It's now 10 years after the financial crisis, but cases of illegal activities in the financial services industry and corporate America are still prevalent. The Securities and Exchange Commission (SEC) says it made a record payout of awards to whistleblowers in its latest fiscal year ending in September. Aided by whistleblowers, the agency says that many the firms and individuals it brought cases against "are involved in the financial services industry," including "broker-dealers, investment advisers, or other registered market participants." In its latest Annual Report to Congress, the SEC indicated that the total amount of the 2018 awards to whistleblowers was extraordinary. "The Commission awarded more dollars in FY 2018 to meritorious whistleblowers who provided new and critical information than in all prior years combined. The Commission also received more whistleblower tips in FY 2018 than in any other previous year."
A Record Year For Whistleblower Awards
|Years||Awards||Number of Whistleblowers|
|2018||$168 million||13 individuals|
|All Years||$326 million||59 individuals|
Significance For Investors
Employees of many public companies, including financial firms, are required by law to report possible violations of securities laws to the SEC. The Dodd-Frank Bill, enacted in response to the crisis, added protections against employment retaliation, and set up a program of monetary rewards to whistleblowers who provide critical information that assists the SEC in its enforcement efforts. Since the inception of the program, 67% of the awards were for tips that led to an investigation or examination, and 33% were designated for tips that helped with an existing probe.
Additionally, while 69% of recipients have been current or former insiders of the entities on which they provided tips, 31% were not. Among those who were insiders, 83% indicated that they turned to the SEC only after first raising their concerns internally, or because they believed that their supervisors or compliance personnel were complicit in the wrongdoing to some degree.
Of the $168 million awarded in FY 2018, $133 million was related to three enforcement actions, with seven individuals sharing the payments. Among these was a payment of $39 million, the second-largest individual award in the history of the program. Also, one of these actions resulted in a record $83 million being paid out in total awards, $50 million to be shared by two individuals and $33 million to a single person. The $50 million award was for information that led to the opening of a probe and "ongoing assistance that saved the Commission a substantial amount of time and resources."
The SEC received a record 5,282 tips in FY 2018, up by 18% from FY 2017. The table below shows the most common categories of complaints in FY 2018.
Biggest Whistleblower Complaints
|Category||% of Total|
|Corporate Disclosures and Financials||19%|
|Trading and Pricing||6%|
Other regulatory agencies, both in the U.S. and abroad, also have been active in making awards to whistleblowers or in ordering restitution by their employers in recent years. An employee of JPMorgan Chase & Co. (JPM) reportedly received a $30 million award from the Commodity Futures Trading Commission (CFTC) for a tip on conflicts of interest that were not disclosed to wealthy clients, as reported by Bloomberg. The Occupational Safety and Health Administration (OSHA) forced Wells Fargo & Co. (WFC) to reinstate a employee who was fired for reporting suspected fraudulent behavior to the bank's own internal ethics hotline, and to pay that person $5.4 million in damages, per The New York Times.
Meanwhile, Goldman Sachs Group Inc. (GS) currently is embroiled in controversy over reports that an employee who called that firm's whistleblower hotline about possible insider trading was told to be quiet by senior managers and apparently forced out of the firm, per another NYT article. One of those managers was David Solomon, who took over as CEO last month. A recent whistleblower scandal in the U.K. involves the CEO of Barclays PLC (BCS), who was fined by British regulators for trying to find the identity of an anonymous tipster in his own ranks, per a third NYT article.
Despite the deterrent effect of rising awards, fraudulent behavior is apt to continue. Meanwhile, the SEC has proposed amendments to the Whistleblower Rules that are designed to make the review process more efficient, to ensure that appropriate rewards are offered, and to create a uniform definition of whistleblower. Earlier this year, the Supreme Court ruled in Digital Realty Trust v. Somers that whistleblower protections against employment retaliation only apply if the employee first reports a suspected violation to the SEC, rather than internally. The SEC proposes to make anti-retaliation protections contingent on their receipt of written information from the complainant.