improper or illegal client activity and the accounting firm fails to promptly report that information to the SEC. The first two exceptions also apply to external auditors when the violation is “material.”
Information Necessary to Prevent “Substantial Injury” to Financial Interest
In April 2015, the SEC issued an award of more than $1 million to a compliance professional who “had a reasonable basis to believe that disclosure to the SEC was necessary to prevent imminent misconduct from causing substantial financial harm to the company or investors.” The SEC has not, however, provided detailed guidance on what type of conduct is “likely” to cause “substantial financial harm.” This vagueness may work in whistleblowers’ favor, as the SEC has used its discretion to issue awards liberally.
In a recent enforcement action, the SEC awarded more than $5.5 million to a whistleblower who failed to meet the requirements for an award. Specifically, the whistleblower did not provide his or her disclosures “in writing,” as the Whistleblower Program requires. The SEC cited “highly unusual circumstances” in deciding to waive the “in writing” requirement for the whistleblower, who had provided information in a manner “expressly requested” by SEC enforcement staff.
Information About “Conduct that Will Impede an Investigation of the Misconduct”
Key compliance personnel can also report to the SEC if their information reveals conduct by the entity that will impede an investigation of the misconduct. While the SEC has not yet issued an award under this exception, the rule appears to be straightforward: if one has evidence of tampering with an internal investigation, then he or she is permitted to report to the SEC immediately. This improper conduct may include destroying documents, influencing witnesses, or otherwise concealing material information.
120-Day Exception
The final, and most concrete, exception applies where at least 120 days have passed since the compliance personnel reported the information to their supervisor or to another person in the organization who is responsible for remedying the violation (i.e., audit committee, chief legal officer, chief compliance officer, or their equivalents). Alternatively, the individual may report the information at least 120 days after receiving the information, if it was received under circumstances indicating that any of the above-mentioned parties was already aware of it.
Importantly, any whistleblower who chooses this route should document the date of his or her disclosure in, for example, an email. Prior to receiving an award, all whistleblowers must prove their eligibility. Documentation that proves they waited 120 days may be the difference between a multimillion-dollar award and nothing.
REPORTING TO THE SEC AND MAXIMIZING AWARD PERCENTAGE
When is the best time to report the fraud or misconduct to the SEC?
In most cases, whistleblowers should report fraud or misconduct to the SEC as soon as possible. While some situations require a whistleblower to wait 120 days before providing information to the SEC, most prudent whistleblowers will raise concerns immediately. There are a few reasons for this:
1. To be eligible for an award, a whistleblower must provide the SEC with “ original information ”—i.e., information not already known to the SEC. If someone reports another individual’s information to the SEC first, the latter will not be entitled to a percentage of any monetary sanctions collected.
2. Even if a whistleblower is the first to report the information, the SEC considers the timeliness of information to be a significant factor when determining the size of an award. Many whistleblowers wait too long to report to the SEC and so receive substantially reduced awards. About 20% of the awards issued through 2015 were reduced because of an unreasonable reporting delay.
3. As a practical matter, the SEC is more likely to act on timely information. The SEC receives a significant number of tips and has limited resources. The best claims reveal fraud that the SEC can halt and whose impact the SEC can potentially minimize. The SEC will probably not act on tips about speculative fraud that occurred years ago.
That said, anyone who may have original information about a securities-law violation should hire a law firm that can quickly: (1) assess the claim; (2) draft a compelling tip, complaint, or referral (“TCR”); and (3) file with the SEC. In our experience, Zuckerman Law has been able to file whistleblowers’ TCRs months before other law firms can even assess potential claims.
Do I have to report the violation to my company before reporting it to the SEC?
To remain eligible for an award, most whistleblowers do not have to report internally before reporting to the SEC. (See eligibility requirements for details.) However, the SEC provides incentives for internal reporting. For example:
• If a whistleblower reports internally, and then to the SEC within 120 days of the internal disclosure, then the SEC will use the date of the internal report in determining whether the whistleblower provided “original information.” This internal reporting essentially “holds your place in line.”
• If a whistleblower’s internal disclosure prompts a company investigation, the whistleblower will benefit from all the information discovered in that investigation.
• The SEC may increase the size of a whistleblower’s award if the whistleblower participated in the company’s internal compliance systems.
Notably, some whistleblowers must report internally before reporting to the SEC. (See eligibility require ments for details.)
Federal circuits are split regarding whether whistleblowers who report potential securities-law violations to their employers but not to the SEC are protected from retaliation under the program.
Can I submit an SEC whistleblower claim if the SEC already has an open investigation into the matter?
Yes. Even if the SEC already has information about a particular securities-law violation, you can still qualify for an award if your information “significantly contributes” to the success of a resulting SEC enforcement action. According to the SEC Whistleblower Office’s 2016 Annual Report to Congress, such information accounted for 40% of the awards in 2016. A whistleblower’s information may “significantly contribute” to an enforcement action in several ways, including if the information:
• allows the SEC to bring the enforcement action in significantly less time or with significantly less resources;
• expands the scope of the current investigation, leading to additional successful claims;
• or allows the SEC to bring claims against additional parties.
On May 13, 2016, the SEC issued an award of more than $3.5 million to a whistleblower who “bolstered an ongoing investigation with additional evidence of wrongdoing that strengthened the SEC’s case.” Per the press release accompanying that award, Mr. Ceresney, the SEC Enforcement Director, explained that “[w]histleblowers can receive an award not only when their tip initiates an investigation, but also when they provide new information or documentation that advances an existing inquiry.” He added, “This particular whistleblower’s tip substantially strengthened our ongoing case and increased our leverage during settlement negotiations with the company.”
How do I submit a tip to the SEC?
The SEC Form TCR (“Tip, Complaint, or Referral”) is the form that whistleblowers and their attorneys use to submit tips to the SEC Whistleblower Office. The form has many sections—whistleblowers and their attorneys should pay close attention to several in particular:
Section B of the SEC Form TCR
Section B requests information about the whistleblower’s attorney. This section is important because whistleblowers can submit their tips anonymously if represented by attorneys, allowing them to leave Section A blank. This is a critical advantage of the SEC Whistleblower Program as compared to other whistleblower programs, such as the IRS Whistleblower Program, which do not allow for anonymous reporting.
Section D of the SEC Form TCR
Eligibility
Section D asks whistleblowers to describe their complaints. Many of Section D’s questio
ns, however, are aimed at determining whether a particular whistleblower is eligible for an SEC award (even though Section E is technically the “eligibility” section). Importantly, almost all whistleblowers can become eligible for awards, if they take certain steps. This includes employees and contractors, such as compliance personnel, auditors, directors, and officers, who may incorrectly assume they are ineligible for SEC awards. Even whistleblowers who were involved in the fraud or misconduct may be eligible for awards.
External auditors, for example, generally are not eligible to receive SEC whistleblower awards. This is particularly true for external auditors who obtained their information during an audit of an issuer. However, an exception allows these external auditors to become eligible if they report the violation or fraud to a superior in their independent public accounting firms and the firms fail to promptly report the information to the SEC. If this happens, the external auditors can report immediately to the SEC and be eligible for awards.
The SEC’s rules include many similar exceptions that allow otherwise-ineligible whistleblowers to become eligible by taking certain steps. Whistleblowers should consult with an experienced SEC whistleblower attorney to determine whether they are, or may become, eligible for SEC whistleblower awards. This consultation could be the difference