The Securities and Exchange Commission recently awarded $4.5 million to a whistleblower who initially reported securities violations internally and the company, after an internal investigation, provided the SEC with information sufficient to trigger SEC action. This is the first SEC whistleblower award based on information submitted to the SEC by a company after a whistleblower triggered an internal investigation. Order Determining Whistleblower Award Claim, SEC Release No. 85936 (May 24, 2019).

According to the SEC order, the whistleblower first submitted an anonymous tip to the company. The whistleblower then submitted the same information to the SEC and another regulatory agency. The company notified the SEC that it had received the tip and began an internal investigation. The SEC staff never contacted the whistleblower and did not open an investigation in response to the whistleblower’s tip. However, the company subsequently provided the results of its internal investigation to the SEC, and it was this report from the company that triggered the SEC investigation. (As in all SEC whistleblower awards, the SEC order does not identify the whistleblower, the company, or the relevant enforcement actions.)

Most SEC whistleblower awards rest on information provided by the whistleblower directly to the SEC. In this case, however, the SEC investigation was triggered by the company’s report following its internal investigation. Nevertheless, the SEC rewarded the whistleblower on the ground that the whistleblower’s internal tip generated the company investigation.

SEC Rule 21F-4(c)(3) provides that a whistleblower is eligible for a monetary award if (i) the whistleblower’s information is properly reported to the company, (ii) the information is also provided to the SEC within 120 days after disclosure to the company, and (iii) either the whistleblower’s information or the result of the company’s internal investigation generates an SEC investigation or contributes to a successful enforcement action. Relying on this provision, the SEC concluded that a $4.5 million award to the whistleblower was appropriate because the whistleblower’s disclosure to the company triggered the internal investigation and, subsequently, “the Company’s findings were a principal motivating factor” in the SEC’s decision to open an enforcement proceeding. In short, the SEC determined that in these circumstances, “the whistleblower gets credit for the company’s internal investigation.” SEC Press Release No. 2019-76.

This decision highlights several considerations important to potential whistleblowers. First, the SEC supports internal reporting. Contrary to industry fears, the SEC does not discourage internal reporting or insist that a whistleblower’s disclosure be made first to the SEC. In fact, timely internal reporting weighs in favor of a monetary award under the governing SEC criteria.

Second, internal reporting is not a substitute for disclosure to the SEC. To qualify as a “whistleblower” eligible for a monetary award, and to be protected under the Dodd-Frank anti-retaliation provisions, a whistleblower must disclose the relevant information to the SEC, regardless of whether there is disclosure to the company.

Third, to be credited with information submitted to the SEC by the company following an internal investigation that was triggered by the whistleblower, the whistleblower’s submission to the SEC must have come within 120 days after the whistleblower tipped the company.

Fourth, a whistleblower need not have complete information to benefit from filing a tip. In this case, the whistleblower’s tip to the SEC did not result in the opening of an investigation. But by making a timely filing with the SEC, the whistleblower was positioned to benefit when the company itself later generated sufficient related information to trigger SEC action.

Fifth, a single whistleblower tip can lead to an award covering more than one enforcement action, including “related actions” by agencies other than the SEC. In this case, the whistleblower’s tip led the SEC to award a percentage of the recoveries in two enforcement actions.

Sixth, the information submitted by a whistleblower need not relate to all claims asserted by the SEC or other enforcing agencies. In this case, the whistleblower’s information related to only one of two sets of allegations in each of the enforcement actions. Nevertheless, the SEC concluded that because each action was “based in part” on conduct identified by the whistleblower, the whistleblower was entitled to an award relating to each action, for a total award of $4.5 million.

Whistleblower Aid

The foregoing discussion is provided by Whistleblower Aid for general information purposes and is not intended to be, and should not be, taken as legal advice. For guidance on how to contact Whistleblower Aid, see
https://whistlebloweraid.org/contact#whistleblower-contact