SEC’s Whistleblower Program: One Year Later

November 19, 2012

On November 15th, the Securities and Exchange Commission released their first full Annual Report (a 2011 report was also released covering August and September of 2011 only) on the Dodd-Frank Whistleblower Program. According to the SEC, in fiscal year 2012, 3,001 whistleblower TCRs (Tips, Complaints, and Referrals) were received, which accounts to over 8 per day.

The most common complaint categories reported by whistleblowers were Corporate Disclosures and Financials (18.2%), Offering Fraud (15.5%), and Manipulation (15.2%). The Commission received whistleblower submissions from individuals in all 50 states, the District of Columbia and the U.S. territory of Puerto Rico, as well as 49 countries outside the United States. The top three states where whistleblowers originated their tips were California (17.4%), New York (9.8%) and Florida (8.1%), while the top three nations with tips from abroad were the UK (74), Canada (46), and India (33). 10.8% of all TCRs were received from abroad.

Absent in the report is what exactly the SEC has been doing with the whistleblower tips. Questions remain on how many of the tips actually found wrongdoing or fraud, were duplicative, or were referred to the Division of Enforcement. Also unanswered is how many tips resulted in investigations being initiated and how many were related to ongoing cases.

Nevertheless during FY 2012 the Office posted 143 Notices of Covered Action for enforcement judgments and orders issued during the applicable period that included the imposition of sanctions exceeding the statutory threshold of $1 million. With just one reward of $50,000 issued since the program was initiated, the value of whistleblower tips remains to be seen. A survey conducted by BDO, and released last month, found that 51% of directors said the SEC. rewards have undermined their businesses’ internal anti-fraud and compliance programs, while 83% said there has been no increase or decrease in internal whistleblowers at their companies since the program started.

An analysis of the False Claims Act’s (FCA) whistleblower program may highlight what’s in store for the SEC’s program in the coming years. Implemented in the mid 1980s, the FCA’s program handed out a mere $100,000 in award claims in its first few years. Yet in 2011 alone, over 600 tips were collected with over $532 million awarded to whistleblowers, a 200% increase since 2008.

Trends point to a future of greater reliance on whistleblower tips. From 2008 to 2011 the IRS awarded over $55million in whistleblower awards, while two high profile cases in 2012 have already paid out a combined $142million. Judging from an increasing number of whistleblower awards, as seen by the IRS and the DOJ’s programs, it is expected that the SEC’s program will ramp up its own enforcement in the years to come. In fact the SEC has 71 active cases for 2012, with 45 already closed.

Corporations would be wise to take the SEC’s whistleblower program as serious as they did when it was first announced in August 2011 and ensure they promote and foster a culture of openness, transparency, and internal reporting within their organizations.