On September 23, 2020, the US Securities and Exchange Commission (“SEC”) finalized changes to its highly successful whistleblower program (the “SEC Program”)1. Since it began, the SEC Program has paid over $500 million in total rewards to tipsters. Earlier this June, one anonymous individual was handsomely rewarded with nearly $50 million for detailed evidence about corporate misconduct which resulted in a successful enforcement action against a company. The SEC Program has proven to be a critical tool in the battle against securities fraud.
Awards range between 10 and 30 percent of what has been collected of the monetary sanctions imposed. In deciding the amount of award, the SEC considers several discretionary “Award Factors” such as the significance of the information, the timeliness of the whistleblower’s report, as well as any unique hardships experienced by the whistleblower in coming forward.
The SEC Program is not limited to American whistleblowers. Anyone anywhere in the world can be eligible for an award, so long as they provide significant information regarding serious violations of American federal securities laws. Indeed, in the past several foreign nationals have received awards for tips.
Despite its success, the SEC Program was slated for significant changes stemming from June 2018 rulemaking proposal that planned to reduce the size of whistleblower awards in large cases and impose additional administrative hurdles for submitting tips. The June 2018 proposals were revised and several changes were abandoned after drawing fierce criticism. For example, one of the changes that was dropped was a mechanism that would have allowed the SEC to automatically reduce awards over $30 million. Critics had alleged that caps on awards would reduce the deterrence potential.
More than two years after these amendments were proposed and subsequently amended, they were approved by a split 3-2 vote across party lines. The three Republican commissioners voted to approve the amended rules. The two Democratic commissioners dissented.
Among the changes that were approved were:
1. Allowing awards based on deferred prosecution agreements or non-prosecution agreements entered into by the US DOJ.
2. Clarifying that awards for recoveries in “related actions” are not available when the SEC determines that another agency has an appropriate reward program.
3. Automatically setting awards at the top end of the range when the statutory maximum award of 30 percent is $5 million or less.
4. Clarifying that the SEC has broad discretion when setting the amount of the awards and applying the Award Factors.
5. Revising the definition of “whistleblower” to conform with a Supreme Court case2 which held that whistleblower protections do not protect internal tipsters.
The amended SEC Program has received mixed reactions among whistleblower advocates. While the decision to drop award caps has been praised, there is criticism of the decision to deny internal whistleblowers protections against retaliation.
In Canada, the Ontario Securities Commission has its own whistleblower program (the “OSC Program”), launched in July 2016 to solicit information about Ontario securities law violations. Violations can include activities like insider trading, abusive short selling, accounting fraud or wash trading. The OSC Program offers rewards of up to $5 million for tips leading to enforcement action. Since its launch, the OSC Program has made more than $8 million in awards.
Earlier this month, the OSC issued a press release appealing for tips on abusive short selling practices by certain market participants. Short selling is the practice of selling securities that the seller does not own but has borrowed for a fee. Abusive short sellers may seek to negatively impact the stock price before a public offering or private placement of a company’s securities. For background on Canadian regulatory efforts regarding abusive short selling, see this Siskinds post.
The OSC and Investment Industry Regulatory Organization of Canada have also jointly issued guidance calling for tips from any “Ontario small-cap or micro-cap issuer seeing misconduct in short selling ahead of public offerings or private placements”.
In both the SEC Program and OSC Program, whistleblowers can report anonymously through a lawyer. If you are considering blowing the whistle on corporate fraud or misconduct by American or Ontario reporting companies, please contact Siskinds at [email protected] for confidential whistleblower advisory services. We provide confidential advice on the process and your chances of receiving an award.
1 17 CFR § 240.21F-1 to 240.21F-17.
2 Digital Realty Trust, Inc. v. Somers, 138 S. Ct. 767 (2018).