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The United States Securities and Exchange Commission Whistleblower Program: A Long and Winding Road

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Corporate Whistleblowing Regulation

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Abstract

As a lawyer, I have represented or conferred with dozens of individuals who have wanted to become whistleblowers under the US Securities and Exchange Commission’s Whistleblower Program and have represented clients who have received awards. In this chapter, I describe the process of being a whistleblower under this Program from the inside out, including advice on how to decide if one has a viable case which can qualify under the myriad of unforgiving and dense thicket of rules that the SEC carefully crafted to govern the program. The opportunities to fail in this process are many, the time periods can be quite long (into the years) and the process from the whistleblower’s perspective can be very frustrating. On the other hand, the prospect that your information can bring down the awesome power and expertise of the SEC on your target after providing the initial information and otherwise qualifying as a whistleblower, can be downright thrilling, and supremely satisfying as you see the “bad guys” getting their due. By describing my practice and cases, if even in a somewhat generic outline, I can give some guidance to readers who may be considering what will become one of the most important decisions of their lives—to “tell truth to power” and become a whistleblower in aid of the U.S. government’s worldwide enforcement of its powerful securities laws.

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Notes

  1. 1.

    Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 11-203 § 922(a), 121 Stat 1894 (2010), 5 U.S.C. Sec. 78u-6(h).

  2. 2.

    Securities and Exchange Commission (2018).

  3. 3.

    Ibid, p. 20.

  4. 4.

    Ibid, p. 1.

  5. 5.

    Ibid. In 2018 the SEC awarded $83 million (shared by three individuals), and an award of almost $54 million (shared by two individuals). In March 2019, awards totaling over $50 million were given to two whistleblowers.

  6. 6.

    The U.S. Commodity Futures Trading Commission (CFTC) has a whistleblower program nearly identical to that of the SEC. It has as of early 2019 made 9 awards to whistleblowers, totaling $87 million. The largest award, $30 million, was made in July 2018. The program had a modest start but appears to be picking up steam. See Commodity Futures Trading Commission (2019). In many respects, my observations will be applicable as well to that program.

  7. 7.

    Securities and Exchange Commission (2018, p. 1).

  8. 8.

    Ibid, p. 24.

  9. 9.

    Ibid, p. 30, and section 21F(g)(3) of the Exchange Act, 15 U.S.C. § 78-6(g)(3).

  10. 10.

    Ibid., p. 1. In FY 2018, the SEC awarded three individuals in the same matter a total of $83 million, and an award of almost $54 million to two individuals.

  11. 11.

    SEC Rules, 17 C.F.R. (2011), § 240.21F-6(b)(1). The most up to date version of these SEC whistleblower rules should be able to be accessed via the Google search “Regulation 21F-SEC.gov”. See also www.sec.gov/whistleblower, then go to “Resources” then to “Statutes and Regulations” then to “Section 922 of the Dodd-Frank Act.”.

  12. 12.

    Ibid, § 240.21F-7(3)(b).

  13. 13.

    Ibid, § 240.21F-7(a).

  14. 14.

    Securities and Exchange Commission (2018, p. 7).

  15. 15.

    Securities Exchange Act of 1934, 15 U.S.C. § 78u-6(h)(1)(B).

  16. 16.

    Securities and Exchange Commission (2018, p. 7).

  17. 17.

    In the major case of Digital Realty Trust, Inc. v. Sommers, 138 S.Ct. 767 (2018), the U.S. Supreme Court held that the whistleblower protections of the Dodd-Frank Act require that a person report a possible securities law violation to the SEC initially to qualify as a whistleblower protected from retaliation under Section 21F(h) of the act. Thus, reporting to the employer alone, or going to the SEC only after suffering retaliation, will not protect the whistleblower under the generous provisions of that law.

  18. 18.

    Securities and Exchange Commission (29 October 2018).

  19. 19.

    See Hurson (2015).

  20. 20.

    Securities and Exchange Commission (2018, p. 16).

  21. 21.

    SEC Rules, 17 C.F.R. (2011), § 240.21F-4(c)(2).

  22. 22.

    Securities and Exchange Commission (2018, p. 16).

  23. 23.

    A useful guide to US securities law is Wake Forest Professor Palmiter (2017). The SEC website contains descriptions of most enforcement actions, called “Litigation Releases.” It may aid a prospective whistleblower to review cases involving other entities in the same or a related business or industry to see if similar conduct has been prosecuted. A very good FCPA primer is the DOJ and SEC’s, Resource Guide to the U.S. Foreign Corrupt Practices Act [Department of Justice and Securities and Exchange Commission (2012)], available on their respective websites or Google “FCPA Resource Guide”.

  24. 24.

    In November 2016, JPMorgan Chase settled an FCPA case with the SEC, DOJ and the US Federal Reserve, paying total penalties and fines of more than $264 million. Over a seven-year period, the firm had hired approximately 100 interns and full-time employees at the request of foreign government officials. As the SEC announced it: “JP Morgan engaged in a systematic bribery scheme by hiring children of government officials and other favored referrals who were typically unqualified for the positions on their own merit.” This was done to enable the firm to win or retain business resulting in more than $100 million in revenues to JP Morgan. This case could have resulted in a whistleblower (if there was one) award of almost $80 million, see Securities and Exchange Commission (2016). The SEC settled a similar case with Deutsche Bank in August 2019, in which the bank paid $16 million in penalties for making such hires. A valuable source of information on SEC enforcement cases, including FCPA cases, is found in the quarterly and annual summaries compiled by the Gibson Dunn law firm, available on its website, https://www.gibsondunn.com/.

  25. 25.

    Securities and Exchange Commission (2018, p. 21).

  26. 26.

    Ibid, p. 20.

  27. 27.

    Ibid, p. 22.

  28. 28.

    Ibid, p. 34.

  29. 29.

    Ibid, p. 23.

  30. 30.

    This is discussed further in part 21.

  31. 31.

    Sarbanes-Oxley Act, 15 U.S.C. § 7241(a).

  32. 32.

    Securities and Exchange Commission (29 October 2018).

  33. 33.

    See Hurson (2016).

  34. 34.

    The Defend Trade Secrets Act of 2016, 18 U.S.C. Sec. 1836, has strong whistleblower protection provisions.

  35. 35.

    Securities and Exchange Commission (2011, p. 95).

  36. 36.

    Securities and Exchange Commission (2018, p. 17).

  37. 37.

    Securities and Exchange Commission (2018, p. 17).

  38. 38.

    See Hurson (2017), in which I have set forth a number of these considerations for whistleblowers and their lawyers.

  39. 39.

    SEC Rules, 17 C.F.R. (2011), § 240.21F-4(b)(7).

  40. 40.

    SEC Rules, 17 C.F.R. (2011).

  41. 41.

    Securities and Exchange Commission (29 October 2018).

  42. 42.

    Securities and Exchange Commission (28 June 2018a).

  43. 43.

    I have been told, on good authority, that the lawyer can ask SEC staff if the investigation has been closed, and the staff is authorized to answer yes or no. I recently did just that, and the Whistleblower Office called to inform me about the status of the case. But the fact the case is not closed only means it is not formally closed, but that may only mean that it is technically still open but not being actively investigated. Many investigations stall out, lawyers leave the agency, witnesses fade away, priorities change, or they just get stale, e.g. meaning the statute of limitations is approaching or has been passed. A recent U.S. Supreme Court case, Kokesh v. SEC, 137 S.Ct. 1635 (2017), held that disgorgement (repayment of unlawfully gained monies) in securities enforcement cases is covered by the general five-year statute of limitations on penalties. Thus, any activity over five years old cannot be the basis for a substantial SEC settlement with disgorgement. In real terms, and given the time it takes to get most SEC investigations off the ground, I would be concerned that any fact pattern involving activity more than three to four years old and not ongoing presently will probably not attract the attention of SEC enforcement staff regardless of its venality. You could also face a substantial award reduction for failure to come to the SEC sooner.

  44. 44.

    SEC Rules, 17 C.F.R. (2011), § 240.21F-8(c)(3).

  45. 45.

    Upjohn Company v United States [449 U.S. 383 (1981)].

  46. 46.

    SEC Rules, 17 C.F.R. (2011) § 240.21F-4(c)(1).

  47. 47.

    SEC Rules, 17 C.F.R. (2011) § 240.21F-4(c)(2).

  48. 48.

    These criteria are set forth in the SEC Rules, 17 C.F.R. (2011) § 240.21F-4(1) and (2). For suggestions as to how to access these rules, see note 11, above.

  49. 49.

    SEC Rules, 17 C.F.R. (2011) § 240.21F-6(a)(1)(i).

  50. 50.

    SEC Rules, 17 C.F.R. (2011) § 240.21F-6(b)(2)(i). For a more detailed explanation as to how the claim review process works, see Securities and Exchange Commission (2011) pp. 6, 12–15, 24–25.

  51. 51.

    Securities and Exchange Commission (28 June 2018b, p. 56).

  52. 52.

    Securities and Exchange Commission (2018).

  53. 53.

    SEC Rules, 17 C.F.R. (2011) § 240.21F-7(a)(3)(b).

  54. 54.

    SEC Rules, 17 C.F.R. (2011) § 240.21F-10.

  55. 55.

    Ibid.

  56. 56.

    Ibid. The form is available at https://www.sec.gov/about/forms/formwb-app.pdf. Accessed 16 April 2019.

  57. 57.

    Securities and Exchange Commission (2018, p. 13).

  58. 58.

    Ibid, p. 14.

  59. 59.

    Ibid, p. 17 (for a description of the factors).

  60. 60.

    SEC Rules, 17 C.F.R. (2011) § 240.21F-10(e)(1)(i).

  61. 61.

    Ibid § 240.21F-10(e)(2).

  62. 62.

    Ibid § 240.21F-10(g)-(h).

  63. 63.

    Ibid § 240.21F-13.

  64. 64.

    As noted, currently (2019) the time for the award decision from the time of the claim has been running two years or more in some cases. The SEC proposed in 2018 some new rules [see Securities and Exchange Commission (28 June 2018b)] to streamline the review process. The OWB has stated: “We anticipate increased efficiencies in the claims review process if certain proposed rule amendments are adopted by the Commission.” (see Securities and Exchange Commission (2018, p. 15).

  65. 65.

    Securities Exchange Act of 1934, 15 U.S.C. § 78u—6(h).

  66. 66.

    SEC Rules, 17 C.F.R. (2011) § 240.21F-17.

  67. 67.

    Securities and Exchange Commission (25 July 2018).

  68. 68.

    Securities and Exchange Commission (2015).

  69. 69.

    Securities and Exchange Commission Act of 1934, 15. U.S.C. § 78u—6(h)(1)(B)(i).

  70. 70.

    Ibid., § 78u—6(h)(1)(C).

  71. 71.

    Ibid., § 78u—6(h)(1)(B)(iii).

  72. 72.

    Section 806 of the Sarbanes-Oxley Act, 18 U.S.C. § 1541 A.

  73. 73.

    The SEC OWB website contains an extensive discussion of retaliation protections (https://www.sec.gov/whistleblower/retaliation). A good description of the two statutes and a comparison of their provisions is found in Zuckerman and Stock (2018). One unfortunate development in US law is a decision from an influential lower US appellate court holding that overseas whistleblowers are not protected by retaliation provisions. That court, which covers federal cases arising from New York and several other states, has held that traditional extraterritoriality doctrines of US law compel that such laws are not enforceable outside the United States, at least in cases where the events in question take place outside the country. Liu Meng-Lin v. Siemens AG, 763 F. 3d 175 (2 Cir. 2014) [see Morrison v. Nat’l Austl. Bank, Ltd., 561 U.S. 247 (2010)]. Despite the Liu holding, the SEC has continued to pay awards to foreign nationals when there is a “sufficient U.S. territorial nexus” such as a violation of U.S. securities laws. Nevertheless, this restriction on retaliation jurisdiction strongly suggests that overseas whistleblowers should use an attorney and report anonymously, and forgo reporting up internally.

  74. 74.

    The Ontario Securities Commission (OSC) in Canada created a whistleblower law in 2016 modeled after the SEC Program and gives awards of 5–15% of monetary sanctions up to $5 million [see Ontario Securities Commission (2016)]. The AMF program in Quebec does not pay an award (see Autorité des marchés financiers (2016). The new Australian law does not give awards [see Treasury Laws Amendment (Enhancing Whistleblower Protections) Act 2019 (Cth)]. Chinese whistleblowing laws allow payment of up to about $73,000 for “significant contributions” to anti-corruption enforcement, (see China Daily 8 April 2016). European countries have not given awards. In April 2019, the European Parliament passed a Whistleblower Directive [see European Parliament (2019)] however this does not contain provisions for rewards. In July 2018, the National Whistleblower Center in Washington wrote to the President of the European Parliament and President of the European Commission regarding that Directive Regarding the lack of awards for whistleblowers in the proposal, the NWC stated:

    We strongly urge the EU to establish reward laws, modeled on the successful U.S. Programs. Without these laws, whistleblowers will never be fully and properly compensated for the risks they take, and the overwhelming majority of persons who may otherwise blow the whistle will remain silent.

    [see National Whistleblower Centre (2018, p. 15)].

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  1. The Law Offices of Daniel J. Hurson, Annapolis, MD, USA

    Daniel J. Hurson

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  1. Flinders University, Bedford Park, SA, Australia

    Sulette Lombard

  2. Flinders University, Bedford Park, SA, Australia

    Vivienne Brand

  3. University of New Brunswick, Fredericton, NB, Canada

    Janet Austin

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Hurson, D.J. (2020). The United States Securities and Exchange Commission Whistleblower Program: A Long and Winding Road. In: Lombard, S., Brand, V., Austin, J. (eds) Corporate Whistleblowing Regulation. Springer, Singapore. https://doi.org/10.1007/978-981-15-0259-0_7

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