SEC Whistleblowers/ Recent Developments and Internal Best Practices

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1 SEC Whistleblowers/ Recent Developments and Internal Best Practices Association of Corporate Counsel Eric M. Fogel March 4, 2015

2 SEC: The Office of the Whistleblower The U.S. Securities & Exchange Commission is authorized by Congress to provide monetary awards to eligible individuals who come forward with high-quality original information that leads to a Commission enforcement action in which over $1,000,000 in sanctions is ordered. The range for awards is between 10% and 30% of the money collected. 2

3 SEC: The Office of the Whistleblower The whistleblower program was designed to complement, rather than replace, existing corporate compliance programs. To ensure that whistleblower payments would not diminish the amount of recovery of victims of securities law obligations, Congress established a separate fund, called the Investor Protection Fund, out of which eligible whistleblowers would be paid. 3

4 Investor Protection Fund Section 21F(g)(5) of the Exchange Act requires certain Fund information to be reported to Congress on an annual basis. Below is a chart containing Fund-related information for Fiscal Year

5 Whistleblower Program Since the SEC Whistleblower Program was established in August, 2011: o The number of annual whistleblower tips from increased from 3,001 to 3,238. o The number of total whistleblower tips from was 6,573. o The number of total whistleblower tips in 2014 was 3,620. 5

6 Increase in Whistleblower Tips For each year that the Whistleblower Program has been in operation, the Commission has received an increasing number of whistleblower tips. The table below shows the number of whistleblower tips received by the Commission on a yearly basis since the inception of the Whistleblower Program. 6

7 Increase in Whistleblower Tips The graph below shows by percentage the number of whistleblower tips the Commission received on a monthly basis during Fiscal Year As reflected in the chart, the volume of tips remained relatively steady throughout the year, with the highest number of whistleblower tips received during the months of March and April. 7

8 A Historic Year Fiscal Year 2014 was historic in terms of both the number and dollar amount of whistleblower awards. The Commission issued whistleblower awards to more individuals in Fiscal Year 2014 than in all previous years combined. 8

9 Whistleblower Anonymity The Commission allows individuals who prefer to remain anonymous to submit their whistleblower tip through an attorney. Although they must disclose their identity to thecommissionbeforetheycanbepaidan award, the Commission does not publicly disclose whistleblower identities when it announces awards. 9

10 Anti-Retaliation Protection Rule 21F-17(a) under the Exchange Act provides, [n]o person may take any action 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 with respect to such communications. 10

11 Anti-Retaliation Protection On June 16, 2014, the Commission brought its first anti-retaliation case, charging a hedge fund with engaging in retaliatory practices after learning that the head trader had reported prohibited principal transactions to the Commission. The Office of the Whistleblower also monitors federal court cases involving the anti-retaliation provisions of the Dodd-Frank Act and the Sarbanes-Oxley Act of In addition, the Office of the Whistleblower has been working to identify employee confidentiality, severance, and other kinds of agreements that may interfere with an employee s ability to report potential wrongdoing to the SEC. 11

12 Covered Actions The Office of the Whistleblower posts Notices of Covered Action on its website for every Commission action that results in monetary sanction of over $1,000,000. In 2013, there were 118 Notices of Covered Action. In 2014, the Office of the Whistleblower returned over 2,731 phone calls from members of the public. 12

13 Whistleblower Awards Since August 2011, the Commission has granted awards to 14 whistleblowers. On August 21, 2012, the Commission announced its first whistleblower award. o In that instance, the whistleblower helped the Commission stop a multi-million dollar fraud. o The Commission made three more payments to this whistleblower in connection with additional amounts that had been collected by the Commission in the underlying enforcement action. 13

14 Large Whistleblower Awards On September 30, 2013, the Commission awarded over $14 million to a whistleblower whose information led to an SEC enforcement action that recovered substantial investor funds. On September 22, 2014, the Commission authorized an award of more than $30 million to a whistleblower who provided original information that led to a successful enforcement action. 14

15 Whistleblower Allegation Types 15

16 Origin of Whistleblower Tips In 2013, the Commission received whistleblower tips from all 50 states, as well as from the U S territories of Puerto Rico, Guam, and the U S Virgin Islands. In 2013, California, New York, and Florida were the three states from which the highest number of whistleblower tips originated. In 2014, the Commission received whistleblower submissions from individuals in all 50 states. California, Florida, New York, and Texas were the top states from which the highest number of whistleblower tips originated in

17 Origin of Whistleblower Tips 17

18 Origin of Whistleblower Tips 18

19 Origin of Whistleblower Tips Since the beginning of the whistleblower program, the Commission has received whistleblower tips from 83 countries outside the United States. In 2013, the Commission received whistleblower submissions from 55 foreign countries. In 2014, the Commission received whistleblower submissions from individuals in 60 countries. The United Kingdom, India, Canada, the People s Republic of China, and Australia were the top countries from which the highest number of whistleblower tips originated in

20 Origin of Whistleblower Tips 20

21 Who are the Whistleblowers? Disaffected Employees Employees worried about being downsized or let-go Employees worried about being scapegoated Ex-employees who have recently separated Employees acting on principle Competitors 21

22 Best Practices Ombudsman - Line to external confidential intake (e.g., independent law firm) Pipeline to Audit Committee Educate and Train Employees Report to the General Counsel Feedback and Engagement with whistleblower 22

23 Do s and Don ts Do Engage whistleblower, take complaint seriously, follow-up, and demonstrate inquiry and action. Don t Have any corporate document that requires employees to first whistleblow internally or prohibits them from contacting regulators. Don t Tolerate a practice of overt or covert retaliation. 23

24 SmithAmundsen 150 N. Michigan Avenue, Suite 3300 Chicago, IL Eric M. Fogel Partner & Chair, Corporate Practice Group (312)