SEC Gives Its Eighth Whistleblower Award

Earlier this month the Securities and Exchange Commission announced that it was paying $875,000 to two whistleblowers who had tipped the agency off to fraud. The SEC isn’t saying what publicly-traded company committed the fraud, what the fraud was, or who the whistleblowers were. The agency did say that the award was split evenly between the two whistleblowers, and that the duo had received the maximum award of 30% of the fine against the company.

As a lawyer who represents whistleblowers, I have been blogging for several years about the status of the SEC Office of the Whistleblower, and this announcement gives us some important clues about where the SEC’s whistleblower program stands.

First, is the SEC serious about its whistleblower program?

I have written a number of entries about Sean McKessey, the head of the SEC’s whistleblower program, and his promises to make good on the enhanced regulations that allow the SEC to compensate whistleblowers. McKessey is passionate about the program, and you cannot help but believe him when you hear him talk about his plans to build the program.

So far the awards have been few — 8 whistleblowers have gotten awards, counting these two – and mostly small. However, in September 2013, George Canellos, at the time the SEC’s co-chief of enforcement, told the Wall Street Journal that there were a number of million-dollar payouts in the pipelines. Furthermore, unlike the Department of Justice with the False Claims Act, the SEC has been generous with the percentage it awards. These two whistleblowers received the maximum 30% of the fine levied by the SEC.

I’m still a believer, in large part because I’ve heard Sean McKessey speak and he is very convincing. The program began in late 2011, so it is just in its third year.

Second, is the SEC serious about protecting its whistleblower sources?

The answer to this question appears to be a resounding yes. The SEC’s press release, SEC Awards $875,000 to Two Whistleblowers Who Aided Agency Investigation, was mighty short.

It didn’t say who got the award, it didn’t name the company that had to pay the fine and it did not say what type of fraud the whistleblowers had disclosed. In fact, pretty much the only two new pieces of information were how many whistleblowers there were and how much they got paid. The SEC noted that: “By law, the SEC must protect the confidentiality of whistleblowers and cannot disclose any information that might directly or indirectly reveal a whistleblower’s identity.”

Only a tiny pool of people have both the business acumen and the inside information to help the SEC track down shareholder fraud. If the SEC wants to get real tips, the law recognizes that it has got to convince that small group that they will be protected if they come forward with information.

Third, what can the SEC do to get more tips to prevent shareholder fraud?

Undoubtedly some industry insiders are still sitting on the fence, waiting to see how other whistleblowers get treated. The more awards the SEC makes, and the larger they are, the more likely the SEC is to get solid information about fraud. Certainly whistleblowers should be getting a very good comfort level by watching how diligent the agency is being in guarding the identities of its whistleblowers.

The SEC is charged with policing fraud that can affect all of the stockholders in a publicly-traded business. The fraud the SEC pursues can have far-reaching effects on direct shareholders, as well as on investors and retirees who have interests in funds that are shareholders in the company.