SEC Reminds Whistleblowers that Time is Money

by Mike Brockland 

Recently, the SEC announced a whistleblower award of at least $325,000 to a former employee of an investment firm who provided the SEC with specific information that led to an investigation and successful enforcement action. While the award is substantial, the SEC used the announcement of the award as an opportunity to let potential whistleblowers know that it is placing a premium on early submission of high-quality, credible tips.

To motivate those with insider knowledge of securities violations, the SEC may provide monetary awards to individuals who come forward with specific and high-quality original information that leads to a successful enforcement action in which over $1 million in sanctions is ordered. Depending on various factors, including the amount of assistance, the significance of the information, and the law enforcement interests at stake, whistleblowers can receive between 10% and 30% of the money collected.

In this particular case, the SEC acknowledged that the whistleblower provided a detailed description of the misconduct and specifically identified individuals behind the wrongdoing. However, the SEC found the whistleblower’s delay in reporting the securities violations to be unreasonable under the circumstances. The delay took place entirely after the creation of the SEC’s whistleblower program in 2011, which was designed to bolster the incentives and protections offered to those who report securities violations. Additionally, during the period of the delay, the investment firm obtained more ill-gotten gains, which increased the monetary sanctions award on which the whistleblower award was based.

It’s doubtful that the SEC thought the whistleblower here was attempting to game the system by allowing the fraudulent conduct to continue just to increase his or her award. But the Commission is not oblivious to the possibility that someone else might.

It is also notable that the Commission was relatively unmoved by any suggestion that the personal and professional risks whistleblowers face would justify a delay in reporting violations, noting the increased whistleblower incentives and protections (e.g. anti-retaliation) enacted in the Dodd-Frank Act were designed to counter-balance such risks.

So, how long of a delay is too long? The SEC didn’t say. But the message is clear—individuals with inside information about potential securities violations should act quickly. Delays in reporting wrongdoing, even if “relatively limited” in duration, could significantly reduce a whistleblower award.

Whether an individual decides to report the wrongdoing internally or directly to the SEC, it is often beneficial for him or her to engage counsel early on to help navigate through the process.

After all, time is money.