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SEC Discourages Incentivizing Whistleblowers to Keep Complaints In-House

Posted in Compliance and Supervision, Dodd-Frank, SEC Compliance, SEC Enforcement

What’s good for the goose is apparently not so good for the gander, as the SEC warns in-house attorneys against whistleblower contracts. 

The SEC has been financially incentivizing whistleblowers to bring securities fraud complaints to the agency’s attention for years, with increasing success.  The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 empowers the SEC to reward whistleblowers who provide original information that leads to an SEC enforcement action in which more than $1 million in sanctions is ordered.  In such instances, the whistleblower reward can range from 10% to 30% of the total money collected.  The Act also established the SEC Office of the Whistleblower, which takes in, evaluates and, pursues whistleblower complaints.

The number of complaints to the Office of the Whistleblower has increased in recent years as large whistleblower rewards are publicized.  According to the 2013 Annual Report to Congress on the Dodd-Frank Whistleblower Program (http://www.sec.gov/about/offices/owb/annual-report-2013.pdf), “[t]he number of whistleblower tips and complaints the Commission receives annually increased from 3,001 in the 2012 fiscal year to 3,238 in the 2013 fiscal year.”  The 2012 number was also up from 334 tips and complaints in the last four months of 2011, when the Dodd-Frank whistleblower program began.

In recent comments, the SEC’s whistleblower chief, Sean McKessy, said the Commission was receiving an average of 9 or 10 tips a day.  Commodity Futures Trading Commission whistleblower chief Christopher Ehrman also recently stated that tips into the CFTC have increased about 50 or 60 percent over the past year. 

This number is only expected to increase, as larger awards are publicized.  For example, the SEC announced on October 1, 2013 that it awarded over $14 million to a whistleblower – the SEC’s largest whistleblower award to date – who provided information that led to an SEC enforcement action that recovered substantial investor funds.

Naturally, securities compliance attorneys are actively brainstorming creative solutions to guard against the growing number of whistleblower complaints.  As in-house attorneys weigh their options, however, they should consider avoiding contracts that offer incentives for employees to keep whistleblower complaints in-house.

At remarks before the Georgetown University Law Center Corporate Counsel Institute last Friday, March 14th, the SEC’s whistleblower chief, Sean McKessy, warned lawyers that they may be disciplined for creatively drafted contracts attempting to incentivize company whistleblowers from bringing alleged company wrongdoing to the SEC’s attention:

“Be aware that this is something we are very concerned about.  If you’re spending a lot of your time trying to come up with creative ways to get people out of our programs, I think you’re spending a lot of wasted time and you run the risk of running afoul of our regulations. . . .  And we are actively looking for examples of confidentiality agreements, separates agreements, employee agreements that . . . in substance say ‘as a prerequisite to get this benefit you agree you’re not going to come to the commission or you’re not going to report anything to a regulator.’”

McKessy noted that securities compliance attorneys should know the risk of drafting such contracts, reminding those in attendance that the agency has the power to revoke attorneys’ ability to appear before the commission:

“And if we find that kind of language, not only are we going to go to the companies, we are going to go after the lawyers who drafted it . . . We have powers to eliminate the ability of lawyers to practice before the commission. That’s not an authority we invoke lightly, but we are actively looking for examples of that.”

In light of this strong language from the SEC’s McKessy – who appeared alongside Commodity Futures Trading Commission whistleblower chief Christopher Ehrman and the Government Accountability Project’s legal director, Tom Devine – general counsel and securities compliance attorneys should be cautious when drafting employment contracts to avoid including language that could be interpreted to offer incentives for employees to keep potential securities fraud whistleblower complaints in-house.

Attribution:  Brian Mahoney reported on McKessy’s recent remarks in Law360:  http://www.law360.com/articles/518815/sec-warns-in-house-attys-against-whistleblower-contracts