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The Director of the SEC Division of Enforcement Speaks About The Impact of The Whistleblower Program

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  • Posted on: Sep 28 2016

On September 14, 2016, Andrew Ceresney (“Ceresney”), Director, Division of Enforcement of the Securities and Exchange Commission (the “SEC” or “Commission”), spoke at the Sixteenth Annual Taxpayers Against Fraud Conference in Washington, D.C. Ceresney covered a lot of ground during his presentation, addressing issues such as the impact of the whistleblower program to the role of whistleblowers and their attorneys in the investigation and claims process.

Impact of the Whistleblower Program on the Commission

Ceresney described the impact of the whistleblower program on the Commission as “transformative”, “both in terms of the detection of illegal conduct and in moving … investigations forward quicker and through the use of fewer resources.” Since the inception of the whistleblower program, the SEC has received more than 14,000 tips from whistleblowers and paid $107 million to 33 whistleblowers, “in cases with more than $500 million ordered in sanctions.”

He also spoke of the Commission’s impact on employers who retaliate (or try to retaliate) against employees that come forward to report fraud – efforts that this blog recently highlighted. In that regard, Ceresney noted the settlement of four actions brought by the SEC “against companies for violating Rule 21F-17”, and the filing of amicus briefs in the courts of appeals and district courts, in support of the SEC’s position that “individuals who make internal reports of possible securities law violations are protected under the Commission’s whistleblower rules.”

Finally, Ceresney underscored the transformative impact of the whistleblower program on “other domestic and foreign regulators,” noting that those regulators “have sought to replicate the successes of [the SEC’s] program.”

Types of SEC Cases where Whistleblower Assistance Is Valued

While valuing all tips of securities fraud or other violations of the securities laws, Ceresney identified “issuer reporting and disclosure cases” as “a category of cases where whistleblower assistance is extremely helpful.” These cases often involve misconduct that (a) is difficult to uncover, (b) is “very document-intensive”, and (c) involves “sophisticated defense counsel.” For these reasons, whistleblowers, especially company insiders, are valued because they can provide (a) the information necessary to understand the misconduct, (b) guidance on the documents to request, and (c) analysis of the information as it relates to the alleged violation.

Another class of cases identified by Ceresney where whistleblowers are helpful is in the enforcement of the Foreign Corrupt Practices Act. Noting that “[m]ost of the activity in these cases is usually overseas, where [the SEC has] less access to evidence,” Ceresney emphasized the importance of international whistleblowers. The SEC has made eight awards to whistleblowers living in foreign countries, with the largest award — $30 million — being paid to a foreign whistleblower who provided the Commission with “original information about an ongoing fraud that would have been very difficult to detect.” In making this award, the Commission made it clear that foreign residency “does not prevent an award when the whistleblower’s information [leads] to a successful Commission enforcement action brought in the United States concerning violations of the U.S. securities laws.”

Who Qualifies as a Whistleblower

People wishing to blow the whistle on securities fraud and other violations of the securities laws often have questions about whether they qualify as a whistleblower under the Dodd-Frank Act. Ceresney addressed this question.

First, Ceresney identified company insiders, either current or former employees, as the “best positioned to witness wrongdoing” and help “investigators unlock intricate fraudulent schemes and investigate the full extent of [securities law] violations.”  “Through 2015, almost half of the award recipients were current or former employees of the companies for which they reported wrongdoing ….”

Second, Ceresney identified compliance and internal audit personnel as important whistleblowers. To underscore their importance, Ceresney noted that awards have been made to this group of whistleblowers in August 2014 and April 2015.

Third, Ceresney identified company outsiders as valuable whistleblowers, such as data analysts. “We welcome analytical information from those with in-depth market knowledge and experience that may provide the springboard for an investigation or may supplement an ongoing investigation,” he said. Again, to underscore the importance of outside whistleblowers, Ceresney noted the payment of “more than $700,000 to an individual who was a company outsider and who provided [the SEC with] this type of data analysis, leading to a successful enforcement action.”

Finally, Ceresney addressed the situation where a person is a participant in the wrongdoing and wants to report the misconduct under the program.  Ceresney said that “in many circumstances, they are eligible for awards” because as “culpable insiders with first-hand knowledge of misconduct” they “can provide valuable information and assistance in identifying participants in, transactions relating to, and proceeds of, fraudulent schemes.” In those instances, they can “receive at least 10% … of the monetary sanctions collected in the enforcement action,” said Ceresney

Timing of Whistleblower Assistance

Ceresney told the audience that whistleblowers should report misconduct “as soon as you learn of [it],” because “you never know whether someone else will report, whether the information will become stale, or whether the statute of limitations will run.”  He noted that “[c]oming forward without delay also helps prevent misconduct from continuing unabated while investors suffer more harm.”  He emphasized the fact that “[un]nreasonable delay in the reporting of information to [the SEC] is a significant factor the Commission considers in determining the amount of a whistleblower award.”

Notwithstanding, Ceresney made it clear “there is no requirement under the Dodd-Frank Act or [the SEC’s] rules that a whistleblower originate a case in order to qualify for an award.” The key is that the information provided “causes the Commission to commence an examination, open or reopen an investigation, or to inquire into different courses of conduct where the resulting enforcement action is based on the whistleblower’s tip, or that otherwise significantly contributes to the success of an enforcement action.” He noted that even if “an investigation is underway, a whistleblower will be eligible for an award if his or her information ‘significantly contributes’ to [the SEC’s] success by, for example, allowing [the Commission] to bring a successful action in significantly less time or with significantly fewer resources, bring additional successful claims, or bring successful claims against additional parties.”

Closing Thoughts For Whistleblowers and Whistleblower Attorneys

Ceresney closed his presentation with a discussion on the importance of attorneys in the investigation of securities fraud and other violations of the securities laws.  As an initial matter, Ceresney noted that the Commission “welcome[s] the involvement of counsel in whistleblower tips.”  He noted the many ways whistleblower attorneys can help advance the investigation, including:

  • identify information having a nexus with the alleged violation of the securities laws;
  • manage client expectations regarding the duration of an investigation and the awards process, especially since the SEC’s investigations are nonpublic; and
  • identify facts or documents that may tend to identify the whistleblower so that the SEC can maintain the confidentiality of the whistleblower and help “to craft document requests and conduct testimony in the most protective manner.”

He also identified ways for both whistleblowers and their counsel to assist the Commission, including:

  • identify and provide corroborating information for their tips;
  • avoid providing information that may be protected by the attorney-client privilege or the work product doctrine; and
  • assist the SEC with its outreach efforts – that is, to help publicize the program and increase public awareness of it.

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