since they properly disclosed the information internally, or since they obtained the information under circumstances indicating that the entity’s officers already knew of the information.
Auditors who obtained the information during their audit of an issuer, however, will be eligible for an award only if:
• they have a reasonable basis to believe the disclosure is necessary to prevent “a material violation of the securities laws” that is likely to cause “substantial injury” to the financial interest or property of the entity or investors;
• they have a reasonable basis to believe the entity is engaging in “conduct that will impede an investigation of the misconduct even if the submission does not contain an allegation of audit firm wrongdoing”;
• or they report the securities-law violation to a superior in their independent public-accounting firm, and the firm fails to promptly report that information to the SEC.
Eligibility depends on various factors. If whistleblowers are uncertain about their eligibility, then they should consult with an experienced SEC whistleblower attorney. A skillful analysis may be the difference between a multimillion-dollar whistleblower award and no award at all. The analysis, moreover, may largely determine the size of an award.
Tip #3: Act Fast
It is never too early to think about maximizing your potential award. Whistleblowers may receive anywhere from 10% to 30% of the monetary sanctions collected in actions brought by the SEC and in related actions brought by other regulatory or law-enforcement authorities. And the timing of a whistleblower’s tip is a significant factor that the SEC considers in determining whether, and how much, to award.
To be eligible for an award, a whistleblower must first submit “original information.” Original information is any information that the SEC does not already have. Whistleblowers who wait to report information, therefore, risk that someone else will submit the same information to the SEC first. Keep in mind that, even if the SEC has already opened an investigation, whistleblowers may still qualify for an award if their information “significantly contributes” to the success of an enforcement action.
Next, the whistleblower office may reduce the amount of an award if the whistleblower unreasonably delays reporting the violation to the SEC. About 20% of the awards issued through 2015 were reduced because of an unreasonable reporting delay. In making this determination, the whistleblower office considers:
• whether the whistleblower failed to take reasonable steps to report the violation or prevent it from occurring or continuing;
• whether the whistleblower was aware of the violation but reported to the SEC only after learning of an investigation into the misconduct; and
• whether there was a legitimate reason for the whistleblower to delay reporting the violation.
For example, on February 28, 2017, the SEC issued an order reducing an award to 20% of the monetary sanctions collected “because of both the Claimant’s culpability in connection with the securities law violations at issue in the Covered Action and the Claimant’s unreasonable delay in reporting the wrongdoing to the Commission.”
Finally, to be eligible for an award, some whistleblowers must take certain actions (e.g., the 120-day exception for auditors under certain circumstances, see Tip #2) before reporting to the SEC. Whistleblowers should therefore understand and consider the specific eligibility requirements in determining when to report to the SEC.
Tip #4: Know the Rules Before Filing with the SEC
Besides avoiding “unreasonable delay,” whistleblowers should be aware of other actions that influence the size of awards. Whistleblowers must learn the rules early on because, as mentioned, some actions must be taken prior to filing with the SEC. For example, the whistleblower office may reduce the amount of an award if the whistleblower:
• participated in, or was culpable for, the reported securities-law violation; or
• interfered with the company’s internal compliance and reporting systems.
On the other hand, the whistleblower office may increase the amount of an award based on:
• the tip’s significance to the success of any proceeding brought against wrongdoers;
• the assistance that you and your legal representative provide in the SEC action or related action;
• the SEC’s law-enforcement interest in deterring the specific violation; and
• whether, and the extent to which, you participated in your company’s internal compliance and reporting systems.
Accordingly, whistleblowers have an incentive to report internally to their companies’ compliance personnel before going to the SEC. If whistleblowers choose to report internally, then they should also report the same information to the SEC within 120 days. That way, in evaluating a potential award, the SEC will consider the date of the internal report, rather than the date that the whistleblower reported to the SEC. As the SEC puts it, the whistleblower office will “hold your place in line.” This may determine, for example, whether a whistleblower submitted “original information.”
Tip #5: Draft a Tip that Grabs the SEC’s Attention
The SEC Whistleblower Office is relatively small, and thousands of tips are submitted annually. Whistleblowers and their attorneys should tailor their tips to quickly grab the SEC’s attention. While we could write a book on this section alone, here are a few “rules” to keep in mind when drafting submissions:
1. Provide the SEC with a clear roadmap for a successful enforcement action. Do not submit a pile of documents and expect the whistleblower office to figure it out. Instead, walk the SEC, step by step, through specific and credible examples of the violation(s).
2. Demonstrate how the violation is “material.” As mentioned, the SEC investigates only those violations that are serious enough to warrant the use of its limited resources. While demonstrating materiality, be sure to analyze the legal issues and tie them to the specific violations. This should include a discussion of potential challenges that the SEC may encounter and how the agency should address them.
3. If possible, provide the whistleblower office with documentation of the violation. The SEC is much more likely to act on a tip that is supported by strong evidence. The SEC does not, however, want all types of evidence. For example, the SEC does not want information that may violate the company’s attorney-client privilege (e.g., documents, including emails, that involve advice from inside or outside counsel).
What type of evidence should I provide to the SEC?
The SEC says that the best way to make your tip useful is to provide specific, timely, and credible information. The greater the lead, the better. This may include even information whose disclosure violates your company’s policies against disclosing confidential or proprietary information.
A recent decision in Erhart v. Bofi Holdings clarifies that whistleblowers (even whistleblower who signed confidentiality agreements with their employers) are permitted to take “appropriate” company documents that are “reasonable necessary” to disclose fraud to the government. The judge warned, however, that wholesale stripping of confidential documents that is “vast and indiscriminate” may not immunize the whistleblower from potential liability.
Furthermore, the whistleblower should exclude certain types of evidence. For example, the SEC does not want information that may violate the company’s attorney-client privilege (e.g., documents, including emails, that involve advice from inside or outside counsel). If you have completed your due diligence and consulted with an attorney, and you still have questionable evidence, then you may want to notify the SEC so that its taint team can handle that evidence.
What factors does the SEC consider when determining the amount of an award?
Many factors affect the amount of an award. The SEC may increase the amount of an award based on the following factors:
1. The significance of the tip to the success of any proceeding brought against wrongdoers. A tip’s significance depends on, for example:
; -the nature of the reported information, including whether the information’s reliability and completeness allowed the SEC to conserve resources; and
-the degree to which the information supported one or more successful claims brought by the SEC or related actions brought by other regulatory or law-enforcement authorities.
The extent of the assistance that you and your legal representative provided in the SEC action or related action. Considerations include:
-whether you provided ongoing, extensive, and timely cooperation and assistance;
-the timeliness of your initial report to the SEC or to your employer;
-the resources conserved because of your assistance;
-whether you appropriately encouraged or authorized others, who might otherwise not have participated in the investigation or related action, to assist SEC staff;
-your efforts to remediate the harm caused by the violations; and -any unique hardships you experienced as a result of blowing the whistle.
The SEC’s law-enforcement interest in deterring the specific violation. Consider factors such as:
-how much an award enhances the SEC’s ability to enforce the federal securities laws and protect investors;
-the degree to which an award encourages the submission of high-quality information;
-whether the specific violation is an SEC priority; and
-the dangers of the specific violation to investors.
4. Whether, and