SEC Pays $14 Million to Dodd-Frank Enforcement Action

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October 8, 2013
Practice Groups:
Government
Enforcement;
Global Government
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SEC Pays $14 Million to Dodd-Frank
Whistleblower After Tip Leads to Rapid
Enforcement Action
By: Matt T. Morley, Luke T. Cadigan and Stephen J. Korotash
The Securities and Exchange Commission recently paid $14 million to an unidentified informant
under the Dodd-Frank whistleblower program. Although the particular enforcement action was not
identified, the SEC said the whistleblower’s tip led to a substantial recovery of investor funds. Given
that awards can range from 10 to 30 percent of the money collected in a case, this recovery was
therefore in the range of $47 million to $140 million.
Notably, the tip enabled the SEC to respond exceptionally quickly ─ its enforcement action was
completed in less than six months. It has been widely anticipated that the Dodd-Frank whistleblower
program would enhance the speed and effectiveness of the SEC’s enforcement efforts by eliciting
high-quality information about securities violations.
Although whistleblower tips have been flowing to the SEC at the rate of a dozen each business day,
this award was only the third since the program took effect in August 2011. Awards of approximately
$50,000 and $125,000 had been made in two previous cases. Now that the program is up and running,
the SEC staff has suggested that it will be making awards more frequently, including awards of
significant amounts. There is little doubt that the agency’s $14 million award, together with
substantial future awards, will do much to generate public awareness of, and greater participation in,
the whistleblower program.
Of course, nothing can prevent a company from becoming the subject of a whistleblower report to the
SEC. Under Dodd-Frank, corporate personnel are not required to report their concerns to the
company before contacting the SEC or at any other time. Moreover, almost anyone can be a DoddFrank whistleblower: competitors, former employees, investors, consultants, former spouses and
significant others.
That said, companies can take steps to reduce their risks in this regard by assuring that it has systems
for its personnel to report instances of potential wrongdoing that those systems are well publicized and
easy to use, and that individuals with concerns about improper conduct are encouraged to bring them
to the company’s attention. One starting place for such efforts can be to review company policies on
internal reporting. Companies contemplating these issues should consider the following options:
1. Require employees to report suspected wrongdoing. Companies should make clear that
employees are expected to report concerns about potentially illegal conduct and violations of company
policy, and that this is an important component of their responsibilities to their employer. Good-faith
reports should be encouraged, even if they may ultimately prove to have been mistaken. At the same
time, it is appropriate to note that the making of a maliciously false report is a serious offense.
2. Actively encourage the reporting of genuine concerns. Given the substantial monetary
incentives for whistleblowers to report matters to the SEC, employers may seek to do more to actively
encourage employees to report suspected wrongdoing internally. This may require a broad and
sustained effort to build trust and confidence with company personnel to convey the message that it is
SEC Pays $14 Million to Dodd-Frank Whistleblower After
Tip Leads to Rapid Enforcement Action
important to the company to receive these reports. Among other strategies, employers should
consider periodic reminder statements or letters from corporate executives and periodic presentations
or discussions at meetings or training sessions.
3. Make it easy to file a report. Employees are more likely to use a reporting process that is clear
─ specifies how reports should be made, how they can be processed anonymously (if desired), and
who will be responsible for subsequent processing and investigation of reports. Companies should
consider offering a number of avenues for employees to report their concerns about improper conduct,
including a selection of designated individuals, and telephone or internet lines of communications. In
some circumstances, employees may find it easier to approach individuals outside their reporting
chain.
4. Describe what will happen after a report is made. The willingness of employees to express
their concerns may be enhanced if they understand how such reports will be handled. While
companies need to preserve sufficient flexibility to respond appropriately in a wide range of
circumstances, there may be value in explaining who will determine the company’s response to the
report and who will direct any subsequent investigation. Employees may derive particular comfort
from knowing that persons implicated in any potential wrongdoing, particularly senior managers, will
not be directing the company’s response to the report. Employees also may be encouraged to report if
there is some mechanism for them to receive a response to their report at a later date. At the same
time, employers should not make unreasonable promises or create detailed procedures that could
hamper an investigation or potentially create later claims for failure to follow procedures.
5. Send a clear message that retaliation will not be tolerated. Employers should emphatically
prohibit retaliation against employees who make reports in good faith, and provide instructions about
what to do if retaliation is suspected. This type of reassurance should help to mitigate the concerns of
employees, and increase the likelihood that they will report any concerns to the company in the first
instance. More importantly, in the event that an instance of retaliation does arise, the company will
need to respond to it decisively, or risk undercutting its efforts to encourage internal reporting for
years to come.
************
There is no simple formula for establishing an internal reporting process that employees will use in
lieu of taking their concerns elsewhere. Good policies and procedures are only a starting point, but the
more difficult task may be creating confidence among corporate personnel that the company will
evaluate their concerns fairly, and that raising a concern in good faith will not put their jobs at risk.
As difficult as these efforts may be, Dodd-Frank’s whistleblower provisions make it more likely than
ever that there will be significant negative consequences for companies that fail to implement
effective internal reporting systems. If a company does not discover and address potential misconduct
by its personnel, the chances are now very much increased that the SEC will uncover and take the
initiative in resolving it.
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SEC Pays $14 Million to Dodd-Frank Whistleblower After
Tip Leads to Rapid Enforcement Action
Authors:
Matt T. Morley
[email protected]
+1.202.778.9850
Luke T. Cadigan
[email protected]
+1.617.261.3118
Stephen J. Korotash
[email protected]
+1.214.939.5817
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regard to any particular facts or circumstances without first consulting a lawyer.
©2013 K&L Gates LLP. All Rights Reserved.
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