The Situation: The Securities and Exchange Commission ("SEC") has announced a string of substantial whistleblower awards totaling $54 million since April 1, 2020.
The Result: The financial incentives for employees or third parties to become whistleblowers have never been greater, and there will be little leeway for alleged antifraud violations during the ongoing COVID-19 crisis.
Looking Ahead: Companies should focus on the adequacy of their internal compliance programs even in the face of the global pandemic and take common sense steps to avoid becoming the subject of a SEC enforcement action as a result of a whistleblower tip.
The SEC publicizes the number and size of awards made through its Whistleblower Program as a key component of its enforcement efforts and to incentivize the submission of additional tips. The program was created by the Dodd-Frank Act, and since inception, the Commission has awarded more than $450 million to 82 individuals who provided original information that led to successful enforcement actions resulting in monetary sanctions over $1 million. Since the beginning of April 2020, the Commission has announced five awards totaling $54 million, including a single award of $27 million on April 16, the sixth highest award in the history of the program. While recent news coverage has understandably been dominated by the health and economic crisis resulting from the COVID-19 pandemic, this string of recent whistleblower awards provides an important reminder on steps that companies should consider taking to avoid becoming the subject of an SEC investigation as a result of a whistleblower tip.
First, companies should review their policies and procedures to determine whether internal reports or complaints relating to compliance issues―including financial or accounting irregularities, disclosure issues, or any alleged misconduct that might constitute a violation of the securities laws―whether from employees, third parties, or anonymous sources, are thoroughly and timely addressed. Notably, the whistleblower who received the $27 million award announced on April 16, 2020, had repeatedly tried to raise the issue internally at the workplace first. Likewise, seven of the eight whistleblower award recipients in 2019 had first reported their concerns internally before contacting the SEC. Given recent statements by the Co-Directors of the Division of Enforcement emphasizing the importance of following corporate controls and procedures and the commitment of substantial resources to ensure that investors are not victimized by fraud and illegal practices, we believe there will be little leeway for alleged antifraud violations during the ongoing COVID-19 crisis.
Second, companies with international operations should address whether their policies and procedures for investigating internal reports or complaints are applied consistently across all markets and whether such reports are timely communicated to appropriate compliance or legal personnel in the United States. The $18 million award announced on April 28, 2020, was based in part on information about alleged misconduct occurring overseas, which remains a continuing focus of the Whistleblower Program. In 2019, three award recipients were either located abroad or reported difficult-to-detect conduct that was occurring abroad.
Third, companies should maintain robust policies prohibiting retaliation against potential whistleblowers and clearly communicate and enforce those policies at all levels of the organization. Several of the Commission's recent award announcements made specific reference to retaliation or hardship experienced by the whistleblowers.
While companies are facing many challenges in responding to the myriad problems created by the COVID-19 emergency, the recent stream of substantial whistleblower awards by the SEC is a reminder that continued focus on maintaining a robust internal compliance program should remain a priority.
Three Key Takeaways
- Companies should review and update their policies and procedures to provide for prompt and effective handling of internal reports or complaints about compliance issues or conduct that might constitute fraud or violations of the securities laws, regardless of source.
- Companies with international operations should consider whether their compliance policies and procedures are applied consistently across all markets and whether reported misconduct abroad is timely communicated to the appropriate personnel in the United States.
- Companies should review their comprehensive confidentiality policies and take steps to widely communicate and uniformly enforce those policies. Specific care should be taken to mark documents confidential and limit access to confidential materials on a need-to-know basis.
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Originally published 28 May, 2020
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