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The Sec Awards More Than $20 Million To A Whistleblower – The Agency’s Third Largest Award To Date

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  • Posted on: Nov 18 2016

On November 14, 2016, the Securities and Exchange Commission (“SEC”) announced that it had awarded more than $20 million to a whistleblower “who promptly came forward with valuable information that enabled the [agency] to move quickly and initiate an enforcement action against [the] wrongdoers before they could squander” their ill-gotten gains.

The award “is the third-highest since the SEC’s whistleblower program issued its first award in 2012.” To date, the SEC has paid “more than $130 million to whistleblowers who voluntarily provided the [agency] with unique and useful information that [has] led to a successful enforcement action.”

The SEC declined to identify the whistleblower or the wrongdoers. By law, the SEC protects the confidentiality of whistleblowers and does not release information that might directly or indirectly reveal the whistleblower’s identity.

Commenting on the award, Jane Norberg, Chief of the SEC’s Office of the Whistleblower, stated: “This whistleblower alerted us with a valuable tip that led to a near total recovery of investor funds.  Sizeable awards like this one should encourage whistleblowers everywhere that there are real financial incentives to promptly reporting potential securities law violations to the SEC.”

Under the program, whistleblowers are eligible for an award if they voluntarily provide the SEC with original information that leads to a successful enforcement action that exceeds $1 million. The award can range from 10 percent to 30 percent of the money collected. All payments come from an investor protection fund established by Congress that is financed through monetary sanctions paid to the SEC by securities law violators.  No money is taken or withheld from harmed investors to pay whistleblower awards.

The SEC Whistleblower Program Is Successful, Yet It May Be in Danger of Being Eliminated?

The SEC’s whistleblower program is, by all accounts, a success.

From the SEC’s perspective, it has: (a) provided a mechanism by which it can receive information about illegal conduct that, under most circumstances, would go undetected, particularly with regard to accounting fraud and valuation issues involving complex securities; (b) enhanced the SEC’s ability to move forward quickly against wrongdoers, thereby reducing the cost to prosecute cases; (c) increased the quality of information submitted to the agency for investigation, prompting the current SEC Chairwoman, Mary Jo White, to call the program a “game changer”; and (d) increased the deterrent effect of engaging in unlawful conduct.

From the whistleblower’s perspective, it has: (a) demonstrated an unyielding effort to protect their identities; (b) shielded them from retaliation and pre-retaliation (attempts to discourage and/or prevent whistleblowing with the SEC – a topic this Blog discussed here); and rewarded them for coming forward as insurance against retaliation and other consequences they could suffer. In short, as noted by the SEC’s Director of the Division of Enforcement, Andrew Ceresney, the SEC whistleblower program has had a “transformative impact,” not only in the United States but also around the world as numerous regulatory agencies are looking to implement similar programs. (This Blog wrote about Director Ceresney’s speech here.)

Despite the success of the program, its continued existence has come into question by the recent election of Donald J. Trump. During the long campaign season, as well as during the current transition period, President-elect Trump has spoken about repealing the Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank Act” or the “Act”). Although he has attacked many aspects of the Act, he has been silent about the SEC whistleblower program. Indeed, the President-elect has stated that he intends to replace the Dodd-Frank Act with “new policies to encourage economic growth and job creation,” according to his transition website, GreatAgain.gov, citing the Consumer Financial Protection Bureau and restrictions on banks’ trading activity as targets for repeal or replacement. This position has been further reinforced by Mr. Trump in a post-election interview with The Wall Street Journal (here).

Additionally, the transition team appointed by President-elect Trump is made up of people who do not support the Dodd-Frank Act, including the SEC whistleblower program. One member of the team, Paul Atkins, a former Securities and Exchange Commissioner under President George W. Bush, has often harshly critiqued the Dodd-Frank Act, including the structure of the whistleblower program. Testifying before the Senate banking committee in 2011, Atkins stated that the whistleblower program (a) “create[ed] perverse incentives” for whistleblowers; (b) “set[] up a system that has many inherent problems,” such as “undermin[ing] internal compliance programs, and failing to create a system that protects companies “from disclosure of confidential information”; and (c) created a boondoggle for plaintiff’s lawyers who would be “inject[ed] into the mix” and “increase[] the potential for specious claims to get traction and win a settlement, especially if the complainant is anonymous.”

Against this negativity stands Senator Charles Grassley of Iowa and Representative Jeb Hensarling of Texas, two Republican lawmakers who appear to have the ear of the President-elect’s camp.  Both have previously voiced support for whistleblower programs.

It is difficult to know how the new administration will approach the SEC whistleblower program. It can be a long time before legislation is enacted to address the whistleblower program, especially given the new administration’s stated priorities of job growth, the repeal and replacement of the Affordable Care Act, and the establishment of a nationwide infrastructure program. Still, the hope is that the whistleblower programs established under the Dodd-Frank Act will survive, especially given the long history of bipartisan support for programs that fight government waste, fraud and abuse.

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