SEC Whistleblower Program: Three Persons Deemed One Claimant and the 8/10ths of a Human Being

November 19, 2019

An interesting aspect of a recent SEC Order is its treatment of the information provided by multiple Claimants as constituting the conduct of a single whistleblower. In the Matter of the Claims for Award in Connection with Notice of Covered Action [Redacted][Redacted] (Order Determining Whistleblower Award Claims, '34 Act Rel. No. 87544; Whistleblower Award Proceeding File No. 2020-1 / November 15, 2019) Although the body of the SEC Order only references "Claimants" and does not indicate the exact number of this multiple-party state, Footnote 1, in part, states that:

[U]nless Claimants, within ten (10) calendar days of the issuance of this Order, make a joint request, in writing, for a different allocation of the award between the three of them, the Office of the Whistleblower is directed to pay each of them individually one-third of their joint award.

As explained in the SEC Order, the SEC's Claims Review Staff ("CRS") issued a Preliminary Determination "recommending that claimants . . ." be awarded an undisclosed percentage of the monetary sanctions on a basis set forth as "jointly." Accordingly, the CRS recommended a $260,000 "undivided payment to Claimants." This odd bit of legal fiction arises because Section 15 U.S.C. § 78u-6(a)(6) of the Dodd-Frank Act states:

(6) Whistleblower

The term "whistleblower" means any individual who provides, or 2 or more individuals acting jointly who provide, information relating to a violation of the securities laws to the Commission, in a manner established, by rule or regulation, by the Commission.

The SEC Order explains, in part, that the SEC accepted the CRS's recommendation based upon a positive assessment of the following facts:

(i) the Claimants' information was significant as it would have been unlikely for Commission staff to have learned of the misconduct absent the Claimants' initial tip; (ii) each of the Claimants provided assistance to Commission staff by providing an interview early in the investigation; (iii) Claimants' information helped the Commission further significant law enforcement interests by enabling the Commission to shut down a fraudulent scheme in which investors in a Redacted company were preyed upon by recidivist violators; (iv) Claimants were harmed investors who lost their retirement savings; and (v) current collections from the defendants of the monetary sanctions ordered were low.

Bill Singer's Comment

In touting the above-cited Award of $260,000 to three claimants, the SEC issued "SEC Awards Over $260,000 to Whistleblowers for Their Help in Spotting Securities Fraud" (SEC Release 2019-238 / November 15, 2019) The SEC Release explains in part that:

"Because of the whistleblowers' information and assistance early in the investigation, the SEC had strong evidence about a fraudulent scheme operated by recidivist violators," said Jane Norberg, Chief of the SEC's Office of the Whistleblower.  "This matter exemplifies the importance of the SEC's whistleblower program to the agency's enforcement efforts and commitment to protect investors."

The SEC has awarded approximately $387 million to 70 individuals since issuing its first award in 2012.  All payments are made out of an investor protection fund established by Congress that is financed entirely through monetary sanctions paid to the SEC by securities law violators.  No money has been taken or withheld from harmed investors to pay whistleblower awards.  Whistleblowers may be eligible for an award when they voluntarily provide the SEC with original, timely, and credible information that leads to a successful enforcement action.  Whistleblower awards can range from 10 percent to 30 percent of the money collected when the monetary sanctions exceed $1 million.

It's nice that the SEC found the three whistleblowers to have been of such wonderful assistance. Unfortunately, I don't believe that this matter exemplifies the importance of the SEC's whistleblower program to that federal regulator. As I and other whistleblower advocates have argued over the years, the SEC's whistleblower program is riddled with unacceptable processing delays and permeated by what comes off as a cultural hostility to outside tips. Worse, the SEC's whistleblower program seems intent on perpetuating a counter-productive and enervating process that serves to impede the timely payment of earned bounties. Consider that in the seven years since the 2012 payment by the SEC of its first whistleblower award, only 70 individuals have been awarded payments. The simple math of 70 divided by 7 yields the somewhat disappointing average of 10 awards per year -- if we divide that number over a year, we have just about .0833 awards per month during the existence of the SEC's Whistlblower Program. Think about it -- each month, only 8/10ths of a human being gets an SEC Whistleblower Award. 

Sadly, the above SEC Order fails to disclose how long it took from the date of:
  • Claimants' initial TCR filings or first Staff interview until the underlying enforcement action to result in the imposition of fines; 
  • the imposition of any fines for the CRS to issue its Preliminary Determination; and 
  • the issuance of the CRS recommendation until the SEC authorization of an Award. 
The SEC may argue that to disclose the above dates might provide enough clues as to uncloak a confidential whistleblower's identity in contravention of the law. To the extent that's a fair and legitimate concern, as a successful lawyer for a whistleblower who was paid about a $1.6 million Award, I appreciate Staff's concerns but I can think of more than enough ways to provide some reasonable timeline indicia without risking a given individual's identity.

As set forth in part in the "2019 Annual Report to Congress / SEC Whistleblower Program"

In FY 2019, the Commission received its second largest number of whistleblower tips in a fiscal year and made its third largest award to date-a $37 million award to a whistleblower who provided significant evidence and assistance that enabled the agency to bring the matter to an efficient and successful resolution. This award followed a $50 million award to joint claimants in March 2018 and a $39 million award to a whistleblower in September 2018. While all awards are important to the Commission and to whistleblowers, these larger awards reflect the significance of the information that whistleblowers are providing to the Commission and are testaments to the whistleblower program's success.

A reasonable inference from the 2019 Annual Report is that the number of whistleblower tips for the year was not the "largest" number received to date but merely the "second." As such, the SEC's whistleblower business seems a tad soft these days -- perhaps reflecting a chorus of naysayers about the federal regulator's delays. If we further consider the Statement on Whistleblower Program 2019 Annual Report to Congress (SEC Chairman Jay Clayton), we find SEC Chair Clayton observing [Ed: footnotes omitted]:

In 2018, building upon our years of experience administering the program, and also to address the Supreme Court ruling in Digital Realty Trust, Inc. v. Somers, we proposed amendments designed to improve the efficiency and effectiveness of our whistleblower program. The amendments were largely designed to allow us to get money into the hands of more whistleblowers faster.  One aspect of that proposal has received significant attention: a proposed framework to guide the exercise of discretion by the Commission in the case of awards over $30 million.  This proposal was mischaracterized by some as a "cap."  The proposed provision was not a "cap," it could not and was not intended to operate as a "cap," and I do not support a cap.  Congress vested in the Commission the authority and responsibility to use our good judgment and experience to determine award amounts within the range of 10-30% prescribed by Congress, and we should do just that.    

This mischaracterization did have a salutary effect. The whistleblower bar, members of Congress and other commentators brought to my attention the fact that the mischaracterization raised uncertainty about the agency's commitment to the program. They explained that uncertainty, including even uncertainty regarding the award process for very large awards, could deter potential whistleblowers from coming forward. This reality of human emotion and decision-making under uncertainty is not lost on me.  While all cases are different and award processes that incorporate the exercise of discretion have an inherent level of imprecision, it is my aim that, as we gain greater experience with the whistleblower program, the award process will be more transparent.  Importantly, such a dynamic should lead to a greater number of actionable TCRs, resulting in awards to meritorious whistleblowers in a more efficient manner. . .

A takeaway from Chair Clayton's candid remarks is that in launching a proposed provision purportedly designed to "improve the efficiency and effectiveness of our whistleblower program," that the proposal was allegedly "mischaracterized by some as a 'cap.'" With all due respect to Chair Clayton, I am a former business-editor and the current publisher of two blogs, and it has been my experience that when something I write is widely "mischaracterized," the source of the confusion tends to be with the writer rather than the reader. Frankly, I think those of us who read the SEC's proposal got it right -- it was a cynical attempt to cap awards. Accordingly, I fully understand why Clayton would offer cover to those who drafted the less-than-articulate language, and why he has beat an organized retreat over the issue. To the SEC Chair's credit, his remarks acknowledge that the federal regulator's whistleblower program needs to move forward "in a more efficient manner."

Some seven years after launching its Whistleblower Program, it's now time for the SEC to find a way to timely process tips and timely pay Awards. Long after the SEC has collected fines from miscreants, the whistleblowers responsible for such successful enforcement efforts are left standing out in the cold and refused any meaningful indication of "how much longer." If the SEC's Whistleblower Program is to remain viable and potent, the federal regulator must hold itself more accountable for acting in a timely manner. A first step -- a token gesture of  good faith -- would be for the SEC to create and post on its website a Statistics page disclosing the historic average and the current trailing 12-month timeline from filing of a TCR to:
  • issuance of a Notice of Covered Action ("NoCA");
  • collection of fines for matters subject to a NoCA;
  • issuance of the CRS Preliminary Determination;
  • issuance of an SEC Award; and, 
  • payment of the first and last payments of any Award. 
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