (here) took a look at the SEC Whistleblower Program and concluded that the award-determination process can take even longer than the average time it takes to investigate and close an enforcement proceeding. Some have attributed this delay to the overwhelming number of claims the agency receives each year – nearly 4,500 tips were received in fiscal year 2017 alone).

SEC Proposes Changes to Improve the Process

Because of the time delay, officials of the Whistleblower Programs have urged changes that would accelerate the length of time needed to resolve a claim and issue an award.

The SEC has proposed changes to the award-determination process, which would make the Whistleblower Program run more efficiently and effectively. Some of the proposed changes include barring individuals from submitting tips if they had previously submitted three meritless/frivolous claims and disposing of tips where it is likely an award will not be issued, such as when an individual fails to come forward with original information required under program rules.

A False Claims Act Case Approach

Another approach being considered is to follow the process used by the U.S. Department of Justice in cases under the False Claims Act in which there are multiple whistleblowers who file claims against the same entity or involve similar illegal conduct. In many of those cases, the whistleblowers reach agreement among themselves as to how to share any award issued in the case.

Although the SEC and the CFTC are restricted from disclosing the identities of a whistleblower, they can share the names of the attorneys representing the whistleblowers involved in the matter, if requested to do so by the whistleblowers. Armed with such information, counsel could negotiate the allocation of any award issued in the case, thereby eliminating much of the delay created by individual requests for reconsideration and consequent appeals.

Takeaway

While the recent CFTC awards underscore the economic benefit to individuals who come forward to report fraud and other illegal conduct, an efficient, less time-consuming award-determination process will go a long way to reinforce the incentives to participate in the SEC and CFTC Whistleblower Programs. As officials at both agencies have noted, the Whistleblower Programs are integral components of their enforcement activities. Given their commitment to protect and reward whistleblowers, it is important for these agencies to improve their programs so that whistleblowers will remain encouraged to report fraud and other violations of the securities and commodities laws.

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