In the wake of the greatest financial meltdown since the global Great Depression, the U.S. Securities and Exchange Commission (SEC) whistle-blower program went into effect in July 2010 as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Dodd-Frank was passed after the near financial cataclysm of 2007-2008 to help mitigate and hopefully avert future financial crises and brought significant changes to financial regulation in the United States. The law established protections and made sweeping changes in financial regulations that impacted most federal financial regulatory agencies and many aspects of the financial services industry.
The SEC’s whistleblower program was created to provide financial incentives for individuals to come forward and report possible violations of federal securities laws. Prior to Dodd-Frank, the SEC had a little used bounty program in place for over 20 years designed to reward whistleblowers for insider trading tips and complaints. However, the bounty program was ineffective as there were very few reports or payments made. Under the new whistleblower program, eligible persons who report original information could collect an award of between 10% and 30% of monetary sanctions (for judgements exceeding $1 million) collected in actions brought by the SEC. The new whistleblower program also strictly prohibited employer retaliation against employees who provided the SEC with actionable information and gave the agency the ability to take legal action against any employer who retaliated against a whistleblower.
As with most government fiats the new whistleblower program has had some significant successes and some notable failures. A quick visit to the SEC’s whistleblower website (https://www.sec.gov/whistleblower) shows four significant awards and actions taken in just the last four months. Since the SEC’s whistleblower program began, over $150 million has been awarded to 43 whistleblowers who provided the SEC with original and useful information that led to successful enforcement actions. Those 43 individuals reaped the benefits of the whistleblower law without repercussions.
There are also some notable failures in the application and enforcement of the SEC whistleblower laws. A perfunctory perusal of the 80+ final orders and dispositions of awards under the SEC whistleblower program shows about one-third of claimants receive awards. Further investigation reveals that, in spite of requisite anonymity, whistle blowers are being targeted and punished for coming forward. Some companies improperly use separation agreements, so employees are forced to waive their ability to obtain whistleblower awards upon leaving a company. The SEC has taken action against BlackRock for insisting more than 1,000 departing BlackRock employees sign separation agreement to “waive any right to recovery of incentives for reporting of misconduct” in order to receive monetary separation payments from the firm. This a clear violation of the whistleblower laws and happens all too often.
A recent New York Times article (http://dtn.fm/XE7Aw) highlights the damage done to an exposed whistleblower. This is a case where the SEC should have stepped in to protect the whistleblower rather than allow a vindictive company to inflict financial, psychological and career retribution. Employees who speak truth to power can be putting themselves in harm’s way. Reports like these stifle other whistleblowers from coming forward with information to protect the public interest. Although instituted to protect the public and the anonymity of individual whistleblowers, the SEC’s whistleblowers act will become impotent without proper enforcement, protections and follow through.
For more information about the whistleblower program and how to report a tip, visit www.sec.gov/whistleblower.
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