A recent Securities and Exchange Commission whistleblower reward marks the first time the agency has issued an award to a whistleblower who reported alleged corporate misconduct to the whistleblower’s employer before going to the SEC.
However, future whistleblowers should think carefully before reporting concerns internally and consult an attorney before they do.
As a result of a US Supreme Court decision last year, those who “only” report possible violations of securities laws and regulations to their employer risk losing valuable protections against job retaliation unless they report the possible violation to the SEC at the same time.
The SEC awarded $4.5 million on May 24 to a whistleblower who reported alleged financial misconduct internally and sent the same information to the SEC within 120 days of making the internal report.
As a result, thanks to incentives to encourage internal reporting built into the SEC whistleblower rules, the SEC credited the whistleblower with all of the information the company had uncovered as a result of the internal investigation spurred by the whistleblower’s internal report and increased the award percentage.
However, the significance of this development is undercut by a Supreme Court decision last year. In Digital Realty Trust Inc. v. Somers, the Supreme Court held that whistleblowers are eligible for protection under the Dodd-Frank Act’s anti-retaliation provisions only if they report information about misconduct directly to the SEC.
As a result, for most potential whistleblowers, the monetary incentive of being credited with all the information uncovered in an internal investigation is entirely offset by the need to preserve the right to have legal protections against retaliation by either bypassing a company’s internal compliance program entirely or – at a minimum – reporting potential wrongdoing internally and to the SEC simultaneously.
That ruling overturned the SEC’s interpretation of the law. The SEC had set up the rules for the whistleblower program to incentivize internal reporting by promising a larger award percentage to those who reported internally first before going to the SEC.
In leaving internal whistleblowers vulnerable to retaliation, the Supreme Court’s ruling undercut the appeal of this incentive, discouraging internal reporting.
SEC whistleblower awards range from 10 percent to 30 percent of the amount the SEC collects as a result of the whistleblower’s information, if more than $1 million is collected. Recoveries in related cases by other agencies also are counted toward the whistleblower award, if the $1 million threshold is reached.
A House of Representatives bill intends to address the vulnerability for whistleblowers created by the Digital Realty ruling and extend Dodd-Frank anti-retaliation protections to whistleblowers who report concerns to their employers. The House Committee on Financial Services last month approved the bill, HR 2515, known as the “Whistleblower Protection Reform Act of 2019.”
The bill says that whistleblowers are covered by Dodd-Frank anti-retaliation protections if they report “any conduct that the whistleblower reasonably believes constitutes a violation of any law, rule or regulation subject to the jurisdiction” of the SEC to a supervisor, a self-regulatory organization, a state securities commission or similar office, or any person working for the whistleblower’s employer who has the authority to investigate, discover or terminate misconduct.
Without the fix that HR 2515 provides, it is unlikely that many – if any – more SEC whistleblower awards that involve the internal reporting incentives built into the current whistleblower rules will be made.
The Dodd-Frank Act provides whistleblowers with important protections by prohibiting firing, demotion, harassment, discrimination and other forms of job retaliation. Whistleblowers who suffer retaliation may sue for doubled back-pay, reinstatement and compensation of legal fees.
To date, the SEC has awarded $384 million to 64 whistleblowers. The SEC has issued more than $1.7 billion in sanctions as a result of whistleblower information and assistance and has been able to prevent untold sums from being lost to financial misconduct.
If you are considering reporting securities law wrongdoing, you should consult with an attorney to make sure that you report in a manner that preserves both your right to a potentially heightened award percentage as well as to being protected against retaliation.
About Phillips & Cohen LLP
Phillips & Cohen is the most successful law firm representing whistleblowers, with recoveries from our cases totaling over $12.3 billion. We have been recognized on such lists as the “Hot List of Plaintiffs’ Attorneys” (National Law Journal), “500 Leading Lawyers in America” (Lawdragon) and “Best Lawyers” (US News and World Report). Our attorneys and cases have often been in The New York Times, The Wall Street Journal, the Financial Times and other news publications, and three of our cases have been featured in the CBS series, “Whistleblower.” The firm’s roster includes former federal prosecutors, the first head of the SEC Office of the Whistleblower, a former deputy administrator of the Centers for Medicare and Medicaid Services, the author of a leading treatise on the False Claims Act and attorneys with decades of experience representing whistleblowers.