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Whistleblower awards: SEC under pressure or shifting stances?

Posted On: Jun. 20, 2016 12:00 AM CST

A recent spate of whistleblower awards by the Securities and Exchange Commission is a signal the agency is no longer relying on businesses to police themselves, says an expert.

This month, the SEC granted its second-highest whistleblower award of more than $17 million to a former company employee whose detailed tip “substantially advanced” its investigation and ultimate enforcement action.

Other recent whistleblower awards, which began in 2011 as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, include:

• An award announced May 29 of more than $450,000 to two individuals for a tip that led the agency to open a corporate accounting investigation and for their assistance once the investigation was underway.

• A planned award announced May 17 of $5 million to $6 million, its third highest since the program's inception, to a former company insider whose detailed tip led the agency to uncover securities violations it said would have been “nearly impossible” to detect otherwise.

• An award announced May 13 of more than $3.5 million to a company employee whose tip bolstered an ongoing investigation with additional evidence of wrong doing that strengthened the SEC's case.

When asked to comment on the number of recent awards, an SEC spokesman referred to a statement by Sean X. McKessy, chief of the SEC's Office of the Whistleblower, about the May 20 action: “The recent flurry of awards reflects the high-quality nature of the tips the SEC is receiving as public awareness of the whistleblower program grows.”

However, Earl “Chip” Jones, III co-chair of the whistleblowing and corporate ethics practice group at Littler Mendelson P.C. in Dallas, said these announcements demonstrate a “shift in public policy.” When the Dodd-Frank Act was enacted, the public policy was self-policing, said Mr. Jones.

The government provided a “guardrail” and a code of ethics, with the idea as long as business could get employees to talk to them on issues, they could police themselves and “not require intervention.”

But now that policy has shifted, “and the government is saying, 'We don't trust you to clean your own house,' ” and is encouraging employees to come to the SEC.

Firms should “really work on the culture” so workers turn to the management first with an issue, without fear of retaliation, Mr. Jones said.

But Richard J.L. Lomuscio, counsel with Drinker, Biddle & Reath L.L.P. in New York, disagrees about a change in policy. Rather, he said, the recent awards reflect pressure on the SEC from whistleblowers and their attorneys that the agency “hasn't been acting fast enough on tips.”

According to the SEC's November 2015 report to Congress, it received nearly 4,000 whistleblower tips in fiscal 2015 and paid more than 120 whistleblower award claims.

There is validity to both points, said Michael E. Clark, special counsel with Duane Morris L.L.P. in Houston. Dodd-Frank “would not have been enacted without a push by Congress to get the SEC more information about what's going on in corporate America,” he said.

“I know there's got to be pressure from whistleblowers' counsel because they want to get reward money at the end of the day,” he said. “At some point you want feedback.”

But the current pace of rewards reflects more “the natural progression of things” as a new program has developed, he said. “You have to rely upon the court system and working through the court systems” before rewards can be issued, he said.