The SEC Whistleblower Program has awarded more than $150 million to 42 whistleblowers. Under the program, the SEC issues awards to individuals who provide original information that leads to enforcement actions resulting in monetary sanctions of more than $1 million. Whistleblowers’ awards range from 10 percent to 30 percent of the resulting monetary sanctions. The program allows whistleblowers to report anonymously if represented by counsel.
Many auditors (internal and external) and accountants may incorrectly assume they are not eligible for awards under the program. In certain circumstances, however, the SEC allows these employees to report violations and become eligible for awards. In doing so, the SEC recognizes that auditors and accountants often are in the best position to recognize and expose fraud.
Tip #1: Determine Eligibility
The first step in any successful whistleblower claim for auditors and accountants is to determine eligibility. This requirement can be very complex for these professionals as the SEC Whistleblower Program has a general rule that individuals who are integral to a company’s compliance are not eligible for awards unless an exception applies. These individuals include employees whose principal duties involve compliance or internal-audit responsibilities, employees of public accounting firms, and even the officers, directors, trustees or partners of the relevant entity.
The exceptions to this rule, found in Section 21F-4 of the Securities Exchange Act, allow certain auditors and accountant to report to the SEC and receive awards under the program if:
(A) They reasonably believe the disclosure is necessary to prevent conduct that is likely to cause “substantial injury” to the financial interest or property of the entity or investors;
(B) They reasonably believe the entity is engaging in “conduct that will impede an investigation of the misconduct”; or
(C) At least 120 days have passed either 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.
Notably, the 120-day exception in (C) does not apply to external auditors who obtained the information during the audit of an issuer. Instead, external auditors can immediately report to the SEC after they inform a superior in their accounting firm about improper or illegal client activity and the accounting firm fails to promptly report the securities law violation to the SEC. The first two exceptions also apply to external auditors when the violation is “material.”
So, what exactly do these exceptions mean…?
(A) Information Necessary to Prevent “Substantial Injury” to Financial Interest
In April, 2015, the SEC issued an award of more than $1 million to a compliance professional who “had a reasonable basis to believe that disclosure to the SEC was necessary to prevent imminent misconduct from causing substantial financial harm to the company or investors.” The SEC has not, however, provided detailed guidance on what type of conduct is “likely” to cause “substantial financial harm.” This ambiguity may work in whistleblowers’ favor, as the SEC has used its discretion to issue awards liberally.
In a recent enforcement action, the SEC awarded more than $5.5 million to a whistleblower who failed to meet the requirements for an award. Specifically, the whistleblower did not provide his or her disclosures “in writing,” as the Whistleblower Program requires. The SEC cited “highly unusual circumstances” in deciding to waive the “in writing” requirement for the whistleblower, who had provided information in a manner “expressly requested” by SEC enforcement staff.
(B) Information About “Conduct that Will Impede an Investigation of the Misconduct”
Auditors and accountants can also report to the SEC if their information reveals conduct by the entity that will impede an investigation of the misconduct. While the SEC has not yet issued an award under this exception, the rule appears to be straightforward: if one has evidence of tampering with an internal investigation, then he or she is permitted to report to the SEC immediately. This improper conduct may include destroying documents, influencing witness or concealing material information.
(C) 120-Day Exception
The final, and most concrete, exception applies where at least 120 days have passed since the auditor (excluding external auditors who obtained the information during the audit of an issuer) or accountant reported the information to their supervisor or to another person in the organization who is responsible for remedying the violation (i.e., the audit committee, chief legal officer, chief compliance officer, or their equivalents). Alternatively, the individual may report the information at least 120 days after receiving the information, if it was received under circumstances indicating that any of the aforementioned parties was already aware of it.
Importantly, any whistleblower who chooses this route should document the date of his or her disclosure in, for example, an email. Prior to receiving an award, all whistleblowers must prove their eligibility. Documentation that proves they waited 120 days may be the difference between a multimillion-dollar award or nothing.
Accordingly, eligibility depends on various factors. If you are uncertain about your eligibility, you 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.
Tip #2: Establish a Material Violation
The second step for auditors and accountants is to determine whether they can establish a material violation of federal securities law. Auditors may be surprised they are not the only profession that constantly refers to the “materiality” of issues. In order words, can you show the SEC that your tip concerns a violation that is serious enough to warrant the use of its limited resources?
Whistleblowers have filed more than 18,000 tips with the SEC in the past five years. In a perfect world, the SEC would be able to investigate all legitimate tips and stop even immaterial violations. However, the SEC has limited resources, so it can pursue only the best tips (see Tip #5 on how to get the SEC’s attention with your tip).
If you have a hunch about a violation but lack any proof, then it may be worth investigating further, rather than submitting an incomplete or speculative claim to the SEC. Tips generally fall to the wayside unless they provide “specific” and “credible” information about material violations. That said, most whistleblowers should submit their tips as soon as possible (see Tip #3).
Tip #3: Act Fast
It is never too early to think about maximizing your potential award. Auditors and accountants may receive anywhere from 10 to 30 percent 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 considered by the SEC 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 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 percent 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;
• The whistleblower was aware of the violation but reported to the SEC only after learning of an investigation into the misconduct; and
• There was a legitimate reason for the whistleblower to delay reporting the violation.
For example, on Feb. 28, 2017, the SEC reduced a whistleblower’s award percentage to 20 percent due to the whistleblower’s delayed reporting and connections to the violation. According to the SEC’s order, “the Claims Review Staff reduced the award below from what it might otherwise have been 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. The Claimant did not submit a response challenging the Preliminary Determination.”
Finally, to be eligible for an award, some whistleblowers must take certain actions (e.g., the 120-day exception for auditors in certain circumstances, see Tip #1) 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,” auditors and accountants should be aware of other actions that influence the size of awards. Whistleblowers must learn the rules early on because 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, auditors and accountants have an incentive to report internally to their companies’ compliance personnel before going to the SEC. If whistleblowers choose to report internally (excluding external auditors who obtained the information during the audit of an issuer, see Tip #1) 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 several “rules” to keep in mind when drafting your SEC Form TCR:
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.” 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 supported by strong evidence. 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 “reasonably 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.
4. 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.