News / Resources

If the number of tips received in the first seven weeks of the whistleblower program is any indication of what's to come, the Securities and Exchange Commission's (SEC) whistleblower program may have its work cut out for it. The program, created by the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), provides a monetary reward to anyone who voluntarily provides the SEC with original information leading to an enforcement action resulting in monetary sanctions of $1 million or more. Whistleblowers are eligible for between 10 percent and 30 percent of the money collected in the SEC's action, or any related case. The ability to collect a portion of any recovery in related criminal or civil actions gives whistleblowers the potential to collect hefty rewards. The program, which became effective August 12, 2011, with the adoption of the final rules, establishes the procedures for submitting tips and applying for rewards. To administer the program, the SEC created a special office, the SEC Office of the Whistleblower, headed up by Chief Sean McKessy.

Types of Violations Reported Are Revealing

On November 11, 2011, the SEC issued its first Annual Report on the whistleblower program, providing some much anticipated insight into the number of tips received in the seven-week period between August 12, 2011, when the program began, and September 30, 2011, the end of the 2011 fiscal year. During this seven-week period the SEC received 334 whistleblower tips -- an average of seven tips per day. When a whistleblower submits a tip, either through the SEC's online questionnaire or by hard copy using the agency's Tip, Complaint or Referral (TCR) form, they must classify the type of violation they are reporting. An analysis of the tips based on the whistleblower's self-categorization revealed some interesting results:

• Almost half of the 334 tips fell into one of three categories: (1) market manipulation (16.2 percent); (2) offering fraud (15.6 percent); and (3) corporate disclosures (15.3 percent).
• Nearly a quarter of the tips (23.7 percent) were classified by whistleblowers as "other," where the whistleblower did not use one of the SEC's defined categories.
• Less than 4 percent of the tips were FCPA violations.
• Less than 10 percent of the tips were related to insider trading

Where Are the Whistleblowers?

The report also looked at the location of the whistleblowers. The results were as expected:

• A little more than half of the tips were received from domestic tipsters (64 percent) representing 37 states.
• California (10 percent), New York (7 percent), Georgia (6 percent) and Texas (5 percent) were the source of almost half of the domestic tips.
• 10 percent of the tips were received from overseas, with China (10 tips) and the UK (9 tips) making up more than half of the 32 tips received from international whistleblowers.
• A quarter of whistleblowers (26 percent) did not indicate their geographic location.

Rewarding Whistleblowers: Are Monetary Rewards Incentivizing Employees to Report Out Rather Than Report Up?

Though the final rules to the Dodd-Frank Act went into effect on August 12, 2011, anyone who submitted a tip to the SEC after July 21, 2010, is eligible to receive an award. The whistleblower fund has more than $450 million available to pay whistleblowers; however, the Commission has not paid any awards thus far. There are currently more than 170 enforcement judgments and orders resulting in sanctions of more than $1 million, all of which are eligible for a whistleblower reward. While the report provides a lot of information about the quantity of tips received, it says very little about the quality. Whistleblowers will have to wait to see how, and just how much of, the bounty will be awarded for their tips.

Seven weeks may be too abbreviated a time period to yield a sample size large enough to extrapolate exact trends or conclusions for 2012. Only time will tell whether the 334 tips are the tip of the iceberg or whether the initial wave of tips will subside. The SEC continues to publicize its whistleblower program and the promise of a monetary reward could be an incentive for employees to report out rather than report up.

How to Protect Your Business

All this means companies must be extra vigilant in their efforts to encourage employees to identify and raise issues internally for resolution. There also needs to be clear messaging and tone from the top that compliance with securities and other laws is a core value, that reports of potential violations will be taken seriously and, finally, that the internal whistleblower will face no retaliation of any kind.

For questions about this alert, or how it may impact your business, contact John J. Carney ( or 212.589.4255). For more information about whistleblowers under the Dodd-Frank Act, see our prior client alert: SEC Adopts Final Dodd-Frank Whistleblower Rules: What You Need to Know.

Authorship credit: John J. Carney and Essence Liburd

Baker & Hostetler LLP publications are intended to inform our clients and other friends of the Firm about current legal developments of general interest. They should not be construed as legal advice, and readers should not act upon the information contained in these publications without professional counsel. The hiring of a lawyer is an important decision that should not be based solely upon advertisements. Before you decide, ask us to send you written information about our qualifications and experience. © 2011 Baker & Hostetler LLP