On July 26, 2024, the Securities and Exchange Commission announced a substantial award exceeding $37 million to a whistleblower whose information and cooperation contributed to a successful enforcement action.
The SEC whistleblower’s dedication to reporting misconduct internally prompted the employer to launch a comprehensive investigation, which was then shared with the Commission. This self-reporting spurred the Commission to conduct its own inquiry. Crucially, without the whistleblower’s persistent, thorough, and timely support, the staff would have lacked a complete grasp of the context and severity of the employer’s misconduct.
Thanks to the whistleblower’s essential contributions, the Commission was able to act swiftly, halting ongoing fraudulent activities and securing significant monetary relief for affected investors.
The Importance of SEC Whistleblowers in Financial Markets
This award is just one example of the crucial role whistleblowers play in protecting investors and maintaining the integrity of our financial markets. Whistleblowers are individuals who come forward with information about possible securities law violations and provide valuable evidence that helps the SEC pursue enforcement actions against wrongdoers. In recognition of their contributions, whistleblowers may be eligible for a monetary award if the information provided leads to successful enforcement actions resulting in more than $1 million in sanctions.
Creola Kelly, Chief of the SEC’s Office of the Whistleblower said “Today’s whistleblower learned of misconduct and made the difficult decision to report their concerns. This individual, who was retaliated against for their whistleblowing activity, played a crucial role in the ultimate success of the enforcement proceeding.”
SEC Whistleblower Rewards
Payments to whistleblowers are disbursed from an investor protection fund established by Congress, which is funded entirely through monetary sanctions imposed on securities law violators by the SEC. Whistleblowers become eligible for awards when they voluntarily provide the SEC with original, timely, and credible information that contributes to a successful enforcement action.
These awards can range from 10 to 30 percent of the funds collected when the monetary sanctions exceed $1 million, underscoring the substantial impact of whistleblowers in upholding market integrity and protecting investors.
Encouraging Whistleblowing
The SEC has made efforts to promote and encourage individuals to come forward with information regarding potential violations. They have established a dedicated Office of the Whistleblower and created multiple channels for reporting misconduct, including online forms and hotlines.
Furthermore, in order to incentivize employees to report internally first, before turning to the SEC, companies are required by law to inform their employees about the whistleblower program and provide them with a copy of the company’s whistleblower policy.
Protecting the Anonymity of the Whistleblower
In accordance with the Dodd-Frank Act, the SEC safeguards the confidentiality of whistleblowers, ensuring that no information is disclosed that could compromise their identity. This includes not revealing the identity of a whistleblower to the company or individual being reported, as well as protecting whistleblowers from retaliation.
Additionally, the SEC allows whistleblowers to submit information anonymously through an attorney, further ensuring their protection.
What types of violations can be reported under the SEC Whistleblower Program?
The SEC Whistleblower Program is designed to encourage individuals to report violations of federal securities laws, which can encompass a wide range of misconduct. Here are the types of violations that can be reported under the program:
Insider trading involves buying or selling securities based on non-public, material information, such as an executive buying shares of their company before a major positive announcement. Fraudulent financial reporting involves manipulating financial statements to mislead investors or stakeholders, like falsifying revenue figures to inflate the stock price. Market manipulation includes activities intended to deceive or mislead investors by artificially affecting market prices or volumes, as seen in pump-and-dump schemes where the price of a stock is artificially inflated before being sold off.
Ponzi schemes are investment frauds that pay returns to earlier investors with funds from more recent investors, often promising high returns with little risk. Unregistered securities offerings involve selling securities without proper registration or exemption from registration with the SEC. This might include offering investment contracts without filing the necessary documents with the SEC. Foreign Corrupt Practices Act (FCPA) violations include bribery of foreign officials to gain business advantages, such as a company paying foreign officials to secure a contract.
Misleading or false statements to investors involve providing false or misleading information about a company or investment, such as overstating a company’s financial health in public disclosures. Improper handling of client funds refers to the misuse or misappropriation of client funds or securities, like using client funds for unauthorized purposes. Investment adviser fraud involves breaches of fiduciary duty or fraud by investment advisers, including failing to disclose conflicts of interest or charging excessive fees. Hedge fund and private fund misconduct includes fraudulent activities or misconduct specific to hedge funds or private funds, such as misrepresenting the value of assets or the nature of investments.
These are just a few examples of the types of violations that can be reported under the SEC Whistleblower Program. If you have information about a potential violation, you can report it to the SEC anonymously. If the SEC takes action based on your information, you may be eligible for a monetary award.