On November 15, the Securities and Exchange Commission (“SEC”) issued its first ever Annual Report on the Dodd-Frank Whistleblower Program for the fiscal year 2012.
The report summarizes steps taken by the Office of the Whistleblower (“OWB”) to establish the reporting and rewards program for corporate misdeeds mandated by Congress in the Dodd-Frank Act. The report also provides interesting statistical information on tips received by the Office, actions taken, and the financial rewards paid to the first SEC whistleblowers. Perhaps most telling is the statistic that of some 3,000 claims received by the end of fiscal year 2012 (September 30, 2012), the SEC took action in only 143 cases (i.e. less than 5%). The Office did note that some of the claims submitted during 2012 are still under investigation and presumably may result in enforcement action in 2013 or later.
The first whistleblower reward was made on August 21, 2012, where the whistleblower received an award of 30% (the maximum payout allowed by law) of the amount collected in the Commission’s enforcement action. A footnote in the report indicates that a second individual sought an award based on the same allegations but was denied because the information did not significantly contribute to the enforcement action. This highlights the importance of being the “first to file” in all whistleblower actions. Also of note, the report indicates that though the initial sanctions in the case exceeded $1 million, only $150,000 had been collected by the end of the fiscal year, thus the actual money paid to the whistleblower amounted to $50,000.
The final pages of the report break down the whistleblower tips by allegation type and geographic location. The top three allegations reported for 2012 included: false corporate disclosures and financial statements, fraud involving securities offerings, and securities market manipulation. Foreign Corrupt Practices Act (“FCPA”) claims, initially forecast to be a hotbed of whistleblower activity, ranked sixth, below insider trading and trading and pricing fraud. Among geographic locations, the State of California ranked first (435 tips), followed by New York (246) and Florida (202). Fifty-seven (57) claims originated in Michigan, ranking Michigan in the middle of the pack among the states. Overseas, the U.K. ranked first (74 claims), followed by Canada (46 claims), India (33 claims) and China (27 claims).
In conclusion, the SEC’s initial report discloses a stunning quantity of tips during the first year of the Act (averaging 10 per day); during a time period when many potential whistleblowers do not even know that the provisions exist. I forecast that the amount of claims and enforcement activity will grow as more whistleblowers become aware of the Acts existence and potential scope. I also believe that the percentage of claims originating abroad (currently just under 11%) will increase due to increased financial activity overseas and foreign business environments which may be tolerant of, or even encourage, fraudulent activity.