Loyola University Chicago School of Law, JD 2023
The U.S. Securities and Exchange Commission (SEC) reached a rather auspicious milestone in September when it announced that, with the addition of two recent awards totaling $114 million, the aggregate amount of monies paid out under the SEC’s whistleblower program since its implementation in 2011 has exceeded $1 billion. In fiscal year 2021 alone, the SEC has awarded a record $500 million. The SEC also reported that award payments have been made to a total of 207 whistleblowers. In a statement, SEC Chairman Gary Gensler said, “[This] announcement underscores the important role that whistleblowers play in helping the SEC detect, investigate and prosecute potential violations of the securities laws.” The two most recent awards included a payment of $110 million to an individual who, according to the SEC, provided the SEC and another regulatory agency with “independent analysis that substantially advanced the SEC’s and the other agency’s investigation” and culminated in successful enforcement actions. Another whistleblower also provided original information to the SEC and received an award of approximately $4 million, although the smaller amount reflects the fact that the information passed on was significantly more limited in scope. As is its standard policy, the SEC declined to specifically name either of the whistleblowers involved or the cases and companies to which they were connected.
What is the SEC whistleblower program?
The SEC whistleblower program was created by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 in an effort to curb some of the abuses that led to the 2008 financial crisis. It was designed to encourage individuals to voluntarily step forward and report fraud and financial wrongdoing involving potential securities law violations. Potential violations include Ponzi schemes, market manipulation, insider trading, and disseminating false or misleading information.
The program includes three basic components: generous monetary awards, anti-retaliatory measures, and anonymity. A whistleblower is eligible to receive an award of between ten and thirty percent of the overall monetary sanctions the SEC collects in any successful enforcement action based upon the whistleblower’s tip, provided the fines are greater than $1 million. Under Dodd-Frank, employers are prohibited from firing, demoting, harassing or discriminating against any employee who provides information or assistance to the SEC. If a company retaliates against an employee for reporting a potential securities law violation, the SEC can bring an enforcement action and impose significant fines. Finally, whistleblowers may submit information anonymously, although to be eligible for an award, they must be represented by an attorney. The Dodd-Frank Act specifically directs the SEC to keep the names of whistleblowers confidential and prohibits the release of identifying information, except in certain limited situations.
Other recent enforcement actions and awards
Although the SEC refuses to comment publicly, in many cases details of past enforcement actions and awards have become known through documents produced in subsequent state prosecutions or from disclosures made by the whistleblowers themselves. In June 2020, Grant Wilson, a former currency trader at Bank of New York Mellon Corp., was awarded $50 million, which at the time was the largest single award paid to an individual, for firsthand information he provided about bank’s abusive practice of overcharging clients to execute their foreign-exchange (FX) currency trades. Grant worked as a government informant for two years, supplying authorities with information on the bank’s manipulation of its “standing-instruction” services. Under these services, large institutional clients permitted the bank to unilaterally execute FX transactions, allegedly free of charge. In reality, BNY Mellon routinely collected the transactions and recorded them later in the day when prices were at their least-favorable exchange rates, allowing the bank to profit from the difference. Ultimately, the bank paid $714 million in fines and compensation to affected clients and agreed to improve its compliance standards.
In 2018, the SEC announced it had paid a combined award of approximately $83 million to three whistleblowers who helped the agency reach a substantial settlement of its enforcement action against Bank of America Corp.’s (BOA) Merrill Lynch brokerage unit. The settlement involved Merrill Lynch’s use of complex trades and loans to artificially reduce the amount of funds it needed to retain in lockup accounts as a hedge against a financial downturn. Although the bank admitted no wrongdoing and said no customers had been harmed, BOA nevertheless paid a $415 million fine for placing billions of customer dollars at risk during a six-year period.
SEC is reconsidering its adoption of two new whistleblower amendments.
Effective December 7, 2020, the SEC amended the rules governing its whistleblower program, stating that the changes would make the program more efficient and provide whistleblowers with greater clarity and transparency in the award determination process. However, whistleblower advocates argued that two of the new amendments would actually discourage individuals from blowing the whistle, and in response, the new administration agreed in August to revisit these two amendments and pause their enforcement in the interim. One amendment has been interpreted as potentially giving future commissions the ability to downsize awards by taking into account the overall dollar amount when making an award determination. The other could prevent the SEC from issuing an award if another regulatory agency in a related enforcement action has its own applicable award program. The SEC has promised to address both of these issues later this year. In the meantime, whistleblowers may request a delay in the processing of their applications if they believe the amendments will adversely affect their cases.