Summer may be coming to an end, but whistleblower awards are far from over. On August 23, 2024, the Securities Exchange Commission (“SEC”) announced payment of over $98 million total to two whistleblowers who provided the SEC with information that led to successful enforcement actions – the fifth largest since the program’s inception in 2011, which to date has awarded nearly $1.8 billion to whistleblowers. This year the Department of Justice (“DOJ”) has followed in the SEC’s footsteps and created the Criminal Division Corporate Whistleblower Awards Pilot Program which allows for financial awards to whistleblowers. With increasing external incentives for speaking up on potential misconduct, there is also a need for similar internal reporting incentives.

Existing Programs and Incentives

SEC

The SEC’s whistleblower program was established to “incentivize whistleblowers to report specific, timely and credible information about possible federal securities laws violations.” The SEC requests information related to:

• Ponzi schemes, pyramid schemes, or High-Yield Investment Programs
• theft or misappropriation of funds or securities
• manipulation of a security’s price or volume
• insider trading
• fraudulent or unregistered securities offering
• false or misleading statements about a company (including false or misleading SEC reports or financial statements)
• abusive naked short selling
• bribery of, or improper payments to, foreign officials
• fraudulent conduct associated with municipal securities transactions or public pension plans
• Initial Coin Offerings and cryptocurrencies

Whistleblower payments can range from 10 to 30% of the money collected when the monetary sanctions exceed $1 million. The payments are made from an investor protection fund that is financed entirely through monetary sanctions paid to the SEC by violators. 

DOJ

Under the DOJ’s Pilot Program, a whistleblower who provides “original and truthful information about corporate misconduct that results in a successful forfeiture may be eligible for an award.” The DOJ requests information related to: 

• certain crimes involving financial institutions, from traditional banks to cryptocurrency businesses
• foreign corruption involving misconduct by companies
• domestic corruption involving misconduct by companies
• health care fraud schemes involving private insurance plans

If the information provided results in a successful prosecution that includes criminal or civil forfeiture exceeding $1 million in net proceeds, the whistleblower may be eligible to receive a percentage of the forfeited assets.

Internal Incentives

In addition to the incentive of avoiding a government investigation, companies are increasingly considering – and implementing – internal incentives for violation reporting. From promoting a “speak-up” culture to enhancing whistleblower retaliation policies, including the evaluation of ethical behavior in performance evaluations, promotions, compensation, and bonuses, the benefits to addressing concerns early are growing.

In addition, under the DOJ’s Pilot Program, companies are incentivized to self-report once a violation has been reported and internally investigated. For example, if a company self-reports within 120 days of receiving an internal complaint, the company “may be eligible for a presumption of a declination under the Criminal Division’s Corporate Enforcement and Voluntary Self-Disclosure Policy if the company reports to the Department before the Department contacts the company.” 

Under the SEC’s whistleblower program, whistleblowers are also incentivized to first report their concerns internally, as participating in the company’s internal compliance program can be considered in determining the award amount. 

Protections Against Whistleblower Retaliation

Following the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the SEC implemented rules enabling the Commission to take legal action against employers who retaliate against whistleblowers. This means that employers may not “discharge, demote, suspend, harass, or in any way discriminate against an employee in the terms and conditions of employment” who has reported conduct to the SEC.

Amendments to the SEC’s whistleblower program rules also require individuals to report information about possible securities laws violations to the SEC “in writing” before the retaliatory conduct occurred to qualify for the retaliation protection.

The DOJ’s Pilot Program guidance also provides for similar anti-retaliation protection. According to DOJ guidance, the DOJ “will consider any retaliation in assessing whether a company or individual cooperated with or obstructed the Department’s investigation and may, in its sole discretion, decline to award the company any cooperation credit in connection with any corporate resolution and/or institute appropriate enforcement action in response to any retaliation.”

Key Take Aways

There are strong incentives to whistleblowing, including the potential for a significant financial payout from the SEC’s whistleblower program and the DOJ’s new Pilot Program. There are also incentives for employees to report misconduct through their company’s internal channels first. Companies are wise to regularly review and enhance their whistleblower policies, promptly and robustly investigate any malfeasance reports, and adjust their compliance programs. Creating strong internal reporting mechanisms and incentives, while challenging to undertake, emphasizes the expression – an ounce of prevention can be worth a pound of cure.