17 April 2018

SEC grants largest ever whistleblower award, as well as first award under “safe harbor”

A number of remarkable whistleblowing awards have recently been granted in the US. The US Securities and Exchange Commission (SEC) has awarded USD 83 million to three whistleblowers for providing information regarding misconduct by Merrill Lynch – the highest award paid to an individual by a US authority in this context. In addition, a whistleblowing award was paid, for the first time, under the “safe harbor” of the Securities Exchange Act of 1934 (the “Exchange Act”). Including these awards, the SEC has awarded more than USD 264 million to 54 whistleblowers since 2012.

Companies are advised to have adequate speak-up and whistleblowing policies in place. Encouraging an open-door policy through clear messages is just one aspect; companies should also: make reporting easy and accessible for all employees, set up accessible employee reporting channels (including online, e-mail, telephone and a postal address), and inform employees about these effectively.

On 19 March 2018, the SEC awarded a total of USD 83 million to whistleblowers in a case related to Merrill Lynch (USD 33 million to one individual, and USD 50 million to be split between the other two). Prior to this, the highest single whistleblower award amounted to USD 30 million, in 2014 (see In context). According to Labaton Sucharow, a law firm representing the whistleblowers, Merrill Lynch “executed complex options trades that lacked economic substance and artificially reduced the required deposit of customer cash in the reserve account.” The bank entered into a USD 415 million settlement with respect to these charges in June 2016.

Originally, the two whistleblowers submitted information jointly to the SEC, which resulted in the opening of an investigation. According to the SEC, their award would have been higher if the submission of the complaint had not been “unreasonably delayed”. Subsequently, the third whistleblower provided new information which resulted in the opening of a second investigation.

These awards by the SEC are intended to encourage those who come into possession of important information regarding irregularities to report this to the relevant authorities. The awards are paid out of the fines imposed on the non-compliant companies and amount to between 10% and 30% of the overall fine when the sanction exceeds USD 1 million. The whistleblower is eligible for the award if he or she voluntarily provides original, timely and credible information resulting in a successful enforcement action. The SEC has a legal obligation to protect the identity of the whistleblowers and protect information that could result in their identification.

On 5 April 2018, the SEC also announced the first ever award paid under the “safe harbor” of the Exchange Act. This act provides that if a whistleblower submits information to another federal agency, and then submits the same information to the SEC within 120 days, the SEC will treat the information as though it had been submitted to the SEC at the same time that it was submitted to the other agency. According to the Chief of the SEC’s Office of the Whistleblower, “whistleblowers, especially non-lawyers, may not always know where to report, or may report to multiple agencies. This award shows that whistleblowers can still receive an award if they first report to another agency, as long as they also report their information to the SEC within the 120-day safe harbor period and their information otherwise meets the eligibility criteria for an award.

Companies are advised to have adequate speak-up and whistleblowing policies in place. Encouraging an open-door policy through clear messages is vital. Companies should also make reporting easy and accessible for all employees, set up accessible employee reporting channels and inform employees about them effectively.