Key Insights from SEC’s 2015 Whistleblower Report to Congress

The SEC Office of the Whistleblower (OWB) has released its Fiscal Year 2015 Dodd-Frank Whistleblower Program report to Congress. Dodd-Frank offers substantial monetary awards to individuals with information that leads to successful enforcement actions. This year’s report confirms the program’s continued growth and success. Since its inception in August 2011, tips are up 30% and $54 million has been awarded to whistleblowers for their efforts.

Key Insights from SEC’s 2015 Whistleblower Report to Congress

SEC Tips, Claims and Award Payouts at an All-Time High

The SEC received a record 3,923 tips this year, up 8% from FY2014. Of the 130 award claims in FY2015, eight whistleblowers were awarded a total of over $37 million, more than 68% of the total payout awarded since the program’s inception ($54 million). OWB attributes the consistent increase in claim numbers over the past four years to the “increased public awareness of the SEC’s whistleblower program” and “in response to the tens of millions of dollars that have been paid to whistleblowers under the program.”

International Participation is Strong in SEC Whistleblower Program

Tips arose from every U.S. state, Washington DC, and 61 foreign countries - a majority of those from Australia, Canada, China, India and the UK. The number of foreign countries contributing to the tip counts highlights the significant international awareness growth of the program.

Corporate Disclosures and Financials Allegations Up 13%

The most frequent allegation types for FY2015 were corporate disclosures and financials (17.5%), offering fraud (15.6%) and manipulation (12.3%). Corporate disclosures and financials allegations increased nearly 13% from the previous year, likely due to the SEC's 2013 formation of the Financial Reporting and Audit Task Force and its recent emphasis on financial reporting and accounting fraud.

More Than Half of SEC FY2015 Whistleblowers Were Non-Insiders

Interestingly, less than half of this year’s whistleblower tips came from former or current employees of the company involved. According to the OWB, the remaining non-insiders are made up of victims of the fraudulent activity, industry professionals, or individuals who know the wrongdoer personally.

SEC Decreases Whistleblower Award Amounts for Unreasonable Reporting Delays

The OWB noted that approximately 20% of all SEC whistleblower award amounts (since 2011) have been reduced due to an “unreasonable reporting delay.” The OWB explained that these delays become a significant issue when they lead to continued securities law violations and increases in damages.

SEC Emphasizes Anti-Retaliation Protections: Awards Statutory Maximum

In the program’s first successful anti-retaliation case initiated out of original whistleblower information, the SEC awarded an employee of the New York hedge fund advisory firm, Paradigm Capital Management, the statutory maximum whistleblower award - 30% of the recovery, equaling $660,000. The report stated that OWB considered the unique hardships the whistleblower faced in deciding to reward the large amount, including demotion from their employment position, being required to investigate the very conduct reported, and removal of supervisory roles.

Continued Focus on Whistleblower Confidentiality Agreements

The report highlights the SEC’s continued involvement in helping to safeguard individuals’ right to report violations without fear of retaliation from their employer. In April 2015, the SEC brought charges against KBR Inc. for drawing up confidentiality agreements that effectively prohibited employees from relating investigative interview statements without company approval.

For the first time, charges were brought under Rule 21F-17(a). The SEC argued that the agreement’s language impeded “such communications by prohibiting employees from discussing the substance of their interview without clearance from KBR's law department under penalty of disciplinary action including termination of employment." KBR Inc. settled at $130,000. The FY2015 report stated that evaluating confidentiality agreements for Rule 21F-17(a) compliance will be of continued focus for OWB in FY2016.

SEC Utilizes Substantial Injury Exception

In yet another 2015 landmark case, the SEC applied the “substantial injury” exception for the first time. Officers, partners, trustees or other individuals whose principal duties involve compliance or internal audit responsibilities are normally not eligible for whistleblower awards unless an exception applies. The SEC issued its first award to a compliance officer – in the amount of $1.4 million - as he reported his information more than 120 days after other compliance personnel learned of the information but failed to act.

Overall, the SEC’s Whistleblower Report demonstrates consistent growth in tips, claims, award amounts and international cooperation. The SEC’s continued focus on whistleblower protections suggests a continued optimism and support for the future of financial services integrity and the role of whistleblowers’ tips in accomplishing their enforcement goals.

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