Since the SEC refused for years to heed Madoff whistleblower Harry Markopolis’ warnings that Madoff was running a Ponzi scheme, we have followed with great interest the efforts of those who sought to create the first meaningful SEC whistleblower program.
The Senate this week took an important step by authorizing a new SEC whistleblower program–one more potent than the SEC apparently wanted–as part of the Wall Street Reform and Consumer Protection Act.
When the Madoff fiasco surfaced, Congress asked why the law failed to encourage SEC whistleblowers to come forward, in the same way the qui tam whistleblower provisions of the False Claims Act have been so successful in rewarding whistleblowers for helping stop fraud against the government. Those same principles in the new IRS Whistleblower program have caused an explosion of valuable information presented by whistleblowers in exposing tax liability of many billions of dollars.
SEC leadership helped shape the tepid House version, which would have made rewards to whistleblowers wholly discretionary.
When we criticized the House version of the proposed SEC whistleblower rewards for that reason, staffers of the Senate Banking Committee contacted us to discuss what a meaningful whistleblower program should include, based on our experience with whistleblowers under the False Claims Act and IRS Whistleblower program. Our response was that, at minimum, a whistleblower with information about significant fraud must have a legally enforceable right to a meaningful reward.
Fortunately, the Senate version included such a right to an award of 10-30% in substantial cases, and the Senate view ultimately prevailed (see below text of whistleblower provisions in Section 922).
It remains to be seen how SEC leadership will respond. At this spring’s Offshore Alert Conference in Miami, an SEC official listened to his panelists describe how successful mandatory rewards have been in causing whistleblowers to come forward in False Claims Act cases and IRS Whistleblower claims, yet apparently failed to “get” that SEC whistleblowers need a similar incentive to come forward in the best cases.
In our experience in representing whistleblowers, persons with the most significant information will rarely come forward without an enforceable right to a meaningful reward. The SEC has not exactly fostered public confidence in its judgment in recent years. If it embraces whistleblowers as Congress has directed, the SEC will find that–like the IRS Whistleblower Office–it will receive better, and dramatically more, information about fraud within its jurisdiction.
The full text of section 922 regarding SEC whistleblowers is reprinted below:
SEC. 922. WHISTLEBLOWER PROTECTION.
(a) In General- The Securities Exchange Act of 1934 (15 U.S.C. 78a et seq.) is amended by inserting after section 21E the following:
`SEC. 21F. SECURITIES WHISTLEBLOWER INCENTIVES AND PROTECTION.
`(a) Definitions- In this section the following definitions shall apply:
`(1) COVERED JUDICIAL OR ADMINISTRATIVE ACTION- The term `covered judicial or administrative action’ means any judicial or administrative action brought by the Commission under the securities laws that results in monetary sanctions exceeding $1,000,000.
`(2) FUND- The term `Fund’ means the Securities and Exchange Commission Investor Protection Fund.
`(3) ORIGINAL INFORMATION- The term `original information’ means information that–
`(A) is derived from the independent knowledge or analysis of a whistleblower;
`(B) is not known to the Commission from any other source, unless the whistleblower is the original source of the information; and
`(C) is not exclusively derived from an allegation made in a judicial or administrative hearing, in a governmental report, hearing, audit, or investigation, or from the news media, unless the whistleblower is a source of the information.
`(4) MONETARY SANCTIONS- The term `monetary sanctions’, when used with respect to any judicial or administrative action, means–
`(A) any monies, including penalties, disgorgement, and interest, ordered to be paid; and
`(B) any monies deposited into a disgorgement fund or other fund pursuant to section 308(b) of the Sarbanes-Oxley Act of 2002 (15 U.S.C. 7246(b)), as a result of such action or any settlement of such action.
`(5) RELATED ACTION- The term `related action’, when used with respect to any judicial or administrative action brought by the Commission under the securities laws, means any judicial or administrative action brought by an entity described in subclauses (I) through (IV) of subsection (h)(2)(D)(i) that is based upon the original information provided by a whistleblower pursuant to subsection (a) that led to the successful enforcement of the Commission action.
`(6) WHISTLEBLOWER- The term `whistleblower’ means any individual who provides, or 2 or more individuals acting jointly who provide, information relating to a violation of the securities laws to the Commission, in a manner established, by rule or regulation, by the Commission.
`(b) Awards-
`(1) IN GENERAL- In any covered judicial or administrative action, or related action, the Commission, under regulations prescribed by the Commission and subject to subsection (c), shall pay an award or awards to 1 or more whistleblowers who voluntarily provided original information to the Commission that led to the successful enforcement of the covered judicial or administrative action, or related action, in an aggregate amount equal to–
`(A) not less than 10 percent, in total, of what has been collected of the monetary sanctions imposed in the action or related actions; and
`(B) not more than 30 percent, in total, of what has been collected of the monetary sanctions imposed in the action or related actions.
`(2) PAYMENT OF AWARDS- Any amount paid under paragraph (1) shall be paid from the Fund.
`(c) Determination of Amount of Award; Denial of Award-
`(1) DETERMINATION OF AMOUNT OF AWARD-
`(A) DISCRETION- The determination of the amount of an award made under subsection (b) shall be in the discretion of the Commission.
`(B) CRITERIA- In determining the amount of an award made under subsection (b), the Commission–
`(i) shall take into consideration–
`(I) the significance of the information provided by the whistleblower to the success of the covered judicial or administrative action;
`(II) the degree of assistance provided by the whistleblower and any legal representative of the whistleblower in a covered judicial or administrative action;
`(III) the programmatic interest of the Commission in deterring violations of the securities laws by making awards to whistleblowers who provide information that lead to the successful enforcement of such laws; and
`(IV) such additional relevant factors as the Commission may establish by rule or regulation; and
`(ii) shall not take into consideration the balance of the Fund.
`(2) DENIAL OF AWARD- No award under subsection (b) shall be made–
`(A) to any whistleblower who is, or was at the time the whistleblower acquired the original information submitted to the Commission, a member, officer, or employee of–
`(i) an appropriate regulatory agency;
`(ii) the Department of Justice;
`(iii) a self-regulatory organization;
`(iv) the Public Company Accounting Oversight Board; or
`(v) a law enforcement organization;
`(B) to any whistleblower who is convicted of a criminal violation related to the judicial or administrative action for which the whistleblower otherwise could receive an award under this section;
`(C) to any whistleblower who gains the information through the performance of an audit of financial statements required under the securities laws and for whom such submission would be contrary to the requirements of section 10A of the Securities Exchange Act of 1934 (15 U.S.C. 78j-1); or
`(D) to any whistleblower who fails to submit information to the Commission in such form as the Commission may, by rule, require.
`(d) Representation-
`(1) PERMITTED REPRESENTATION- Any whistleblower who makes a claim for an award under subsection (b) may be represented by counsel.
`(2) REQUIRED REPRESENTATION-
`(A) IN GENERAL- Any whistleblower who anonymously makes a claim for an award under subsection (b) shall be represented by counsel if the whistleblower anonymously submits the information upon which the claim is based.
`(B) DISCLOSURE OF IDENTITY- Prior to the payment of an award, a whistleblower shall disclose the identity of the whistleblower and provide such other information as the Commission may require, directly or through counsel for the whistleblower.
`(e) No Contract Necessary- No contract with the Commission is necessary for any whistleblower to receive an award under subsection (b), unless otherwise required by the Commission by rule or regulation.
`(f) Appeals- Any determination made under this section, including whether, to whom, or in what amount to make awards, shall be in the discretion of the Commission. Any such determination, except the determination of the amount of an award if the award was made in accordance with subsection (b), may be appealed to the appropriate court of appeals of the United States not more than 30 days after the determination is issued by the Commission. The court shall review the determination made by the Commission in accordance with section 706 of title 5, United States Code.
`(g) Investor Protection Fund-
`(1) FUND ESTABLISHED- There is established in the Treasury of the United States a fund to be known as the `Securities and Exchange Commission Investor Protection Fund’.
`(2) USE OF FUND- The Fund shall be available to the Commission, without further appropriation or fiscal year limitation, for–
`(A) paying awards to whistleblowers as provided in subsection (b); and
`(B) funding the activities of the Inspector General of the Commission under section 4(i).
`(3) DEPOSITS AND CREDITS-
`(A) IN GENERAL- There shall be deposited into or credited to the Fund an amount equal to–
`(i) any monetary sanction collected by the Commission in any judicial or administrative action brought by the Commission under the securities laws that is not added to a disgorgement fund or other fund under section 308 of the Sarbanes-Oxley Act of 2002 (15 U.S.C. 7246) or otherwise distributed to victims of a violation of the securities laws, or the rules and regulations thereunder, underlying such action, unless the balance of the Fund at the time the monetary sanction is collected exceeds $300,000,000;
`(ii) any monetary sanction added to a disgorgement fund or other fund under section 308 of the Sarbanes-Oxley Act of 2002 (15 U.S.C. 7246) that is not distributed to the victims for whom the Fund was established, unless the balance of the disgorgement fund at the time the determination is made not to distribute the monetary sanction to such victims exceeds $200,000,000; and
`(iii) all income from investments made under paragraph (4).
`(B) ADDITIONAL AMOUNTS- If the amounts deposited into or credited to the Fund under subparagraph (A) are not sufficient to satisfy an award made under subsection (b), there shall be deposited into or credited to the Fund an amount equal to the unsatisfied portion of the award from any monetary sanction collected by the Commission in the covered judicial or administrative action on which the award is based.
`(4) INVESTMENTS-
`(A) AMOUNTS IN FUND MAY BE INVESTED- The Commission may request the Secretary of the Treasury to invest the portion of the Fund that is not, in the discretion of the Commission, required to meet the current needs of the Fund.
`(B) ELIGIBLE INVESTMENTS- Investments shall be made by the Secretary of the Treasury in obligations of the United States or obligations that are guaranteed as to principal and interest by the United States, with maturities suitable to the needs of the Fund as determined by the Commission on the record.
`(C) INTEREST AND PROCEEDS CREDITED- The interest on, and the proceeds from the sale or redemption of, any obligations held in the Fund shall be credited to the Fund.
`(5) REPORTS TO CONGRESS- Not later than October 30 of each fiscal year beginning after the date of enactment of this subsection, the Commission shall submit to the Committee on Banking, Housing, and Urban Affairs of the Senate, and the Committee on Financial Services of the House of Representatives a report on–
`(A) the whistleblower award program, established under this section, including–
`(i) a description of the number of awards granted; and
`(ii) the types of cases in which awards were granted during the preceding fiscal year;
`(B) the balance of the Fund at the beginning of the preceding fiscal year;
`(C) the amounts deposited into or credited to the Fund during the preceding fiscal year;
`(D) the amount of earnings on investments made under paragraph (4) during the preceding fiscal year;
`(E) the amount paid from the Fund during the preceding fiscal year to whistleblowers pursuant to subsection (b);
`(F) the balance of the Fund at the end of the preceding fiscal year; and
`(G) a complete set of audited financial statements, including–
`(i) a balance sheet;
`(ii) income statement; and
`(iii) cash flow analysis.
`(h) Protection of Whistleblowers-
`(1) PROHIBITION AGAINST RETALIATION-
`(A) IN GENERAL- No employer may discharge, demote, suspend, threaten, harass, directly or indirectly, or in any other manner discriminate against, a whistleblower in the terms and conditions of employment because of any lawful act done by the whistleblower–
`(i) in providing information to the Commission in accordance with this section;
`(ii) in initiating, testifying in, or assisting in any investigation or judicial or administrative action of the Commission based upon or related to such information; or
`(iii) in making disclosures that are required or protected under the Sarbanes-Oxley Act of 2002 (15 U.S.C. 7201 et seq.), the Securities Exchange Act of 1934 (15 U.S.C. 78a et seq.), including section 10A(m) of such Act (15 U.S.C. 78f(m)), section 1513(e) of title 18, United States Code, and any other law, rule, or regulation subject to the jurisdiction of the Commission.
`(B) ENFORCEMENT-
`(i) CAUSE OF ACTION- An individual who alleges discharge or other discrimination in violation of subparagraph (A) may bring an action under this subsection in the appropriate district court of the United States for the relief provided in subparagraph (C).
`(ii) SUBPOENAS- A subpoena requiring the attendance of a witness at a trial or hearing conducted under this section may be served at any place in the United States.
`(iii) STATUTE OF LIMITATIONS-
`(I) IN GENERAL- An action under this subsection may not be brought–
`(aa) more than 6 years after the date on which the violation of subparagraph (A) occurred; or
`(bb) more than 3 years after the date when facts material to the right of action are known or reasonably should have been known by the employee alleging a violation of subparagraph (A).
`(II) REQUIRED ACTION WITHIN 10 YEARS- Notwithstanding subclause (I), an action under this subsection may not in any circumstance be brought more than 10 years after the date on which the violation occurs.
`(C) RELIEF- Relief for an individual prevailing in an action brought under subparagraph (B) shall include–
`(i) reinstatement with the same seniority status that the individual would have had, but for the discrimination;
`(ii) 2 times the amount of back pay otherwise owed to the individual, with interest; and
`(iii) compensation for litigation costs, expert witness fees, and reasonable attorneys’ fees.
`(2) CONFIDENTIALITY-
`(A) IN GENERAL- Except as provided in subparagraphs (B) and (C), the Commission and any officer or employee of the Commission shall not disclose any information, including information provided by a whistleblower to the Commission, which could reasonably be expected to reveal the identity of a whistleblower, except in accordance with the provisions of section 552a of title 5, United States Code, unless and until required to be disclosed to a defendant or respondent in connection with a public proceeding instituted by the Commission or any entity described in subparagraph (C). For purposes of section 552 of title 5, United States Code, this paragraph shall be considered a statute described in subsection (b)(3)(B) of such section.
`(B) EXEMPTED STATUTE- For purposes of section 552 of title 5, United States Code, this paragraph shall be considered a statute described in subsection (b)(3)(B) of such section 552.
`(C) RULE OF CONSTRUCTION- Nothing in this section is intended to limit, or shall be construed to limit, the ability of the Attorney General to present such evidence to a grand jury or to share such evidence with potential witnesses or defendants in the course of an ongoing criminal investigation.
`(D) AVAILABILITY TO GOVERNMENT AGENCIES-
`(i) IN GENERAL- Without the loss of its status as confidential in the hands of the Commission, all information referred to in subparagraph (A) may, in the discretion of the Commission, when determined by the Commission to be necessary to accomplish the purposes of this Act and to protect investors, be made available to–
`(I) the Attorney General of the United States;
`(II) an appropriate regulatory authority;
`(III) a self-regulatory organization;
`(IV) a State attorney general in connection with any criminal investigation;
`(V) any appropriate State regulatory authority;
`(VI) the Public Company Accounting Oversight Board;
`(VII) a foreign securities authority; and
`(VIII) a foreign law enforcement authority.
`(ii) CONFIDENTIALITY-
`(I) IN GENERAL- Each of the entities described in subclauses (I) through (VI) of clause (i) shall maintain such information as confidential in accordance with the requirements established under subparagraph (A).
`(II) FOREIGN AUTHORITIES- Each of the entities described in subclauses (VII) and (VIII) of clause (i) shall maintain such information in accordance with such assurances of confidentiality as the Commission determines appropriate.
`(3) RIGHTS RETAINED- Nothing in this section shall be deemed to diminish the rights, privileges, or remedies of any whistleblower under any Federal or State law, or under any collective bargaining agreement.
`(i) Provision of False Information- A whistleblower shall not be entitled to an award under this section if the whistleblower–
`(1) knowingly and willfully makes any false, fictitious, or fraudulent statement or representation; or
`(2) uses any false writing or document knowing the writing or document contains any false, fictitious, or fraudulent statement or entry.
`(j) Rulemaking Authority- The Commission shall have the authority to issue such rules and regulations as may be necessary or appropriate to implement the provisions of this section consistent with the purposes of this section.’.
(b) Protection for Employees of Nationally Recognized Statistical Rating Organizations- Section 1514A(a) of title 18, United States Code, is amended–
(1) by inserting `or nationally recognized statistical rating organization (as defined in section 3(a) of the Securities Exchange Act of 1934 (15 U.S.C. 78c),’ after `78o(d)),’; and
(2) by inserting `or nationally recognized statistical rating organization’ after `such company’.
(c) Section 1514A of Title 18, United States Code-
(1) STATUTE OF LIMITATIONS; JURY TRIAL- Section 1514A(b)(2) of title 18, United States Code, is amended–
(A) in subparagraph (D)–
(i) by striking `90′ and inserting `180′; and
(ii) by striking the period at the end and inserting `, or after the date on which the employee became aware of the violation.’; and
(B) by adding at the end the following:
`(E) JURY TRIAL- A party to an action brought under paragraph (1)(B) shall be entitled to trial by jury.’.
(2) PRIVATE SECURITIES LITIGATION WITNESSES; NONENFORCEABILITY; INFORMATION- Section 1514A of title 18, United States Code, is amended by adding at the end the following:
`(e) Nonenforceability of Certain Provisions Waiving Rights and Remedies or Requiring Arbitration of Disputes-
`(1) WAIVER OF RIGHTS AND REMEDIES- The rights and remedies provided for in this section may not be waived by any agreement, policy form, or condition of employment, including by a predispute arbitration agreement.
`(2) PREDISPUTE ARBITRATION AGREEMENTS- No predispute arbitration agreement shall be valid or enforceable, if the agreement requires arbitration of a dispute arising under this section.’.
(d) Study of Whistleblower Protection Program-
(1) STUDY- The Inspector General of the Commission shall conduct a study of the whistleblower protections established under the amendments made by this section, including–
(A) whether the final rules and regulation issued under the amendments made by this section have made the whistleblower protection program (referred to in this subsection as the `program’) clearly defined and user-friendly;
(B) whether the program is promoted on the website of the Commission and has been widely publicized;
(C) whether the Commission is prompt in–
(i) responding to–
(I) information provided by whistleblowers; and
(II) applications for awards filed by whistleblowers;
(ii) updating whistleblowers about the status of their applications; and
(iii) otherwise communicating with the interested parties;
(D) whether the minimum and maximum reward levels are adequate to entice whistleblowers to come forward with information and whether the reward levels are so high as to encourage illegitimate whistleblower claims;
(E) whether the appeals process has been unduly burdensome for the Commission;
(F) whether the funding mechanism for the Investor Protection Fund is adequate;
(G) whether, in the interest of protecting investors and identifying and preventing fraud, it would be useful for Congress to consider empowering whistleblowers or other individuals, who have already attempted to pursue the case through the Commission, to have a private right of action to bring suit based on the facts of the same case, on behalf of the Government and themselves, against persons who have committee securities fraud;
(H)(i) whether the exemption under section 552(b)(3) of title 5 (known as the Freedom of Information Act) established in section 21F(h)(2)(A) of the Securities Exchange Act of 1934, as added by this Act, aids whistleblowers in disclosing information to the Commission;
(ii) what impact the exemption described in clause (i) has had on the ability of the public to access information about the regulation and enforcement by the Commission of securities; and
(iii) any recommendations on whether the exemption described in clause (i) should remain in effect; and
(I) such other matters as the Inspector General deems appropriate.
(2) REPORT- Not later than 30 months after the date of enactment of this Act, the Inspector General shall–
(A) submit a report on the findings of the study required under paragraph (1) to the Committee on Banking, Housing, and Urban Affairs of the Senate and the Committee on Financial Services of the House; and
(B) make the report described in subparagraph (A) available to the public through publication of the report on the website of the Commission.