Enforcement News: “Safe Harbor” Affords Whistleblower Opportunity to Receive An Award Even Though The Tip Was Initially Reported Internally

• Posted on: Mar 31 2021

In 2010, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) to combat illegal and fraudulent conduct on Wall Street and promote compliance with the federal securities and commodities laws.  The Dodd-Frank Act contains whistleblower provisions that authorize the Securities and Exchange Commission (“SEC” or the “Commission”) to pay substantial cash rewards to whistleblowers who voluntarily provide the SEC with information about securities fraud and other violations of the securities laws, including the Foreign Corrupt Practices Act. 

The Dodd-Frank Act enables the SEC to pay an award to any individual, or group of individuals, who provide “original information” about a violation of the federal securities laws. To be “original”, the information must be unknown to the SEC and derived from the whistleblower’s independent knowledge or analysis. 

Information will be considered “original” even if the whistleblower first reports the violations internally or to another agency, so long as the whistleblower reports the same information to the SEC within 120 days of the initial tip. Under this “safe harbor” (see Rule 21F-4(b)(7) of the Securities Exchange Act of 1934 (here)), the SEC will treat the information as though it had been submitted to the SEC at the same time that it was submitted to the other agency (i.e., it will treat the information as “original information”). 

The SEC first applied the safe harbor to a whistleblower tip in April 2018. As announced (here), the SEC awarded more than $2.2 million to a former company insider who first reported information about a violation of the securities laws to another federal agency and within 120 days thereafter provided the same information to the SEC.

As explained in that press release, the whistleblower voluntarily reported information to a federal agency covered by the rule, which then referred the matter to the SEC. As a result, the SEC opened an investigation. Within 120 days of the initial report, the whistleblower provided the same information to the SEC and later provided substantial cooperation in the investigation. Although the whistleblower’s tip came after the SEC had opened its investigation, the Commission treated the submission as though it had been made when the whistleblower provided the information to the other agency.

Recently, the SEC made an award to a whistleblower who availed himself/herself of the safe harbor provision. On March 29, 2021, the SEC announced (here) that it awarded more than $500,000 to a whistleblower who raised concerns internally before submitting a tip to the Commission. The whistleblower’s information and assistance allowed the SEC and another agency to quickly file actions that shut down an ongoing fraudulent scheme.

The whistleblower’s information prompted an internal investigation by the company, which subsequently reported the conduct to an outside agency, which in turn provided the information to the SEC. Separately, the whistleblower reported the alleged misconduct to the SEC within 120 days of reporting the violations internally to the company. Under the “safe harbor” provision of the SEC’s whistleblower rules, the SEC treated the whistleblower’s information as though it had been submitted to the SEC at the same time it was internally reported because the whistleblower reported the violations to the SEC within 120 days of the internal report.

Takeaway

Congress created the whistleblower program to incentivize individuals possessing original, timely, and credible information about violations of the federal securities laws to report such misconduct to the SEC. The Commission will treat information reported to a covered authority (e.g., a federal agency, a state Attorney General or securities regulatory authority, any self-regulatory organization, the Public Company Accounting Oversight Board, or to an entity’s internal whistleblower, legal, or compliance procedures for reporting allegations of possible violations of law) as “original information” if the whistleblower submits the same information to the Commission within 120 days of the initial report. The safe harbor, therefore, provides the whistleblower with an additional opportunity to be rewarded for reporting a violation of the securities laws when they are uncertain as to where they should report the violation.