Today Better Markets issued a compelling report documenting the success of the SEC Whistleblower Program titled SEC’s Whistleblower Program: A $5 Billion Success Story With a Bright Future (Report).  Better Markets is a non-profit, non-partisan, and independent organization that promotes the public interest in the financial markets and supports the financial reform of Wall Street.  The Report identifies how the program “has profoundly improved the SEC’s ability to detect, punish, and deter securities fraud while helping injured investors recover their losses.”

Citing data from the SEC Whistleblower Program’s FY 2021 annual report, the Better Markets’ Report notes that the 52,400 SEC whistleblowers tips submitted to the SEC since the inception of the program have resulted in the SEC obtaining nearly $5 billion in monetary sanctions against fraudsters who violated securities laws and SEC rules, including more than $3.1 billion in disgorgement of ill-gotten gains and interest.  And of that amount, more than $1.3 billion has been, or is scheduled to be, returned to harmed investors.

In addition, the Report identifies the following key benefits of the program:

• Whistleblowers “help halt violations of law that the SEC might never uncover, thus preventing hundreds or thousands of investors from suffering losses, and they help recover funds for the benefit of already-victimized investors.”

• Whistleblower tips expand the Commission’s knowledge base and provide insight into fraudulent activities harmful to U.S. investors, enabling the SEC to optimally target its limited enforcement and examination resources.

• Whistleblowers save the SEC (and by extension taxpayers), a government agency with limited resources, a significant amount of investigative time and money. “Almost certainly, many of these tips led to enforcement actions that would not have even been initiated absent the information, and many tips ensured that enforcement actions succeeded that otherwise would have failed or produced more modest results.”

• Whistleblowers “also provide important information about violations of law even when the activities are taking place or being planned in countries where the SEC lacks jurisdictional authority.”

Better Markets’ findings are consistent with our experience representing whistleblowers at the SEC.  Our clients’ courageous whistleblowing has helped halt more than $800 million in Ponzi schemes and other investment fraud schemes, assisted the SEC in returning fraudulently obtained funds to harmed investors, and punished accounting violations at public companies.  And while our clients are highly motivated to combat fraud and protect investors, the opportunity to get an SEC whistleblower reward is critical to encourage them to take the significant risk of stepping forward to report fraud and assist with the investigation and prosecution of fraud schemes.

Countering Misconceptions About the SEC Whistleblower Program

The Report counters the misconception that whistleblowers are receiving undeserved windfalls at the expense of taxpayers or, worse, ripped-off investors by pointing out that a whistleblower is eligible for an award only when they (1) voluntarily provide original information to the Commission; (2) their original information leads to a successful case; (3) that case results in a penalty or sanction of over $1 million; and (4) the Commission actually collects those sanctions.  These requirements “ensure that whistleblowers only collect awards when they offer information that is actually useful to a truly successful Commission enforcement action that actually results in a real monetary recovery” and “prevent unscrupulous actors from collecting awards for information they were obligated to provide in the first place.”

In addition, the Report clears up an erroneous assumption that whistleblowers receive a windfall as a result of being in the right place at the right time.  The Report correctly notes:

Whistleblowers face considerable risks and hardships which can be career-ending, result in the destruction of professional relationships, and cause significant financial hardship. It obviously requires the prospect of a substantial award to persuade most people to assume these enormous risks. Without adequate financial incentives, few people would come forward and undertake those burdens for the mere possibility of an award.

This is an important point in that many of our whistleblower clients have suffered workplace retaliation and in some instances, our clients were legitimately concerned about their safety.

Future of the SEC Whistleblower Program

The Report discusses how some of the September 2020 amendments to the SEC’s whistleblower rules undermine the efficacy of this highly successful program, “without a persuasive legal or investor protection justification” and praises Chairman Gensler for his announced intention to issue proposed revisions to two of the September 2020 rules to address concerns that these recent amendments would discourage whistleblowers from coming forward.

The Report concludes by predicting a bright future for the SEC whistleblower program:

Due to the enforcement efforts made possible by the whistleblower program, investors have more confidence in the securities markets. That in turn helps ensure that investors can safely invest in markets and reap the returns they offer, while entrepreneurs and companies have access to the capital they need to start and grow their businesses. Fortunately, the Commission has committed to maintaining a robust whistleblower program and reversing earlier rule changes and guidance that undermined the program in important respects. With those steps, the whistleblower program will remain on track as a robust and effective law enforcement tool to be used against those who would violate the law and prey on others for personal gain.

While we agree that the SEC Whistleblower Program will continue to be a critical enforcement tool, there are challenges for the program that should be addressed to ensure its continued success.  Those include:

• SEC whistleblowers have very limited, weak protection against retaliation. Due to a drafting error in the Dodd-Frank Act, the whistleblower protection provision that was intended to provide SEC whistleblowers with a remedy to combat retaliation does not protect internal disclosures.  In the wake of the Supreme Court’s Digital Realty decision, Congress should enact stronger protections for SEC whistleblowers, that would include, at a minimum, protection for internal whistleblowing, the right to a jury trial, protection against post-employment retaliation, a “contributing factor” causation standard, and the opportunity to recover compensatory damages.  If companies want whistleblowers to report internally rather than bypassing internal compliance programs to report directly to the SEC, then they should support giving whistleblowers a credible remedy to combat retaliation.

• The SEC Whistleblower Program could become a victim of its own success. In FY 2021, the SEC received more than 12,200 whistleblower tips—the largest number of whistleblower tips received in a fiscal year, which represents an approximate 76% increase over FY 2020.  An increase in tips without the resources necessary to investigate tips poses a risk that the SEC will be unable to pursue tips revealing ongoing fraud schemes and miss the opportunity to protect investors.  The SEC’s FY 2022 Congressional Budget Justification reveals a staggering workload in Enforcement and in all areas of the SEC’s operations.  For FY 2021, the SEC received approximately 28,000 tips and complaints, opened approximately 1,000 investigations while continuing to investigate 1,610 matters, and was litigating approximately 1,715 administrative proceedings and 2,100 civil proceedings.

• With a budget of under $2 billion, the SEC is charged with policing increasingly complex and rapidly evolving securities markets. It oversees approximately $100 trillion in annual securities trading on U.S. equity market and the activities of more than 28,000 registered entities, 24 national securities exchanges, nine credit rating agencies, and seven active registered clearing agencies, as well as the PCAOB, FINRA, MSRB, SIPC, and FASB.  As Congress considers the SEC’s annual appropriations, it should bear in mind that weak enforcement of the federal securities laws has significant consequences for investors and the economy.  Better Markets estimates the 2008 financial crash and the economic catastrophe it caused cost the U.S. more than $20 trillion.  A more effective cop on the beat could have detected prevalent fraud that caused the financial crisis, especially if insiders at banks had been incentivized to report to the SEC the misleading financial reporting by banks that failed to accurately disclose the risks posed by mortgage-backed derivatives, collateralized debt obligations, and credit default swaps.

In a letter to SEC Chair Gensler, Taxpayers Against Fraud offers suggestions to strengthen the SEC whistleblower program.  Fortunately, current SEC leadership supports the SEC Whistleblower Program and appears inclined to increase the SEC’s collaboration with whistleblowers to effectuate the SEC’s mission.  In prepared remarks commemorating National Whistleblower Day, SEC Chair Gensler stated: “We must ensure that whistleblowers are empowered to come forward when they see misbehavior; that they are appropriately compensated according to the framework established by Congress; and that those who report wrongdoing are protected from retaliation.”  While the underfunding of the SEC remains a significant challenge, we share Better Market’s optimism that the SEC Whistleblower Program will continue to be a game-changer for the SEC.