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SEC’s Whistleblower Program Trudges Forward

Not everyone can see the truth, but he can be it.

-Franz Kafka

Section 922 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act) amended the Securities Exchange Act of 1934 by adding the Securities Whistleblower Incentives and Protection. The new section requires that the Securities and Exchange Commission (SEC) provide financial awards to private persons who volunteer information that leads to successful SEC enforcement actions that result in sanctions over $1,000,000.

The bite of the program

On February 2011, the SEC appointed Sean X. McKessy to lead the Office of the Whistleblower (OWB) which consists of eight lawyers, three paralegals and one program support specialist. To promote its enforcement of SEC regulations, the OWB is empowered to give financial awards to whistleblowers that give information that lead to successful SEC enforcement resulting in the imposition of penalties over $1,000,000. The award to the whistleblower is 10 to 30 percent of the penalties collected.

Report of Fiscal Year 2012

During 2012, 3,001 whistleblower tips were received.  The most common complaint categories were corporate disclosures and financials, fraud and manipulation.

On August, 21, 2012, the OWB awarded its first whistleblower, Dee Dee Stone, who provided a tip about an ongoing multi-million dollar fraud. She later handed over documents that enhanced the SEC’s investigation and led to the filing of an emergency action in federal court to stop the fraud. With the whistleblower’s assistance, the court ordered more than $1 million in penalties.  Stone received the maximum award of 30 percent.

Reasons for sluggishness

Critics point to the OWB’s sluggish start of 3,000 tips and one award and contrast it with the IRS’s highly successful whistleblower program that paid 128 claims in 2012.  One reason for the SEC’s slow whistleblower program is that in order to be eligible for an award, a whistleblower must give new information that leads to successful enforcement that yields more than $1 million in fines.  Comparable whistleblower programs do not have this restriction.

Another cause of the SEC’s slow whistleblower program is that it allows awards of 10 percent to 30 percent of the recoveries directly from the whistleblower’s information.  The Internal Revenue Service’s whistleblower program gives 15 to 30 percent from all of the recoveries from the entity or individual named in the initial complaint.

Blowing the whistleblower on a multi-million dollar hedge fund or major corporation issuing stock can be a daunting task. Consultation with a Texas whistleblower lawyer may help you understand your rights.

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