SEC Whistleblower Program: Gathering Steam
The SEC’s Whistleblower program has been steadily gaining momentum. The increase in whistleblower protections and incentives to report misconduct is a real and serious risk.
Companies, however, have a lot on their plate these days, and it is hard to brush aside higher priority risks to address whistleblower issues. Once companies start to focus on the issue, they need to develop procedures for listening to employee concerns and for proactively responding to potential/existing whistleblowers.
Whistleblowers can trigger a government investigation and that is the real risk to companies. A whistleblower triage program requires companies to identify and investigate potential whistleblower claims as quickly as possible so that they can assess the potential risks. In some cases, companies may have to self-disclose to the government in advance of the whistleblower. These are very difficult calculations and strategy calls.
The SEC released, on November 15, 2013, its third annual Whistleblower Report to Congress (Here). In the last year, the SEC paid four major bounties, one of which was $14 million for information leading to recovery of investor funds, and three other payments totaling $832 thousand regarding a sham hedge fund.
The SEC has promised that more significant payments to whistleblowers can be expected in the next year.
More importantly, the total number of complaints increased in the last year to 3,238 tips, an increase of nearly 8 percent over the prior year.
The three most common issues raised in tips were corporate disclosures and financials, offering fraud and manipulation. The number of FCPA-related tips increased from 115 to 149. The SEC expects the number of FCPA-related tips to increase.
The SEC’s whistleblower program has instituted a model hotline and responsive reporting system. The SEC’s staff is quick to contact a whistleblower and respond to any attempt to contact the SEC. The SEC’s staff returned all whistleblower calls within 24 hours. All of this was expected, especially in view of the significant resources given to the SEC for the whistleblower program.
The number of tips is likely to increase, especially as SEC payouts continue and are publicized. The whistleblower bar is active and thriving, especially in the SEC and False Claims areas. FCPA complaints will continue to rise, and remain a real threat for companies, especially for those operating in high-risk countries like China, Russia, India and Brazil.
Companies already have suffered from whistleblower complaints. A number of cases which are being investigated by the Justice Department and the SEC began with whistleblower complaints, usually involving disgruntled employees who were fired or passed over for a promotion. With the addition of financial compensation, whistleblowers have a new and greater incentive to report misconduct.