An SEC First: $700,000 Awarded to Company Outsider for Whistleblowing

Author Malcolm Gladwell popularized the concept of the 10,000 Hour Rule, the approximate number of hours it supposedly takes to become a top expert in any given field. Although subsequent research has cast doubt on the actual length of time necessary to develop expertise, it’s safe to say that becoming exceptional at what you do takes a great deal of work.

Beyond the financial rewards of accomplishing expertise, one of the benefits an industry expert can offer to society is a heightened awareness of both the bigger picture and the nuances within her field. The more complex the industry, the more our society needs individuals with high-level knowledge of it to ensure that nothing is amiss.

In the financial sector, this role is particularly important, and it does not have to be performed by a company insider. The SEC’s most recent success story was made possible by an industry expert who also happened to be a company outsider.

This individual’s independent analysis of the company’s alleged wrongdoing resulted in successful SEC enforcement on January 15th. It also earned him a $700,000 award for his courageous whistleblowing against a company committing securities violations.

The SEC has not released the name of the whistleblower or the company that was under investigation, but the agency specified that this individual had in-depth, high-level understanding of securities violations. The whistleblower supplied the SEC with a detailed analysis that led to the agency successfully holding the company accountable for its actions.

How independent analysis can help detect securities fraud

Securities fraud can be difficult to understand, which makes it difficult to address. After all, the terminology alone involved in high-level financial matters is sometimes astoundingly obscure. Industry experts who understand the nuances of trading, reporting and investments are therefore in an especially apt position to catch and report this type of fraud.

Past SEC cases have focused primarily on companies whose current or former employees became whistleblowers. With the success of this recent case, it’s clear that even an outsider can provide valuable information leading to SEC enforcement.

How whistleblowing awards are determined

Financial awards are available to qualifying whistleblowers as both an incentive and a reward for reporting tips about large-scale securities fraud to the government. As demonstrated in this case, the whistleblower does not need to be part of the company under investigation. Qualified tips do, however, have to be original, and they have to be offered voluntarily.

An original tip is either one that is not publically known, or it is an independent analysis of publically known information that leads to an original conclusion. In order for the whistleblower to be eligible for an award, those tips must then lead to the recovery of over $1 million in monetary sanctions by the SEC.

Whistleblowers can also be eligible for awards if they report through an internal compliance process within their company. In these cases, there is a time window of 120 days from the internal report date to submit an additional report to the SEC. Awards can amount to anywhere between 10% and 30% of the monetary sanctions seized.

The SEC may reduce the reward based on any possible culpability the whistleblower carries in the company’s fraudulent acts, and they may increase it based on the significance of the tips or the risks involved in reporting them.

Whistleblowing and confidentiality

When a potential whistleblower submits a tip to the SEC through any of its approved channels, confidentiality is one of the office’s top priorities. It is also possible for whistleblowers to submit anonymous tips, but only through an attorney with whom they have completed the appropriate legal requirements specified in provision 21F-7 of the Dodd-Frank act. If an award is applicable, the anonymous party has to allow his name to be verified by the SEC.

In cases where confidentiality cannot be sustained long-term, the SEC makes clear that retaliation against whistleblowers is illegal. Two cases last year demonstrated that the SEC is committed to protecting whistleblowers from retaliation and prosecuting companies who violate this law.