General Counsels Wants More from SEC in Corporate Whistleblower Cases

Topics: Corporate Legal, Government, Thomson Reuters

Corporate counsels and outside lawyers want more from the U.S. Securities and Exchange Commission (SEC) in regards to how the agency is applying its metrics in determining corporate whistleblower awards.

Mostly, the legal bar wants more details released publicly about what factors go into determining the percentage-size of a whistleblower’s award, whether that whistleblower had reported internally to the company prior to going to the SEC, and what considerations are being given to the whistleblower’s own role in the alleged wrongdoing.

That thread of thought ran through several panels at the 3rd Annual Corporate Whistleblowing Forum, held recently. Just a week before the forum was held, the SEC announced its largest award ever given to a corporate whistleblower—$30 million. That announcement and that dollar amount also reverberated through the forum.

“I understand that is a very eye-opening amount,” said Sean McKessy, chief of the SEC’s Office of the Whistleblower, during the forum’s regulators panel. “And I hope that the award of that $30 million leads to more tips coming in.” McKessy told the forum attendees the SEC is averaging about 3,000 whistleblower tips each year with more than 100 cases being brought. In nine cases in which a whistleblower reached the threshold for a financial reward, 14 individuals have been awarded a combined total of about $46 million. “We have been very pleased with the quantity and quality of the tips we’re getting,” McKessy said.

The Dodd-Frank Act mandated the SEC create a corporate whistleblower program, which has the agency paying a financial award to a whistleblower whose tip or assistance leads to a successful enforcement action with sanctions exceeding $1 million. The award is between 10% and 30% of the sanction total, and its level is determined by the SEC, which takes into consideration a number of determining factors. The Department of Justice and the Commodity Futures Trading Commission have similar whistleblower award programs in place.

But it’s the murkiness in exactly how the SEC determines that award percentage, as well as the SEC’s tight-lipped delineation of any details of the awarded whistleblower cases themselves that vexed many of the lawyers at the forum.

Christian Bartholomew, a partner at Jenner & Block, and organizer and co-chair of the Corporate Whistleblowing Forum, echoed the frustrations of many lawyers in attendance when he said the SEC needs to be providing more details on how it’s applying different nuances in determining the final award percentage. “For example,” Bartholomew told attendees. “It’s frustrating that the SEC doesn’t even reveal whether or not a whistleblower went internally first with their allegations before going to the SEC.”

And this information is important, especially to corporate counsel who are under mandates from both the Sarbanes-Oxley Act and the Dodd Frank Act to monitor and maintain a robust compliance program that allows company whistleblowers to come forward with allegations of fraud or other crimes commitment by the company or its executives.

As mandated in those laws, general counsel have directed their companies to create whistleblower hotlines, enacted policies that urge employees to speak up when they see wrongdoing, and established robust monitoring and investigation programs all to encourage company whistleblowers to come forward if there is a problem. But without any ongoing disclosure from the SEC about how its administering these enforcement cases, corporate counsels and outside lawyers are often left to play a guessing game or doing some fancy reverse mathematics to try to determine the particular case or any additional details that could help them when dealing with the SEC in whistleblower cases involving their own companies or clients.

For its part, however, the SEC has said—and McKessy reiterated at the forum—that the agency is sworn to protect the confidentiality of whistleblowers and therefore does not disclose information that might directly or indirectly reveal a whistleblower’s identity.

Still, without any ongoing disclosures about how the SEC is viewing the activities of these whistleblowers in enforcement cases, companies and their counsel sometimes feel they are whistling in the dark.