Since 2012, the Untied States Securities and Exchange Commission (“SEC”) has awarded $676 million to 108 individuals, known as whistleblowers, who have reported instances of securities fraud at their respective companies to the SEC. Recently, the SEC paid $114 million to an anonymous whistleblower. According to Jane Norberg, Chief of the SEC’s Office of the Whistleblower, “[a]fter repeatedly reporting concerns internally, and despite personal and professional hardships, the whistleblower alerted the SEC and the other agency of the wrongdoing and provided substantial, ongoing assistance that proved critical to the success of the actions.” Traditionally, SEC whistleblower awards range from 10 percent to 30 percent of the money collected when the monetary sanctions exceed $1 million.
The concept of whistleblowing is not a new phenomenon. The practice dates back to seventh century England. During that time, King Wihtred of Kent, declared that “if a freeman works during [the Sabbath], he shall forfeit his [profits], and the man who informs against him shall have half the fine, and [the profits] of the labor.” This declaration by the King was one of the very first examples of providing incentives to private citizens to report violations of government legislation, i.e. whistleblowing.
In America, whistleblowing has been around since our inception. In fact, one of the first whistleblowers in America was one of our founding fathers, Benjamin Franklin. In 1773, Franklin exposed confidential letters showing that the royally appointed governor of Massachusetts had intentionally misled the English Parliament to promote a military buildup in the Thirteen Colonies. Almost a century later, in 1863, the False Claims Act provided the first congressional legislation for whistleblowers. In the midst of the Civil War, defense contractors intentionally sold defective ammunition and rifles, among other things, to both the Union and the Confederate armies, which hindered both sides’ efforts. Thus, on March 2, 1863, Congress passed the False Claims Act, which allowed private individuals to sue these contractors on behalf of the United States if these individuals had personal knowledge of the fraudulent scheme. If an individual was successful in proving the fraud on behalf of the United States, then he or she was entitled to receive half the money recovered by the suit. Congress would amend the False Claims Act again in the 1980’s in response to defense contractors again defrauding the government during the Cold War.
Thirty years later, in the aftermath of the Great Recession, Americans demanded reforms on Wall Street, given the financial fraud that occurred had crippled our nation to a point not seen since the depths of the Great Depression. In July 2010, Congress answered and passed the Dodd-Frank Wall Street Reform and Consumer Protection Act, referred to as Dodd-Frank, which represented the biggest overhaul of Wall Street regulations since the Securities Act of 1933 and the Securities and Exchange Act of 1934 were passed in response to the Great Depression.
Within Dodd-Frank, there is a special provision for whistleblowers who report violations of the federal securities laws, which include fraudulent accounting and the filing of false statements with the SEC, among other things. Given that whistleblowers are often reporting on their employers’ fraudulent misconduct, Dodd-Frank and the SEC protects the anonymity of these individuals, and whistleblowers are also protected from any retaliatory acts by an employer against a whistleblower.
The SEC whistleblowing process can be a complex and, quite frankly, an uneasy process. However, Johnson Fistel, LLP is well equipped to handle the SEC whistleblowing process, can protect your anonymity, and provide assistance with the drafting and submission of a SEC whistleblower complaint. If you are considering submitting one of these complaints or have any questions about the SEC whistleblowing process, please feel free to contact us.