New SEC Whistleblower Program: Will the Payouts Prove Effective?

In August of this year, the Securities and Exchange Commission (SEC) announced the first monetary award under its new Whistleblower program. A whistleblower who allegedly aided the SEC in preventing a multi-million dollar fraud will be given approximately $50,000 as a reward.

The $50,000 represents 30 percent of the amount collected by the SEC in an enforcement action - 30 percent is the maximum percentage allowed for payouts. Hopefully these potentially large payouts will not motivate insiders to report unfounded allegations of securities fraud in hopes of collecting on a huge payday - after all, unfound allegations means not only more unnecessary work for the SEC but also the accused company.

Whistleblower Program

The new Whistleblower program is a product of the "Dodd-Frank Wall Street Reform and Consumer Protection Act," which was signed into law on July 21, 2010. The program was put into action at the SEC in August 2011, and since that time, the SEC has received approximately eight tips a day relating to securities fraud.

The aim of the whistleblower program is to encourage insiders to report potential violations of federal securities law by providing financial incentives and protecting whistleblowers from retaliation. Eligible whistleblowers can receive from 10 to 30 percent of the total monetary sanctions collected as a reward.

To be eligible, a whistleblower must voluntarily provide the SEC with original information, and that information must lead to a successful action with an order for monetary sanctions exceeding $1 million.

Information is considered "voluntary" if the whistleblower supplies it before it's requested by the SEC or another federal agency in connection with an investigation. To be considered "original," the information must be independent knowledge or analysis that is not already known by the SEC. When someone reports a concern is crucial since the first reporter is the only one who will be compensated.

Whistleblowers can still collect a reward even if they first report their concerns to their companies for internal investigation as long they also report directly to the SEC as well within 120 days. Further, the determination of the whistleblower's place in line in this situation will be based upon the date he or she reported the information for internal investigation.

The amount of the award is determined by a number of factors, and it may still be possible for a whistleblower to collect a reduced amount even if he or she was culpable in the wrongdoing.

Hopefully this new program doesn't result in a rush by insiders to report unsubstantiated security fraud claims so that they are the first in line for payouts. Their over-zealous attempts will not only waste the SEC's time but the company will also have to deal with the unfounded allegations. This may put companies in an already heavily-regulated industry at a further disadvantage of not knowing what potential activities may expose them to liability.

Given that a fully compliant company may still be subject to investigations, companies concerned about possible securities fraud allegations against them should consult an experienced attorney to find out exactly what their options are.