The Securities and Exchange Commission (SEC) recently announced that fiscal year (FY) 2022 was the second highest in both the number and dollar amount of awards in the history of its whistleblower program. The Commission issued 103 awards totaling $229 million to whistleblowers during the fiscal year which ended on September 30, 2021. These results were second only to FY 2021 where $564 million was awarded to 108 individuals.
Since the start of its whistleblower program in July 2010, the SEC has recovered more than $6.3 billion from individuals and companies and has issued over $1.3 billion in whistleblower awards.
Record Number of Whistleblower Tips Received by SEC in 2022
In the last fiscal year, the Commission received more than 12,300 tips — the largest number in the 12-year history of its whistleblower program.
Market Manipulation
The largest number of tips involved market manipulation (21%) which involves misconduct that artificially causes a change in the supply or demand for a particular security.
Examples of manipulation include spreading false or misleading information about a company, and rigging quotes, prices, or trades to give the appearance that the demand for a security is different than what is actually the case.
Offering Fraud
The second largest category of misconduct reported by whistleblowers was offering fraud (17%) which involves material misrepresentations and/or omissions to potential investors in a new company.
For example, in July 2021, the SEC filed a complaint against a Colorado company, and its director, alleging that they told investors the company had sufficient funds to acquire three Italian cycling-related companies, and that the director had invested millions of dollars of his own money in the offerings when neither statement was true.
The case is currently pending in the District of New Jersey.
The next largest categories of misconduct reported by whistleblowers were initial coin offerings and cryptocurrencies (14%) and corporate disclosures and financials (13%).
SEC Enforcement Actions
Since the SEC lacks the resources to investigate every tip it receives involving alleged securities violations, it focuses on tips that contain specific and reliable information in order to justify the use of the Commission’s limited resources.
Experience has shown that the SEC also pursues allegations of securities violations involving misconduct in areas where it has placed special emphasis. Reviewing the types of enforcement actions over the past fiscal year offers insight into the potential likelihood that the Enforcement Division will pursue a particular tip from its whistleblower program. SPACs and Cryptocurrencies are two areas where the SEC focused its attention in FY 2022.
SPACs
A special purpose acquisition company, or SPAC, is a type of shell company with no commercial operations that completes an initial public offering. The purpose of the IPO is to raise funds for a merger with, or acquisition of, an unidentified company within a certain timeframe. Although the market experienced a downturn in FY 2022, the SEC pursued enforcement actions involving SPACs which, according to the Commission, continued to attract significant public attention and investor funds.
In December 2021, Nikola Corporation, an electric truck manufacturer, agreed to pay $125 million to resolve allegations that it created a SPAC which misled investors about its products, technical advancements, and commercial prospects. The SEC’s order alleged that the company violated the antifraud and disclosure control provisions of federal securities laws.
Cryptocurrency Whistleblowing
In the expanding world of digital currencies and crypto assets, the SEC has clearly established its authority to enforce violations of federal securities laws involving fintech. In February 2022, entered an Order charging BlockFi Lending LLC, a financial services company based in New Jersey, with offering and selling its BlockFi Interest Accounts to investors without filing a registration statement.
Relying on case precedents that predated the introduction of digital assets, the SEC determined that the BlockFi Interest Accounts were notes that were offered and sold as investment contracts. As such, the company was required to register its offering or otherwise qualify for a registration exemption. BlockFi agreed to pay of civil penalty of $50 million to settle the charges. The company also agreed to pay an another $50 million in fines to 32 states to settle similar charges.
Recent Amendments to the SEC Whistleblower Program
In August of this year, the Commission adopted two amendments to the rules of its whistleblower program. The first expands the scope of what constitutes a related action for purposes of eligibility for an award under the SEC’s whistleblower program.
- Under amended Rule 21F-3, which went into effect on October 3, 2022, whistleblowers can potentially receive awards resulting from certain actions brought by other governmental entities when (i) the other entity’s whistleblower program is not comparable to the SEC’s program or (ii) the maximum award the Commission could pay on the related action would not exceed $5 million.
- The second rule amends Rule 21F-6 by affirming the SEC’s authority to consider the dollar amount of a potential award for the purpose of increasing, but not decreasing, an award to a whistleblower.
Maintaining Anonymity of Whistleblowers
The SEC rigorously guards the confidentiality of whistleblowers. Unlike most cases filed under the False Claims Act, the identity of a whistleblower is kept confidential indefinitely, except in very limited circumstances.
Even orders explaining the Commission’s rationale for issuing whistleblower awards are heavily redacted making it impossible to identify any information that might reveal the identity of a whistleblower. The SEC also accepts anonymous tips; however, a whistleblower must be represented by an attorney to be eligible for an award.
Who Can be a Whistleblower?
Anyone with information and evidence of securities violations can potentially be a whistleblower. Evidence is an indispensable component of any whistleblower claim. The adage it’s not what you know, it’s what you can prove is especially true for whistleblower claims.