By Jordan Cafritz
In an attempt to combat financial fraud and corporate malfeasance, Section 922 of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act instituted a whistleblower program that incentivizes those with knowledge of wrongdoing to come forward. The “Securities Whistleblower Incentives and Protection” provisions authorize the SEC to pay awards to eligible whistleblowers that voluntarily provide the SEC with original information leading to a successful enforcement action yielding monetary sanctions of over $1 million. This gargantuan task is the responsibility of a 14-member team tasked with receiving and investigating all potential tips. Since the implementation of the whistleblower program in August 2011, the team has received over 3,000 reports from all 50 states and 49 foreign countries. During that time frame, however, the SEC has made only one payout. It is apparent that the continued use of this program will enhance corporate governance, but without adequate staffing resources, it is unlikely the SEC whistle blower program will be able to fully investigate and monitor all potential claims.
Whistleblower programs have an established history as an effective enforcement tool. Although Dodd-Frank represents one of the first times this practice has been put to the exclusive use of combating corporate fraud and malfeasance, whistleblower programs can trace their heritage back to the False Claims Act. In 1863, during the heart of the Civil War, Congress enacted the False Claims Act in response to fears that suppliers to the Union Army were defrauding the federal government. The Act allowed private citizens to file lawsuits on behalf of the U.S. Government and, in turn, these citizens were then entitled to collect a portion of any penalties assessed in those cases. Still in use today, the Act recently resulted in multi-million dollar payments related to the illegal actions of banks prior to the 2008 financial crisis. In attempting to mimic the successful model of the False Claims Act, the whistleblower provisions of Dodd-Frank grant the SEC the right to distribute monetary awards to whistleblowers, of between 10% and 30% of the money collected in a case, when the information provided leads to more than $1 million in sanctions. Recently, the SEC released to Congress their “Annual Report on the Dodd-Frank Whistleblower Program,” which shows evidence of the successful nature of the program, as well as the potential enormity of the task before the small office.
The annual report released by the SEC shows that over 3,000 reports were received from all 50 states and 49 foreign countries. These tips related to a variety of illegal activities, but were chiefly concentrated in three principle areas, as reports of fraud and malfeasance amongst corporate disclosures, securities offerings, and market manipulation amounted to almost 50% of all tips. The first whistleblower award occurred on August 21, 2012, and resulted from tips, by the award recipient, allowing the Securities and Exchange Commission to stop an ongoing multi-million dollar fraud. The award recipient gave documents and other significant information to the Commission that allowed them to immediately proceed to trial, averting further loss of investor funds and to preventing others from falling victim. The results of the trial resulted in the court ordering more than $1 million in monetary sanctions, of which $150,000 was collected. The whistleblower was awarded 30 percent of this total, nearly $50,000. This example is not the sole tip that has resulted in the SEC taking action. In fact, based on the SEC’s report, during fiscal year 2012, there have been 143 cases in which whistleblowers have provided tips leading to judgments that exceed the statutory threshold of $1 million. Although these whistleblowers must apply for any monetary award relating to these successes, it is obvious that the whistleblower program has incentivized individuals to step forward and help stop fraud and malfeasance. Despite these instances of success, it is obvious that more can still be done.
The SEC report notes that over 3,000 tips and claims were received in 2012 alone. Given the large number of accusations, it seems unlikely that a staff of 14 individuals is capable of adequately researching and responding to all reported claims. Although these 14 individuals appear to have capably followed up on most of these reports, evidenced by the 3,050 phone calls made by the staff to members of the public, it is unclear how effective this small team has been at researching all 3000 tips. Based on the instant success of the program in its first year, it is likely that the number of claims made will only increase. Therefore it is disappointing that the Annual Report was absent any opinion regarding whether the 14-member team is capable of researching all tips for potential fraud, or if the lack of resources devoted to evaluating these tips will permit ongoing fraud and malfeasance to continue without SEC action. Should the SEC fail to adequately devote resources to this new program, the possibility for unrestrained fraud will continue to grow, despite the SEC receiving evidence of the fraud. Accordingly, the SEC should devote adequate resources to this new program as the Annual Report has shown the breadth of fraud and the benefits of having a functioning and responsive whistleblower program.