Implemented by the 2010 Dodd Frank Act, the Securities and Exchange Commission (SEC) maintains a growing whistleblower program. Much like the False Claims Act, the SEC’s program is designed to offer confidential consideration of fraud claims, as well as incentives for successful prosecutions of costly and wasteful securities fraud.
In today’s post, we discuss a recent whistleblower reward received by a company officer, representing the first SEC whistleblower reward for an executive relator since the program began. The SEC’s rules regarding whistleblower lawsuits require extreme confidentiality, even with regard to the details of the settlement. For this reason, the relator’s identity, employment position, and affiliated employer were not revealed by the Commission at the time of the settlement. However, the settlement represents increasing growth and confidence in the program, which has seen an increase in fraud reports each year since its inception.
SEC settles with company engaged in securities fraud
The most recent SEC whistleblower represents its 15th successful prosecution of relator-reported fraud claims. However, this particular settlement is unique in that it involved a company officer – an employee typically exempt from collecting a reward under the whistleblower program.
According to the rules of the program, anyone with “high-quality, original information” about securities fraud is welcome to come forward and report the incidents. If the information results in a settlement with the defendant, the relator can receive a portion of the settlement as an incentive for coming forward. However, the rules preclude recovery by officers, trustees, partners, or directors who come to know of the fraud due to the internal reporting of the situation by a company employee. As an exception to this rule, an officer may recover even if an employee reported internally, provided the internal compliance procedures failed to adequately address or rectify the problem within 120 days of the report.
In this case, the officer ultimately opted to report to the SEC after internal protocol failed. As a result of the officer’s willingness to come forward, he or she is set to receive a reward in an amount between $475,000 and $575,000.
A short but meaningful history
As compared with the False Claims Act, which was enacted during the American Civil War, the SEC’s whistleblower program is in its infancy. Under the terms of the whistleblower program, relators can receive between 10 and 30 percent of the ultimate recovery, provided the total amount recovered exceeds $1 million.
So far, the program is responsible for rewarding $50 million to courageous whistleblowers. More than half of this amount, however, went to one overseas whistleblower in 2014. In 2013, an unidentified whistleblower received a $14 million reward for coming forward with allegations of investor abuse.
In response to the settlement with the corporate office, the SEC commented by stating, “Corporate officers have front-row seats overseeing the activities of their companies, and this particular officer should be commended for stepping up to report a securities law violation when it became apparent that the company’s internal compliance system was not functioning well enough to address it….”
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