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Fraudster Sued to Prevent Shareholders from Communicating with the SEC


The SEC has accused an alleged securities fraudster of conditioning returns of shareholder funds on agreements that prohibited the investors from communicating with the SEC.  According to the SEC, certain suspicious investors received a refund of the money invested upon executing a Stock Purchase Agreement and/or Settlement Agreement that prohibited them from communicating with the SEC or any other governmental agency.  The defendants also sued two of the investors for violating this provision, claiming that speaking with the SEC would jeopardize the entire enterprise including the current stock valuation.  The whistleblower rules prohibit any actions to “impede an individual from communicating directly with the Commission staff about a possible securities law violation, including enforcing, or threatening to enforce, a confidentiality agreement.”

OUR TAKE: Hire a lawyer that actually  knows the law.  It’s pretty clear that the confidentiality provisions violated the whistleblower rules.  To attempt to enforce the illegal provisions through a lawsuit is doubling down on the malpractice.

SEC Has Made Awards to Only 0.2% of Whistleblowers


The SEC reported near-record activity in its whistleblower program for 2019.  The Office of the Whistleblower received more than 5,200 tips in fiscal in 2019, nearly equaling last year’s record total.  However, only eight individuals received a portion of the $60 million in whistleblower awards in 2019.  Since the program began in 2011, the SEC has received over 33,000 tips but has awarded a total of $387 million to 67 individuals.   The most common tips involve corporate disclosures and financials, offering fraud, and manipulation.  The SEC expects to adopt new rules that expand the program in 2020.

The SEC whistleblower program has made awards to only 0.2% of tips (67/33,300).  While we laud the $2 Billion that has been recovered, we wonder whether the SEC could develop a more efficient reporting mechanism. 

SEC Seeks Expansion of Whistleblower Program

The SEC has proposed expanding whistleblower awards to include deferred and non-prosecution agreements with the Department of Justice or a state attorney general in a criminal case as well as SEC settlements outside of a judicial or administrative proceedings.  According to the SEC, the proposal would “ensure that whistleblowers are not disadvantaged because of the particular form of action” taken.  The SEC also proposed allowing discretionary awards in smaller cases that would not otherwise qualify.  The SEC whistleblower program, established by the Dodd-Frank Act, has ordered over $266 Million in 55 whistleblowers, although 40% has been paid out to only 3 awards.

OUR TAKE: We would prefer to see the SEC limit the snitch program, rather than expand it.  While the logic behind the program makes sense, the SEC should also examine its unintended consequences including the disincentives to include all necessary employees in problem resolution and the growth of extortionist lawyers representing disgruntled employees.


Supreme Court Rules that Whistleblower Must Report to SEC

The United States Supreme Court has ruled that Dodd-Frank’s anti-retaliation provisions apply only to whistleblowers who report the misconduct to the SEC.  In the case, the employee brought a claim under Dodd-Frank’s whistleblower anti-retaliation provisions, even though he had not reported to the SEC, because he claimed that he was fired as a result of reporting to management suspected securities law violations.  The Supreme Court reversed the decision of the Ninth Circuit based on the plain reading of the statute which defines “whistleblower” as any individual who provides information relating to a violation of the securities laws to the SEC.   The Court rejected the SEC rule that expanded anti-retaliation protection to those who only report internally.  Looking at legislative history, the Court reasoned that “Dodd-Frank’s award program and anti-retaliation provision thus work synchronously to motivate individuals with knowledge of illegal activity” to report to the SEC.

OUR TAKE: We re-state our opinion that the Court is correct on the law even though Congress probably did want to protect those who only reported internally.  Regardless, companies should still avoid retaliating against internal whistleblowers because (i) good companies should want to ferret out wrongdoing by encouraging employees to come forward and (ii) other laws and rules (e.g. state employment laws, Sarbanes-Oxley) could serve as the basis for a lawsuit.


The Friday List: 10 Important Facts about the SEC Whistleblower Program

Today, we offer our “Friday List,” an occasional feature summarizing a topic significant to investment management professionals interested in regulatory issues.  Our Friday Lists are an expanded “Our Take” on a particular subject, offering our unique (and sometimes controversial) perspective on an industry topic.

The SEC recently announced that it has now ordered more than $1 Billion in financial penalties based on tips from whistleblowers.  Also, the Supreme Court is currently deciding the definition of a “whistleblower.”  We felt it a good time to offer 10 significant facts about the SEC’s Whistleblower program, which was created in 2012 as part of the Dodd Frank-Act.


10 Important Facts about the SEC Whistleblower Program


  1. The SEC has awarded more than $175 Million to 49 whistleblowers.
  2. The largest whistleblower award to date is $30 Million.
  3. A whistleblower is entitled to 10%-30% of monetary sanctions if the sanctions imposed exceed $1 Million.
  4. Both an outsider and a former employee can be a whistleblower.
  5. Covered firms may not take retaliatory job action against a whistleblower.
  6. Employee separation and non-compete agreements may not limit an employee’s whistleblower rights.
  7. Directors can be liable for whistleblower retaliation.
  8. Unless the Supreme Court decides otherwise, internal reporting, is sufficient, but not required, to become a protected whistleblower.
  9. In-house counsel and compliance officers are entitled to whistleblower protections.
  10. Firms must adopt whistleblower procedures.

General Counsel Awarded $7.9 Million for Wrongful Whistleblower Termination


A jury awarded a terminated General Counsel $2.9 Million in compensatory damages and $5 Million in punitive damages for wrongful termination due to his whistleblower activities.  In a key ruling, the Court (USDC for Northern District of California) ruled not to exclude evidence provided by the GC that his former employer claimed was privileged under California professional rules.  The Court held that federal law preempted the more stringent state law and that federal common law governing privilege applied to his Sarbanes-Oxley Act whistleblower retaliation claim.  The GC had raised Foreign Corrupt Practices Act compliance concerns.

OUR TAKE: While we sympathize with the plaintiff in this case, the broader policy of piercing lawyer-client privilege may result in limiting the role of in-house counsel.  Because the court can discard privilege, senior management and outside counsel may be less likely to include in-house lawyers in more sensitive matters.

Large Asset Manager Pays $340,000 Fine because Separation Agreements Violated Whistleblower Rule


The SEC fined a large asset manager $340,000 because it added provisions to its separation agreements prohibiting employees who received severance payments from collecting whistleblower awards.  The SEC contends that the respondent added the provisions after the SEC adopted the Dodd-Frank rule prohibiting any action that could impede a potential whistleblower.   The SEC imposed the fine even though the respondent voluntarily changed the language and even without any evidence that any employee was actually impeded or that the respondent ever sought to enforce the restrictions.  An SEC official faulted the firm for taking “direct aim at our whistleblower program by using separation agreements that removed the financial incentives for reporting problems to the SEC.”

OUR TAKE: Registrants must immediately review and revise confidentiality and separation agreements to strike any potentially violative language.


SEC Imposes $1.4 Million Fine for Whistleblower Rule Violations

whistleblower woman

The SEC fined a public company $1.4 Million because its severance agreements violated the Dodd-Frank’s whistleblower rules and because it retaliated against an internal whistleblower.  The SEC maintains that the firm’s severance agreements, which included non-disparagement and confidentiality provisions, violated the whistleblower rules because they impeded severed employees from communicating with the SEC.  Also, the SEC asserts that the respondent terminated an internal whistleblower for raising concerns about how the firm calculated oil and gas reserves.  The SEC’s Whistleblower Chief noted, “This is the first time a company is being charged for retaliating against an internal whistleblower.”

OUR TAKE: In addition to the retaliation action, the SEC, for the first time this year, imposes a 7+ figure fine for violating the whistleblower rules.  As we predicted, the SEC continues to bring more cases assessing punitive fines for violations of the whistleblower rules.  Compliance officers should review severance agreements and internal complaint processes.


SEC Risk Alert Warns About Whistleblower Policies and Practices


The SEC’s Office of Compliance Inspections and Examinations has issued a Risk Alert notifying advisers and broker-dealers that examination staff will examine whether agreements and other documents limit whistleblowers in violation of the Dodd-Frank Act.  The staff will examine compliance manuals, codes of ethics, and employment and severance agreements to determine whether any provisions directly or indirectly impede an employee or former employee from communicating potential securities laws violations to the SEC.  For example, the staff will assess whether confidentiality agreements include exceptions for SEC reporting or provisions requiring an employee to represent that s/he has not assisted with an investigation.  The Risk Alert recommends immediate remedial measures including revising documents and notifying both current and former employees about their unrestricted right to report to the SEC.   The SEC has brought several cases during the last year alleging that a registrant’s practices violated Dodd-Frank’s whistleblower provisions.

OUR TAKE: Our most recent C-suite survey reported that 91% of respondents have not changed their compliance programs due to whistleblower concerns.  Compli-pros should add policies and procedures that ensure that whistleblowers are in no way impeded by company documents.  Then, firms should test the policies by reviewing agreements and interviewing current and former employees.


Company Fined for Whistleblower Retaliation


The SEC fined a public company $500,000 for terminating and otherwise retaliating against a whistleblower who claimed financial statements may have been misstated.  The whistleblower reported his concerns to management, an internal hotline and, ultimately, to the SEC.  The company limited certain career opportunities and finally terminated him after an internal investigation found that the company’s financial statements were not misstated.  The employee had received consistently positive performance reviews.  The SEC claims that the job actions violated the whistleblower anti-retaliation provisions of the Dodd-Frank Act.

OUR TAKE: Dodd-Frank protects whistleblowers even if their assertions are later determined to be incorrect.  Notably, the respondent agreed to pay a fine to the SEC.   What about the aggrieved whistleblower?  We assume he will hire a lawyer and file a claim for wrongful discharge, if he hasn’t already sued or settled.