A $14 million award to a whistle-blower who went straight to the Securities and Exchange Commission (SEC) without first bringing the complaint to the attention of the worker’s employer may be a sign of things to come, according to Steve Pearlman, an attorney who is co-head of the Whistleblowing & Retaliation Group at Proskauer in Chicago.
Documentation of the Oct. 1, 2013, award to the worker—the SEC’s largest whistle-blower award from a fund established by the Dodd-Frank Act—has scant details from the agency. The whistle-blower did not want to be identified, but provided “original information” and assistance that led the SEC to investigate an enforcement matter more quickly than otherwise would have been possible. Less than six months after receiving the whistle-blower’s tip, the SEC was able to bring an enforcement action against the perpetrators and secure investor funds.
The SEC also did not identify the company or persons complained of, noting in a press release that “By law, the SEC must protect the confidentiality of whistleblowers and cannot disclose any information that might directly or indirectly reveal a whistleblower’s identity.”
SEC Whistle-Blower Program
There was no suggestion from the settlement that the employee reported internally to the company, but instead likely went straight to the SEC, Pearlman said.
As word about the millions available from the SEC for whistle-blower awards spreads, “HR needs to take steps to incentivize employees to report internally to HR, an audit committee, hotline or legal,” he added.
Congress created the SEC’s whistleblower program to provide monetary incentives for individuals to come forward and report possible violations of federal securities laws to the SEC. Under the program, eligible whistle-blowers are entitled to an award of between 10 percent and 30 percent of the monetary sanctions collected in actions brought by the SEC and related actions brought by other regulatory and law enforcement authorities. The program also prohibits retaliation by employers against employees who provide the SEC with information about possible securities violations.
A whistle-blower may recover from the program if he or she provides “original information” about a possible violation of federal securities law that leads to a successful SEC action resulting in sanctions exceeding $1 million. “Original information” is derived from independent knowledge—facts known to the whistle-blower that are not gleaned from publicly available sources—or independent analysis not already known by the SEC. Employers could choose to disclose the information to the SEC before employees have a chance to.
Pearlman said HR often is well-positioned to field whistle-blower complaints.
“Some employees view HR as a safe haven that looks out for the interests of employees,” he remarked. “HR should want to foster and capitalize on that perception. HR usually is well-equipped to handle complaints and act as a liaison to the whistle-blower.”
Dodd-Frank created a “new regime that encourages employees to keep eyes and ears open.” In other words, if they see something, they are to say something, preferably to the employer if it is able to encourage employees to come to it first, but to the SEC first if the employee so chooses.
“Employees are deputized to act as agents of the government,” Pearlman noted, observing that the SEC has a lot of whistle-blower cases in the pipeline.
“While it is certainly gratifying to make this significant award payout, the even better news for investors is that whistle-blowers are coming forward to assist us in stopping potential fraud in its tracks so that no future investors are harmed,” said Sean McKessy, chief of the SEC’s Office of the Whistleblower. “That ultimately is what the whistle-blower program is about.”
Allen Smith, J.D., is the manager of workplace law content for SHRM. Follow him @SHRMlegaleditor.