It looks like there has never been a better time to be a whistleblower. This is especially true for public companies or within the securities industry.
In 2010 the Securities & Exchange Commission’s (SEC) established a whistleblower awards program. As a result, whistleblowers now have unprecedented financial incentives to disclose potential misconduct to the government. Also, they are enjoying extraordinary legal protection for doing so.
Nowadays even compliance personnel, the employees tasked with identifying internal misconduct within a company, are receiving substantial payouts for reporting their own companies in some instances.
However, if you are the company being faced with a whistleblower, the situation has never been more difficult. The companies face several problems. One is the legal minefield when trying to deal with reports of misconduct. Another is the consequence of increased financial incentives for the whistleblowers to report actual or perceived misconduct. On top of it all, the companies are dealing with all this under an extremely tight reporting timeline.
Before Financial Incentives, Whistleblowers Were Scared To Speak Out
Before the awards program was established in 2010, whistleblowers had very little incentive to speak out. Quite the opposite. They had incentive to stay quiet in order to avoid retaliation.
In 2002, the Sarbanes-Oxley Act of 2002 went into effect and whistleblowers were protected against retaliation. However, this provision was not only weak, it was often ineffective.
Paradigm Shift In 2010
The passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 changed everything for whistleblowers. This was the first time whistleblowers were offered a financial reward for whistleblowing relating to securities violations.
Million Dollar Settlements
Dodd-Frank directed the Commission to pay eligible individuals when the original information they provided lead to SEC and other enforcement actions to a monetary sanction over $1,000,000. What does that mean for the whistleblower? With awards ranging from 10 to 30 percent of the total amount of money collected in a case, it means a lot!
The Commission determined that whistleblower awards need not be limited to those in the United States. Four of the 17 whistleblower awards to date were to whistleblowers living in foreign countries.
Penalties for Retaliation
Beyond the Sarbanes-Oxley Act of 2002, Dodd-Frank broadly prohibited retaliation against whistleblowers who report possible wrongdoing.
Thanks to the stringent protection and the financial incentives, 17 whistleblowers have received awards under Dodd-Frank, paying out nearly $50 million. The number of whistleblowers continues to rise. The first quarter of 2015 saw a 20 percent increase in the number of whistleblower tips over the same quarter last year.
What companies subject to the SEC’s oversight should be concerned about:
- The SEC has expressed intense interest in retaliation cases.
- The SEC has recently granted awards to a company’s own compliance officers.
- The SEC has voices a serious concern about the use of confidentiality agreements that may suppress SEC whistleblowers.