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Even Bartenders And Personal Trainers Can Receive Whistleblower Awards From The SEC

Even Bartenders And Personal Trainers Can Receive Whistleblower Awards From The SEC

Authored by Jordan A. Thomas, chair of the whistleblower practice at the law firm of Labaton Sucharow

Crafted by an ad agency immediately following 9/11, the slogan “if you see something, say something” took hold with astonishing speed. The tagline reflected a tectonic cultural shift; the serious and growing need for public participation in the nation’s enforcement paradigm. In many ways, those six words have come to define a change in guard in which government has effectively deputized everyday citizens to be its eyes and ears.

The Securities and Exchange Commission sought a similar kind of cooperation with a revolutionary program that provides whistleblowers the ability to report anonymously and receive significant monetary awards and employment protections for tipping the agency to federal securities violations.  Its “deputies” are rewarded handsomely. Since its launch, the program has received tens of thousands of tips and has paid out approximately $158 million from a replenishing account funded by penalties, not taxpayer dollars.   

Remarkably, only about half of whistleblower award recipients were current or former employees of the subject companies, according to a 2015 report to Congress by the SEC. While that figure inched up in the subsequent year, even at our firm’s practice, over one-quarter of whistleblower clients were not employed by the companies on which they reported. So who are these outsiders and how are they changing the game?

Who Can Blow the Whistle?

Almost anyone can be an SEC whistleblower. Eligibility is more defined by the nature of the intelligence, than the source. That is, qualifying information provided by a tipster must be original and derived from either independent knowledge or independent analysis. Generally, where a whistleblower works does not factor into the eligibility calculus. Whistleblowers can be analysts, forensic accountants, secretaries, investors and even journalists. We have also met successful whistleblowers who gained their knowledge from a personal relationships with individuals at the subject companies. The net is wide; even bartenders, hair stylists and personal trainers could be eligible to receive a monetary award if they learn about possible securities violations from their clients.   

This broad eligibility also extends to outside advisors of the company in question. Pursuant to the SEC guidelines, so-called gatekeepers such as officers, directors, attorneys, accountants and compliance professionals can be whistleblowers, although they must satisfy special procedural requirements. For instance, lawyers must carefully navigate their professional responsibilities, such as the attorney-client privilege.

Outsiders In Action: Historical Awards

When it comes to shining a light on corporate wrongdoing outsiders play a vital role. Consider the case of medical device company Orthofix International NV, which earlier this year agreed to pay over $14 million to settle charges that it improperly booked revenues and made payments to Brazilian doctors in violation of the Foreign Corrupt Practices Act. Four former executives also agreed to pay penalties to settle cases related to the accounting failures.

The case is significant because my firm’s clients, the Orthofix whistleblowers, were two independent financial analysts who performed the extensive detective work that enabled the SEC to bring its case. The analysts initially had a hunch that something about the company’s financial performance looked “odd.” They examined publicly available financial information and compared Orthofix’s reported sales and inventory turnover data with that of its peers to unearth evidence of suspicious practices. The whistleblower submission, supported by work from our in-house investigative team, included extensive briefing documents and analysis, which armed the SEC for a successful enforcement action. The analysts will be well rewarded for their diligence and determination: their award is expected to total at least $2.5 million.

In a more recent example, on July 25, 2017, the SEC announced a whistleblower award of nearly $2.5 million to an employee of a domestic government agency. The related SEC order noted that, in general, an employee of a federal, state or local government agency can be a qualified whistleblower. There are some exceptions that apply to employees of certain regulatory agencies or law enforcement organizations, who are charged with uncovering legal violations as part of their responsibilities.

Last year, in announcing an award of more than $700,000 to an outsider who provided the SEC with a detailed analysis that led to a successful enforcement action, Andrew Ceresney, then Director of the SEC’s Enforcement Division, affirmed the important role of outsiders in the new enforcement paradigm: “The voluntary submission of high-quality analysis by industry experts can be every bit as valuable as first-hand knowledge of wrongdoing by company insiders.”

Finally, what was likely the first award issued to an outsider was also one of the largest SEC whistleblower awards ever made. In October 2013, the SEC awarded $14.7 million to an individual who provided key information to halt an ongoing scheme. Years later, in subsequent litigation with his partners, the whistleblower was identified as an investment fund manager who provided information regarding a visa-for-sale scam perpetrated by a Chicago man who raised $147 million from Chinese investors.

What’s A Outsider To Do?

In some respects, outsiders are free from certain pressures that plague employee whistleblowers who anticipate workplace retaliation or may have executed secrecy agreements that attempt to bar the reporting of misconduct. While both are illegal, such instruments and behaviors force employee whistleblowers to operate from positions of fear. Outsiders, on the other hand, can stand up and speak out against wrongdoing from an entirely different platform. And there is no doubt that in crafting the guidelines, the SEC fully intended and expected that outsiders would play a key role in helping to detect and deter securities violations. Indeed, during my tenure at the SEC, I was a part of the small group that developed the statutory and regulatory provisions of the whistleblower program. Recognizing that a panoply of individuals outside of the defendant companies could have actionable intelligence, we designed a program that ensures that virtually all knowledgeable individuals can speak up about possible securities violations—regardless of whether they are insiders or outsiders.    

Nevertheless, it can be tricky for outsiders to move from hunch to knowledge and suspicion to proof. When information about potential violations is based on professional judgment rather than firsthand knowledge, it is mission critical to verify suspicions with in-depth analysis or other tangible (legally acquired) evidence. In our practice, our investigative team is led by a former FBI agent who calls upon seasoned investigators and financial analysts to support our clients’ submissions. This is particularly important for our clients outside the violating company, who want to confirm their suspicions or fill in any evidentiary gaps.

At the end of the day, whether an individual suspects fraud from a distance or is smack dab in the midst of its damaging spiral, law enforcement authorities need the public’s help and should haven’t to go it alone. Frauds are too complex, too far-reaching and our enforcers stretched too thin. This is a public-private partnership of the highest order and the greatest necessity. If tiplines and overt vigilance are the ‘new normal,’ those who report misconduct are the heroes of our generation. And the government will reward their courage.

So much for “tattletales.”

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