Whistleblowing bolsters SEC enforcement activity

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With the Australian government hoping to have a single whistleblower protection regime in place by next year, the latest update on the effectiveness of the US’s whistleblower program makes interesting reading.

In its seventh annual report to congress, the US Securities and Exchange Commission (SEC) says whistleblowers have provided great value to its enforcement efforts.

Chief of the Office of the Whistleblower (OWB), Jane Norberg, notes that since the SEC’s whistleblowing program’s inception in 2010, the SEC has ordered wrongdoers to pay over US$975 million in total monetary sanctions. This has included more than US $671 million in ill-gotten gains and interest that wrongdoers have been forced to give up  most of which has been, or will be, returned to harmed investors.

Since the SEC agency issued its first award in 2012, the SEC’s whistleblower program has also awarded more than US$175 million to 49 whistleblowers.

In the 2017 fiscal year, whistleblower awards of nearly US$50 million were made to 12 individuals.

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. Awards can range from ten per cent to 30 per cent of the money collected when the monetary sanctions exceed US$1 million.

By law, the SEC protects the confidentiality of whistleblowers and does not disclose information that might directly or indirectly reveal a whistleblower’s identity.

In the 2017 fiscal year, Norberg reports that prompt action by one whistleblower enabled the SEC to quickly initiate action against wrongdoers before they could spend their ill-gotten gains. Information from another helped stop a hard-to-detect fraud while other tipoffs helped the SEC detect and stop two active investment schemes that directly targeted and victimised unsophisticated investors.

During 2017, the SEC also brought several actions to address cases where companies retaliated against their employees or impeded their employees’ ability to report freely to the SEC.

In one example, it found that HomeStreet, a Seattle-based financial services company, tried to uncover the identity of a presumed whistleblower after being contacted by SEC staff regarding potential accounting violations.

‘In its efforts to root out the whistleblower, the company suggested that it could deny indemnification for legal costs to the individual whom the company believed to be the whistleblower,’ says Norberg.

‘The company also required former employees to sign severance agreements waiving potential whistleblower awards or otherwise risk losing their severance payments and other post-employment benefits.’

The SEC also brought two actions against companies for using restrictive language in separation and severance agreements that specifically targeted its whistleblower rules and incentives. In January 2017, for example, it found that New York-based asset manager BlackRock, used separation agreements that required departing employees to waive their right to receive any incentives for reporting misconduct under the Dodd-Frank Wall Street Reform and Consumer Protection Act.

In addition, the SEC brought a settled action against Oklahoma-based oil and gas company, SandRidge Energy, for terminating an employee in retaliation for raising concerns to company management about how the company calculated its reserves.

Norberg says the awareness of the whistleblower program has grown significantly with the number of whistleblower tips received consistently rising. In the 2017 financial year, the SEC received over 4,400 tips  a jump of nearly 50 per cent since 2012.

She says whistleblowers are encouraged to submit tips on the OWB’s webpage or by mail or fax. The OWB also operates a hotline.

‘During the 2017 fiscal year, we returned nearly 3,200 calls from members of the public, exceeding the number of calls returned the prior fiscal year. Since May 2011 when the hotline was established, the OWB has returned over 18,600 calls from the public,’ she says.

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