On Nov. 15, the U.S. Securities and Exchange Commission (SEC) released its 2013 Annual Report to Congress on the Dodd-Frank Whistleblower Program, available in full here. The report contains helpful insight into the operation of the SEC’s Office of the Whistleblower (OWB), and details OWB’s progress to date, its priorities moving forward, and the payments awarded through the program. This information is relevant for companies looking to improve internal controls and prevent securities misconduct, individuals in a position to become whistleblowers, and business and compliance professionals throughout the securities industry.
From all indicators, fiscal year 2013 was a year of growth for the OWB. We anticipate this trend will continue in 2014 and beyond, especially as the program and its awards are more widely publicized. Some of the program’s key metrics from 2013 are as follows:
OWB received 3,238 tips and complaints in fiscal year 2013, an increase of almost 8% from the previous fiscal year.
Corporate Disclosures and Financials (17.2%), Offering Fraud (17.1%), and Manipulation (16.2%) remained the most common complaint categories this fiscal year, and all categories saw an increase in the number of complaints (except for Municipal Securities and Public Pensions).
- OWB received tips and complaints from 55 foreign countries, all 50 states, the District of Columbia, Puerto Rico, Guam, and the U.S. Virgin Islands.
- California (375), New York (215), and Florida (187) were the three leading sources of tips domestically, while the United Kingdom (66), Canada (62), and China (52) were the three leading sources internationally.
- OWB posted 118 Notices of Covered Actions to its website, meaning that there were 118 award-eligible enforcement actions and orders (i.e. each having sanctions greater than $1,000,000).
- Of the six whistleblower awards since the inception of the program, four were announced during the 2013 fiscal year.
The SEC has recently announced some new priorities and a number of tougher enforcement policies, including: pursing individuals whenever possible, more frequently requiring admissions of wrongdoing in plea agreements, as well as focusing on less frequently policed areas of the market (e.g. hedge funds, private equity funds, mutual funds, microcap securities). As the SEC seeks more enforcement actions arising from more segments of the market, an OWB that takes in more information will certainly advance those efforts. For example, the SEC’s co-director of enforcement recently stated that the Commission’s emphasis on Foreign Corrupt Practices Act violations will likely make it “an increasingly fertile ground for Dodd-Frank whistleblowing,” vowing to “remain the vigilant cop on the beat” for an area that saw an almost 30% increase in tips from 2012. To that end, the report described several OWB policies and priorities designed to encourage more tips and complaints.
First, OWB Chief Sean McKessy confirmed that “[o]ne of the most crucial tenants by which OWB operates is the protection of a whistleblower’s identifying information.” This commitment is evidenced by the most recent award announced October 30th, the recipient of which remains anonymous to the public. Allowing anonymous contact and establishing a successful track record of protecting identities may ease concerns of potential whistleblowers, and subsequently induce more people to report.
Second, the report reiterated that successful whistleblowers have “provided high-quality original information that allowed the Commission to more quickly unearth and investigate the securities law violation, thereby better protecting investors from further injury and helping to conserve limited agency resources.” This emphasis on actionable tips about ongoing violations, comports with the SEC’s stated goal of protecting the individual investors in jeopardy, while also precipitating quick changes in conduct throughout the market. Indeed, the largest whistleblower award to date was the result of information that allowed the SEC to secure “substantial investor funds” via an enforcement action within six months from the receipt of the tip.
Of the six whistleblower awards announced by the SEC, one occurred in fiscal year 2012, four occurred in fiscal year 2013, and the most recent award was announced on October 30, 2013, which will be counted towards fiscal year 2014.
- Four awards were given to individuals in fiscal year 2013, totaling $14,831,965.64.
- A $14,000,000 award to a single whistleblower is the largest program payment to date.
- The remaining awards from this fiscal year were given to three individuals who provided related information about a sham hedge fund.
The number of awards to date is undeniably small, with only six awards on more than 6,500 tips during two-plus years. There are, however, several indicators that this is just the beginning for the Dodd-Frank Whistleblower Program. With fiscal year 2014 already off to a quick start with one award, the headlines garnered by the $14,000,000 payment, and a renewed commitment within the SEC on enforcement actions, we fully anticipate that the Whistleblower Program will continue to grow in size and significance. This year’s increase in the volume of tips, the number of awards, and the size of the awards will likely continue in 2014.
 See Mary Jo White, Chair, U.S. Sec. and Exch. Comm’n, Remarks to the fall conference of the Council of Institution Investors (Sept. 26, 2013), available here. See also Luis A. Aguilar, Commissioner, U.S. Sec. and Exch. Comm’n, Remarks to the 20th Annual Securities Litigation and Regulatory Enforcement Seminar (Oct. 25, 2013), available here.
 Andrew Ceresney, Co-Director of the Division of Enforcement, U.S. Sec. and Exch. Comm’n, Remarks to the International Conference on the Foreign Corrupt Practices Act (Nov. 19, 2013), available here.
Report by DrinkerBiddle White Collar Criminal Defense and Investigations Team