Are SEC Whistleblower Awards the Road to Riches or a Waste of Time?
On August 23, 2024, the Securities and Exchange Commission (“SEC”) announced It had awarded a total of $98 million to two SEC whistleblowers “whose information and assistance led to an SEC enforcement action and an action brought by another agency.” The first lucky tipster, whose contribution prompted the opening of an investigation and who provided continuing assistance, will pocket a cool $82 million. The second will receive $16 million.
In its press release about the awards, the SEC explained briefly how the program works:
Payments to whistleblowers are made out of an investor protection fund, established by Congress, which is financed entirely through monetary sanctions paid to the SEC by securities law violators. 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 to 30 percent of the money collected when the monetary sanctions exceed $1 million.
In the associated SEC Order, the circumstances surrounding the awards are explained fully, but not to us. The document is heavily redacted to protect the whistleblowers’ identities. We do learn that Claimant I alerted SEC staffers to the conduct that prompted the opening of an investigation and that he or she met with them “multiple times” and provided “additional helpful submissions.” Claimant II, apparently acting independently of Claimant I, offered “new helpful information” a year after the investigation had been opened, saving staff time and resources. Claimant I’s information addressed all the transactions in the covered actions filed by the SEC and the “other agency,” while Claimant II’s submission addressed only one of them.
Though Claimant II’s much smaller award of $16 million was hardly chump change, s/he wasn’t happy and protested in a request for reconsideration on the grounds that “1) the information attributed to Claimant I was “less than remarkable” and some of Claimant I’s information proved to be factually incorrect; 2) the importance of Claimant II’s information was marginalized and he/she provided information on more than one transaction; and 3) Claimant II communicated with different Other Agency staff than the staff with whom OWB [Office of the Whistleblower] conferred concerning Claimant II’s contributions to the Related Actions.”
Claimant II further objected that enforcement staff’s initial declaration contained 42 paragraphs about Claimant I’s contributions, compared to “a mere 12” paragraphs discussing Claimant II’s assistance. Worse yet, Claimant II believed, the initial staff declaration failed to give him/her credit for providing “important insight” into an element of the case that presumably proved essential but is redacted in the Order. Alas, according to enforcement staff, the information that had, in reality, guided them was provided by Claimant I.
Claimant II also noted that it was only three months after he’d first contacted enforcement staff that they had, if we’re reading this correctly, made the existence of the investigation known to [redacted] who was probably one of its targets, perhaps an individual who received a Wells notice, or perhaps the company itself. In any case, the investigations had become known, and the press wrote about them. Evidently, Claimant II thought that had entirely to do with him, but it did not. As the SEC observed, “That a news organization may have published an article concerning the investigations has no bearing on the importance of Claimant II’s information, particularly in light of the fact that the record reflects that both Claimant I and Claimant II were providing information to SEC and Other Agency staff.”
Claimant II adduced a few more similar arguments that fell on deaf ears. The SEC concluded that:
…most of the information provided by Claimant II was already known as a result of Claimant I’s information and assistance or as a result of investigative steps already taken during the sixteen months prior to investigative staff’s receiving Claimant II’s information. While Claimant II may have provided information concerning the other transactions, that information was not new, and as such, cannot form the basis for an award. It was the additional information and detail that Claimant II provided about the Redacted that was new and helpful.
Claimant I, in the meanwhile, had the wisdom not to contest the decisions of the Claims Review Staff. S/he said only that should the staff consider altering the award percentage, it should be in her or his favor, not Claimant II’s. Since Claimant I’s comments were not an official contest of the decision, they were not entered into the record, and so were not considered by the SEC.
Claimant II would have to be content with a $16 million windfall.
The SEC’s Whistleblower Program
The SEC did not always have a Whistleblower Program. It was created in July 2010, when Congress amended the Securities Exchange Act of 1934 to add a new Section 21F entitled “Securities Whistleblower Incentives and Protection.” The new section directed that the SEC pay awards to whistleblowers who “voluntarily provide the SEC with original information about a violation of the securities laws that leads to the successful enforcement of an action brought by the SEC that results in a covered judicial or administrative action and certain related actions.”
Since its inception, the program has been highly successful, at least from the standpoint of the SEC. Not all whistleblowers and potential whistleblowers are happy, however. As the case above illustrates, there’ve often been disagreements about the worth of a tipster’s information. Not all information has equal value, and some, sad to say, has no value at all. A great many successful whistleblowers work for the companies whose activities they report, or work for service providers associated with those companies. (Officers and directors of issuers under investigation are usually excluded from consideration. Interestingly, individuals who were part of the fraud may be eligible, though any eventual award is likely to be smaller than if the tip had been submitted by someone else.)
Obviously, an employee working in the accounting office of a company that’s up to no good might find evidence of systematic fraud in the materials she handles routinely. The personal assistant of an office might overhear his boss revealing nonpublic company information to a friend with a view to engaging in a little insider trading. People inside and outside the company might be aware of an undisclosed stock promotion, though only a few would have documentation to back up their allegations.
Would-be whistleblowers who work for the company they’re providing information about naturally take considerable risks. Once they’ve provided information in writing to the SEC, they’re protected by anti-retaliation measures. That means “employers may not discharge, demote, suspend, harass, or in any way discriminate against an employee in the terms and conditions of employment who has reported conduct to the SEC that the employee reasonably believed violated the federal securities laws.” Pursuant to the Dodd-Frank Act, employees who’ve reported possible violations of the securities laws to the SEC in writing and believe they’ve been retaliated against can sue their employer in federal court and seek double back pay (with interest), reinstatement, reasonable attorneys’ fees, and reimbursement for certain costs in connection with the litigation.
Whistleblowers would rather not have to deal with retaliation. They could be fired and have difficulty finding new employment. It could take a lawsuit and several years to get back pay and reinstatement. Moreover, the requirement that in order to qualify for those protections, they must have submitted information to the SEC in writing—which is relatively new and based on a Supreme Court decision from 2018 in Digital Reality Trust, Inc. v. Somers—creates problems for individuals who are still gathering information with which to make an initial submission. If caught, they’d have no recourse against retaliatory actions.
Apparently, some whistleblowers continue to work for the company even after receiving awards. Very few ever identify themselves as the millionaires they’ve become, much less make their whistleblowing the subject of break room chatter.
Successful whistleblowers are entitled to between 10 and 30 percent of the amount recovered by the SEC in fines and penalties. As we’ve seen above, the awards can be very generous. The largest so far, in the amount of $279 million, was awarded in 2023 to a single individual in connection with an SEC investigation and an investigation conducted by another federal agency. Since no awards may be made until the SEC has actually been paid a judgment or settlement in excess of $1 million, the judgment or settlement in those cases must have been in the neighborhood of $900 million.
At the other end of the scale are awards under $5 million. Amendments made to the whistleblower rules in 2020 provide that there is a presumption that the recipient should receive the maximum 30% award percentage when the amount collected in the covered action and related action(s), in the aggregate, would yield a maximum award of $5 million or less.
Another important change was made to the rules in 2020 — this one affecting the type of information that may be accepted by the OWB. Until then, the program had two core requirements: that the whistleblower must have provided “original information” to the SEC and that the information must have “led to” the successful enforcement of an action. Back in 2011, when the rules were adopted:
…the Commission stated that “Congress primarily intended our program ‘to motivate those with inside knowledge to come forward and assist the Government to identify and prosecute persons who have violated the securities laws[.]’” The Commission further acknowledged that Congress sought to make awards available in cases where “highly-probative expert analysis of data … suggest[s] an important new avenue of inquiry, or otherwise materially advance[s] an existing investigation.” But critically, the Commission made clear that, in its view, Congress did not intend to base awards “on information that is available to the general public.”
And so, until 2020, the people who qualified for awards were in some way “insiders” who provided “original information.” That has now changed, though in a rather complicated way. In its amendments, the SEC opened up the field to a whistleblower’s “independent analysis” of publicly available information. However, that analysis must provably “lead to” the successful enforcement of an action.
And so, the rule-makers came up with an “independent analysis standard”:
In order to qualify as “independent analysis,” a whistleblower’s submission must provide evaluation, assessment, or insight beyond what would be reasonably apparent to the SEC from publicly available information. In assessing whether this requirement is met, the SEC would determine based on its own review of the relevant facts during the award adjudication process whether the violations could have been inferred from the facts available in public sources.
[Emphasis ours.]
They add that while their solution is a bit ambiguous, they believe it offers the SEC a “solid foundation” on which to build a workable interpretation. But they’ve already set a pretty high bar. It seems the SEC people evaluating your submission will have to look at it and exclaim: “Hey, I’d never have thought of that!” even if they hadn’t even heard of the issuer in question until that moment. It seems that under these circumstances, the whistleblower presents the publicly available facts of the case and ties them together. But if the person reading along comes to the same conclusion—that fraud has probably been committed—the whistleblower may be out of luck all the same.
The rule-makers add in a footnote: “We note that although publicly available information may not serve as the basis for an award, the provision of such information to the SEC can be an important public service.” Good to know.
Even if the “Hey, I’d never have thought of that!” standard is met, the provider of the independent analysis must still have “led to” a successful covered enforcement action. And that, for the rule-makers, is a complicated question:
This standard requires an assessment of whether the whistleblower’s analysis—as distinct from the publicly available information on which the analysis was based—either (1) was a principal motivating factor in the staff’s decision to open its investigation, or (2) made a substantial and important contribution to the success of an existing investigation.
It seems to us that the “original information” standard is very specific, while the “independent analysis” standard is almost entirely subjective, depending in very large part on how the investigating SEC attorneys feel about its importance to the case. There is a great deal more about this reasoning in the proposed new rules from 2020. Some of it hangs on a proper understanding of the word “reveal”:
To “reveal” means to make something known that was previously secret or hidden, or to open something up to view. Accordingly, to be considered “analysis,” the whistleblower’s submission must include some insight—beyond the existence of the publicly available information—that is revelatory; that is, the whistleblower’s evaluation of the publicly available information should do the work of making known and opening up to view for the SEC the possible securities violations.
That is still ambiguous. We’d say that if whoever reads the information in question was unaware of it before reading, and if that information documents fraud, then it was indeed revelatory.
The rule-makers explain further that Harry Markopolos, who tried to blow the whistle on Bernie Madoff many years before he was busted, would qualify as a provider of useful “independent analysis.” They acknowledge, however, that providers of “independent analysis” need not only be people with Markopolos’s kind of technical expertise and specialized training. What’s important is that this kind of whistleblower’s submission is, once again, “revelatory in utilizing publicly available information in a way that goes beyond the information itself and affords the SEC with important insights or information about possible violations.”
In a page on its website explaining the 2020 amendments briefly, staff has added that “no independent analysis will be found where a whistleblower points to public discourse in which investors or others are alleging a fraudulent scheme (e.g., discussions on a public message board).” We know the agency receives a great many tips and complaints—18,354 in 2023—and that contributions from people active on social media are far from rare. Probably most are not particularly useful.
So You Want to Apply for a Whistleblower Award
In its publications on the SEC website, the OWB makes applying for an award seem straightforward, if complicated. But it is not straightforward. There are very strict requirements and equally strict deadlines to be met. Omission of some steps, or tardiness with others, could cause disqualification. It is probably best to hire an attorney to help, though it’s no guarantee of success. The process can take years and may end in disappointment.
Some securities lawyers specialize in helping clients win whistleblower awards. One of them is Jordan Thomas, who we’ve written about before. Thomas has served in the Navy’s Judge Advocate General’s Corps, worked for the Department of Justice and the SEC, and since 2011 has been aiding whistleblowers. He’s uniquely qualified to do that because while he was at the SEC, he helped design and implement the Whistleblower Program. He now has a company of his own, called SEC Whistleblower Advocates.
Thomas says he takes no more than 12 new cases a year and believes there’s a need for more lawyers like him. He’s convinced that many more people have award-worthy information than ever consider reporting it. One of his clients, who reported violations at JPMorgan, said, “There were a dozen people I worked with who knew the same information I knew and still didn’t report anything.” He won a $13 million award.
The SEC offers a good deal of information about how the award process works. The first step is to submit a tip through the agency’s online TCR (“tips, complaints, and referrals”) system. That can be done electronically or by fax or mail. Your information should be as detailed and specific as possible. If you wish to submit it anonymously, you’ll need to hire an attorney and include their name and contact information in your submission.
Once your tip is received, it will be reviewed by the Office of Market Intelligence (OMI). Tips with high-quality information will be assigned to one of the agency’s eleven regional offices, to a specialty unit, or to an enforcement group in the D.C. office. Tips related to an ongoing investigation will be sent to the staff working on it.
If your tip results in a covered action exceeding $1 million in sanctions, the SEC will post a Notice of Covered Action (NoCA). If you’ve been working with staff on the matter, they may inform you of the posting of the NoCA. You may also request email updates when the list is updated.
Once the matter you tipped to the SEC is posted, you must file a Form WB-APP within 90 days. It is important to submit the form in a timely manner and to be sure the case in question is the one you provided information about.
Your claim will then be reviewed, and a preliminary determination will be arrived at. That may take time. The determination will tell you if you’ll receive an award, and, if you will, the amount of the award. If you were turned down completely or are set to receive less money than you think is fair, you may submit a reconsideration request. The SEC will analyze all that and issue a final order.
The process may not go smoothly or quickly. Bill Singer is an attorney who, like Thomas, represents whistleblowers applying for rewards. On his blog, he’s written a good deal about the program and its problems. In late 2022, he produced a lengthy article pointing out defects remaining in the system even after the 2020 amendments. In it, he complained that while the applicant for an award is held to a strict timeline for his submissions, the SEC gives no clear idea of how long the process will take. Pointing to many cases of delays, indecision, or changes made to the size of awards, he suggests additional reforms that might be put in place.
In closing, we’ll return to the largest award ever, the $279 million that went to a single individual. Surely, he or she was elated to become so very wealthy. However, he was not the only claimant; the SEC Order shows there were two others, both of whom were denied rewards. Claimant 2’s information, the CRS concluded, did not cause the SEC to “commence an investigation, open or reopen an investigation, or inquire into different conduct as part of a current SEC examination or investigation,” nor did it significantly contribute to the success of a SEC enforcement action. Claimant 2 had first reported the matter to the company itself, as whistleblowers may do, and then reported the same information to the SEC within 120 days. S/he argued that his or her submission convinced the SEC to convert its MUI (matter under inquiry) into a formal investigation. The OWB disagreed.
The preliminary investigation found the same in the case of Claimant 3. Though, as always, the Order is heavily redacted, it appears that Claimant 3’s submission was about a different company or at least about different violative conduct.
Claimants 2 and 3 were out of luck. Your information may be different. If you feel you have a tip worth reporting, give it a try. But first, make sure it meets the OWB’s standards and, above all, that it’s not frivolous. People who make more than three frivolous submissions will be permanently barred from participating in the program.
If you’d like to discuss your potential tip with us, call or email to set up a preliminary discussion.
To speak with a Securities Attorney, please contact Brenda Hamilton at 200 E Palmetto Park Rd, Suite 103, Boca Raton, Florida, (561) 416-8956, or by email at [email protected]. This securities law blog post is provided as a general informational service to clients and friends of Hamilton & Associates Law Group and should not be construed as and does not constitute legal advice on any specific matter, nor does this message create an attorney-client relationship. Please note that the prior results discussed herein do not guarantee similar outcomes.
Hamilton & Associates | Securities Attorneys
Brenda Hamilton, Securities Attorney
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Boca Raton, Florida 33432
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