SEC Office of the Whistleblower

US Security and Exchange Commission Office, in Washington, D.C., near Union Station.
SEC Office of the Whistleblower

The U.S. Securities and Exchange Commission (SEC) whistleblower program went into effect on July 21, 2010, when the President signed into law the "Dodd-Frank Wall Street Reform and Consumer Protection Act The same law also established a whistleblower incentive program at the Commodity Futures Trading Commission, currently run by former Sr. SEC Enforcement attorney,[1] Christopher C. Ehrman,[2][3] that rewards individuals who submit tips related to violations of the Commodity Exchange Act.[4] The U.S. Securities and Exchange Commission can make awards ranging from 10 to 30 percent of the monetary sanctions collected, which are paid from its Investor Protection Fund.

In Fiscal Year 2012, 3,001 whistleblower Tips, Complaints, or Referrals (TCR) were received by the TCR system. One award was issued and one application was rejected.

Overview

The U.S. Securities and Exchange Commission had an established Bounty (reward) program for more than 20 years that was designed to reward whistleblowers for insider trading tips and complaints, an Office of the Inspector General's 2013 report found there were very few payments made under the program and the Commission received very few applications from individuals seeking a bounty. The report also found that the program was not widely recognized inside or outside the Commission. Finally, the report determined the SEC’s bounty program was not fundamentally well-designed to be successful.

Sean McKessy the current Chief of the SEC Office of the Whistleblower

Sean McKessy is the current Chief, of the Office of the Whistleblower.[5] According to the U.S. Securities and Exchange Commission's announcement, "Mr. McKessy served as corporate secretary for both Altria Group, Inc. and AOL Inc., and as securities counsel for Caterpillar, Inc. In these roles, Mr. McKessy developed and supervised internal compliance and reporting programs related to the federal securities laws, served as corporate compliance officer, and coordinated the reporting of potential violations to boards of directors."[6]

February 2011, McKessy re-joined the SEC to oversee the Office of the Whistleblower (OWB) in the Division of Enforcement. Mr. McKessy had a previous stint at the SEC, where he was a Senior Counsel in the Division of Enforcement from 1997 to 2000. McKessy had also worked for both Altria Group, Inc. and AOL Inc., & Caterpillar, Inc. McKessy graduated from the University of Notre Dame and the National Law Center at George Washington University.

According to the U.S. Securities and Exchange Commission's announcement, "Mr. McKessy served as corporate secretary for both Altria Group, Inc. and AOL Inc., and as securities counsel for Caterpillar, Inc. In these roles, Mr. McKessy developed and supervised internal compliance and reporting programs related to the federal securities laws, served as corporate compliance officer, and coordinated the reporting of potential violations to boards of directors."[7][8]

On January 17, 2012, the Commission named Jane A. Norberg as the Office’s Deputy Chief.[9] In addition to Mr. McKessy and Ms. Norberg, the Office is currently staffed by eight attorneys, three paralegals, and one program support specialist.

Sean McKessey, Chief of the Securities and Exchange Commission Office of the Whistleblower, emphasizes several key points, including that tips should be as specific, and whistleblowers should feel free, and indeed are encouraged, to update the SEC with anything useful they learn after submitting a tip. In addition, whistleblowers should understand which factors the SEC uses to determine whistleblower award amounts, and understand that SEC investigations and enforcement actions is slow by nature and will require patience.[10]

In a story published in Forbes 6/26/2013 it states that the U.S. Securities and Exchange Commission expects to pay “some extremely significant whistleblower awards” for information that has led to “incredibly impactful cases,” said Stephen Cohen, associate director of the U.S. Securities and Exchange Commission’s Division of Enforcement, at a recent Corporate Crime Reporter conference.[11]

“We are likely to see more awards at a faster pace now that the program has been up and running and the tips we have gotten are leading to successful cases,” said Sean McKessy, director of the SEC’s Whistleblower Office, in an interview with the Wall Street Journal published on 6/26/2013.[12]

Sean McKessy, said he understand's (the public's) skepticism about the program. "I view it as already having been a very significant success, but I understand that people want to see the deliverable. And the deliverable, in our view, is paying people for good information," he said.

On May 31, 2012 McKessy stated to the Huffington Post, that he hardly sees himself as an obstacle to passing out the big bucks. He said he's as eager as anyone for that first payout, and many more to come. "The more, the better, obviously. The higher the amounts, the better. I am a competitive person," he said. "I would like to have a high number and have high dollar values associated with it."[13]

Awards issued

As of August 26, 2014: 16 applications have been rejected and 9 case awards have been presented to ten Whistleblowers. [14]

September 22, 2014: The SEC announced an expected award of $30 million to a foreign whistleblower who provided original information regarding "an ongoing fraud that would have been very difficult to detect.[15]
The award is the largest made by the SEC’s whistleblower program to date.
August 29, 2014: The SEC awarded 20% of recovery to one of two people that filed applications for the related reward, the second applicant was denied. The ruling in regard to the denied applicant involved "organizations in Florida; a report published by the Boca Raton Regional Hospital Foundation; several public news stories about Israeli agents in Australia, a couple who pled guilty to money laundering in 2000, a merger between two banks, and the presidential pardon of Marc Rich.[16]
July 31 2014: The SEC awarded a applicant more than $400,000 after review of a earlier denial it was determined that the whistleblower did in fact qualify for the award under the require criteria. [17][18]
July 22 2014: The SEC issues an "award claim" awarding three people a portion of recovered damages in an unnamed case. Claimant #1 was awarded fifteen percent (15%), Claimant #2 was awarded ten percent (10%), and Claimant #3 shall received five percent (5%) of the collected fines penalties and disgorgement's.[19]
June 3 2014: SEC Announces $875,000 to Two Whistleblowers Who Aided Agency Investigation[20]
April 4, 2014: SEC Announces Additional $150,000 Payment to Recipient of First Whistleblower[21] Award[22]
October 30, 2013: SEC Rewards Whistleblower With $150,000 Payout. The award recipient, who does not wish to be identified, provided significant information that allowed the SEC to quickly open an investigation and obtain emergency relief before additional investors were harmed.[23]
October 1, 2013: The Securities and Exchange Commission announced an award of more than $14 million to a whistleblower whose information led to an SEC enforcement action that recovered substantial investor funds. [24][25] SEC Docket number 2013 - 4. [26]
August 30, 2013: The first payments were made to three whistleblowers who will receive a total of 15 percent of the money that the U.S. Securities and Exchange Commission ultimately collects from its enforcement action against sham hedge fund who defrauded investors of $2.7 million and plead guilty on December 12, 2012. To date, the U.S. Securities and Exchange Commission has collected &170,000 on these judgments, so a small payment of $25,000.00 was made to the whistleblowers. The agency said the claimants are also eligible to apply for a portion of the $800,000 already collected by the Department of Justice in a related action.[27]
August 21, 2012: A whistleblower who helped the Securities and Exchange Commission stop a multi-million dollar fraud will receive nearly $50,000 — the first payout from a new U.S. Securities and Exchange Commission program to reward people who provide evidence of securities fraud.[28] A second application was denied.[29][30]
No whistleblower appeals have been filed with the Federal Court of Appeals. However, one whistleblower has appealed a preliminary determination made by the Claims Review Staff, and that ruling was later overturned by the commission.[31]

Whistleblower process

The Whistleblower process includes the following phases:

Phase 1 – Intake/triage

During Phase 1 of intake and triage, whistleblowers submit a complaint to the SEC. Designated Division of Enforcement staff review the complaint to determine whether it should be assigned for further investigation or based on their initial review no further action (NFA) is warranted. Whistleblowers can submit a complaint using SEC form TCR to the U.S. Securities and Exchange Commission through its public website, by mail, or by SEC Fax (703) 813-9322. TCR system can also be accessed at SEC TCR reporting system

Online submissions are automatically uploaded into the U.S. Securities and Exchange Commission’s Tips, Complaints, and Referrals system. Complaints received by mail and fax are manually entered into the TCR system by the Tips, Complaints, and Referrals intake group. The Office of Market Intelligence (OMI), located within Enforcement, reviews all Tips, Complaints, and Referrals and whistleblower complaints Enforcement receives.

OMI triages all Tips, Complaints, and Referrals received by Enforcement. When Office of Market Intelligence determines a complaint warrants further investigation, OMI assigns the complaint to one of the U.S. Securities and Exchange Commission’s 11 regional offices, an Enforcement specialized unit, or an Enforcement Associate Director group located in the U.S. Securities and Exchange Commission’s Headquarters. When it is determined that a complaint does not warrant further investigation or the complaint does not fall into Enforcement’s priorities, Office of Market Intelligence will designate the complaint as No Further Action. No Further Actions get a second review before a final decision is made to close the complaint. In some cases NFAs may be referred to an external government agency or other agency for action. On occasion the Office of the Whistleblower Chief will determine On occasion the Office of the Whistleblower Chief will determine that a whistleblower Tips, Complaints, and Referrals is sufficiently specific, timely and credible which results in the Tips, Complaints, and Referrals being expedited through the triage process and assigned to investigative staff by Office of Market Intelligence.

Phase 2 – Tracking

During Phase 2, Office of the Whistleblower personnel monitor whistleblower submissions that are assigned to investigative staff. Also, during this Phase, Office of the Whistleblower ––tracks whistleblower cases to document the whistleblower’s cooperation and the content and helpfulness of whistleblower information, answers questions, and aids Enforcement staff by providing subject matter expertise regarding the whistleblower program.

Furthermore, Office of the Whistleblower documents information needed to process whistleblower awards. The office conducts quarterly conference calls with investigative staff to reconcile items that are tracked, with work that is assigned and resourced, and to discuss the quality of each whistleblower complaint.

A whistleblower complaint results in a successful action against a defendant if the monetary sanctions:

Phase 3 – Claim for an award

During Phase 3, a whistleblower can claim an award if information he or she provided to the Office of the Whistleblower leads to, or significantly contributes to, a successful U.S. Securities and Exchange Commission action. This action could result in the whistleblower receiving a monetary award if the sanctions ordered are over $1 million. Office of the Whistleblower posts a Notice of Covered Action on its website for cases that result in monetary sanctions over $1 million. Whistleblowers have 90 days to submit a claim for an award using the Form WB-APP (application). Office of the Whistleblower ’s website provides a notice date and a claim due date for each covered whistleblower action.

As noted below, whistleblowers receive their awards from the Securities and Exchange Commission Investor Protection Fund (“Fund”) established pursuant to Section 922 of the Dodd-Frank Act.

When the Office of the Whistleblower or Enforcement staff knows that a whistleblower has provided a tip that led or significantly contributed to a successful action, they should contact the whistleblower or the attorney for the whilstleblower and inform him or her that a Notice of Covered Action has been posted on its website in connection with the tip or information he or she provided. The Office of the Whistleblower should advise the whistleblower on the process and timeline to apply for the award.

Office of the Whistleblower staff analyze the claims for awards to assess whether the whistleblower satisfied the eligibility and definitional requirements for an award. When a whistleblower is determined to have satisfied these criteria, Office of the Whistleblower then uses four positive and three negative factors to derive a recommended award range between 10 to 30 percent of the dollar amount that was collected in the action.

Office of the Whistleblower process for its analyses includes reviewing and comparing the facts of a claim to the whistleblower statute and regulations, reviewing relevant databases for information regarding the case and subsequent enforcement action, interviewing Enforcement staff regarding the case and the whistleblower’s actions, interviewing the whistleblower and/or their counsel, and conducting due diligence and legal research to ensure proper consideration is given to each award claim.

The positive factors considered in recommending an award’s percentage include the significance of the whistleblower information, assistance and cooperation from the whistleblower in the investigation and proceedings, any law enforcement interest advanced by a potentially higher award, and whether the whistleblower cooperated with the company’s internal compliance system in connection with the matter. The negative factors considered include the whistleblower’s culpability, an unreasonable delay in reporting wrongdoing, and the whistleblower’s interference with the company’s internal compliance system. Though Office of the Whistleblower considers both these positive and negative factors, the office has discretion in making award recommendations.

When making an award recommendation, Office of the Whistleblower submits a recommendation package to Enforcement’s Claims Review Staff. They then meet with the Claims Review Staff. A preliminary determination is prepared and forwarded to the whistleblower. A whistleblower has 30 days to request a copy of the record the Claims Review Staff based its decision on and/or to request a meeting with Office of the Whistleblower staff.

Should a whistleblower’s claim be denied in the preliminary determination phase and the whistleblower fail to submit a timely response, the preliminary determination becomes the U.S. Securities and Exchange Commission’s final order. If the whistleblower submits a timely response to appeal the preliminary determination decision, Office of the Whistleblower’s staff will assess the appeal and make a recommendation to the Claims Review Staff. The Office of the Whistleblower then meets again with the Claims Review Staff and the Claims Review Staff makes a proposed final determination. Office of the Whistleblower then notifies the Commission of the proposed final determination. The Commission has 30 days to review this determination. Any Commissioner can request within 30 days of receiving the proposed final determination notification, that the proposed final determination be reviewed by the Commission. If no Commissioner objects during the 30-day window, the proposed final determination becomes the final order and Office of the Whistleblower then provides a copy of the final order to the whistleblower or the whilstleblower's attorney.

After the final order has been issued, if a whistleblower has gotten an award that falls between 10 to 30 percent of the monetary sanctions collected in the action, the process is complete and the amount is not subject to appeal. However, if the whistleblower did not receive an award, or the award percentage is outside the statutory 10 to 30 percent that is collected from an action, the whistleblower may appeal the decision at the Federal Court of Appeals level. The Office of the General Counsel handles these appeals for the Commission.

Whistleblower awards are paid out of the Investor Protection Fund that was established in the Dodd-Frank Act. Payments from the IPF are made through the U.S. Securities and Exchange Commission’s Office of Financial Management and are based on amounts that were collected from each individual case. A single payment can be made to the whistleblower if all monies are collected at the time the final order is issued, or the payment can occur on a rolling basis if the monies are collected over time, after the final order is issued.

To file a claim for a whistleblower award, one must file Form WB-APP, Application for Award for Original Information Provided Pursuant to Section 21F of the Securities Exchange Act of 1934. You must sign this form as the claimant and submit it to the Office of the Whistleblower by mail or fax.

Updating whistleblowers about the status of their applications

Below are the ways U.S. Securities and Exchange Commission Office of the Whistleblower communicates with whistleblowers after they submit an award application to the U.S. Securities and Exchange Commission:

Notwithstanding the representations of the SEC's Office of the Whistleblower, critics of the office's policies and procedures warn that there is a disturbing lack of communication with whistleblowers and their lawyers. See, for example,"SEC Whistleblower Program Is A Black Hole Of Despair" (BrokeAndBroker.com Blog, April 9, 2015)[32] In the preamble to the BrokeAndBroker article, veteran industry regulatory lawyer Bill Singer noted:

°As part of my law practice, I represent whistleblowers, and for several years, I have been representing one such client before the Securities and Exchange Commission ("SEC") and dealing with the federal regulator's Office of the Whistleblower ("OWB"). Frankly, the experience has been incredibly frustrating. I simply cannot persuade the OWB that it needs to adjust its mind-set and understand that my client is not an adversary or a defendant/respondent in a criminal/regulatory case. If OWB's attitude doesn't change, it will undermine the SEC's Whistleblower Program and dissuade informants from coming forward and deter lawyers from representing those individuals on a contingency basis.
″As a former regulator with two Wall Street self-regulatory organizations, I fully understand and respect the need for prosecutors and regulators to scrupulously maintain whatever confidentiality is mandated for investigations and trials/hearings. Since I represent individuals and entities that are often industry defendants/respondents and I also represent defrauded public customers, I am particularly vested in ensuring that the regulatory and criminal justice processes remain legal and ethical. I understand the rules of the game and I honor the rulebook. It is in that spirit that I urge the SEC to implement more deadlines within its Rule 21F. Also, I urge the SEC to investigate its Office of the Inspector General ("OIG") and determine whether the use of third-party service providers is appropriate for the intake of complaints directed to that office.°

Office of the Inspector General Evaluation

In the Office of the Inspector General Evaluation of the Securities and Exchange Commission's Whistleblower Program, Jan, 18 2013 the program was outlined by the Inspector General providing some insight into it inner workings. Section 922 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank), amended the Securities Exchange Act of 1934 (Exchange Act) by adding Section 21F, “Securities Whistleblower Incentives and Protection.” Section 21F directs the U.S. Securities and Exchange Commission to make monetary awards to eligible individuals who voluntarily provide original information that leads to successful Commission enforcement actions resulting in the imposition of monetary sanctions over $1,000,000, and certain related successful actions. The U.S. Securities and Exchange Commission can make awards ranging from 10 to 30 percent of the monetary sanctions collected, which are paid from the U.S. Securities and Exchange Commission’s Investor Protection Fund. In addition, Section 924(d) of Dodd-Frank directed the U.S. Securities and Exchange Commission to establish a separate office within the Commission to administer the whistleblower program. In February 2011, the Commission established the Office of the Whistleblower to carry out this function.

On May 25, 2011, the Commission adopted final Regulation 21F to implement the provisions of Section 21F of the Exchange Act. Regulation 21F became effective on August 12, 2011. Among other things, Regulation 21F defines terms that are essential to the whistleblower’s program operations, establishes procedures for submitting tips and applying for awards – including appeals of Commission determinations, and whether and to whom to make an award; describes the criteria the U.S. Securities and Exchange Commission will consider in making award decisions, and implements Dodd-Frank’s prohibition against retaliation for whistleblowing.

Use of the "Investor Protection Fund"

In 2012, the Investor Protection Fund was used to pay one whistleblower award which amounted to approximately $46,000. As mentioned, the fund is also used to pay for OIG’s employee suggestion program activities which amounted to $112,000 in fiscal year 2011 and $70,000 in fiscal year 2012. Even though some expenditures were paid from the fund, its balance has not substantially changed since the fund was established.

Establishment of the fund

The Investor Protection Fund was established in the fourth quarter of fiscal year 2010 to be available to the U.S. Securities and Exchange Commission, without further appropriation or fiscal year limitation for paying awards to whistleblowers and funding the work activities of Office of Inspector General’s employee suggestion program.

The U.S. Securities and Exchange Commission is required to annually request and obtain apportionments from Office of Management and Budget to use these funds. OFM has developed policies and procedures for Investor Protection Fund that include a description of the whistleblower awards process, financial reporting requirements, budget request procedures, and procedures for replenishing the Investor Protection Fund.

The Investor Protection Fund was first established in August 2010 with approximately $452 million of non-exchange revenue that was transferred to the fund from the U.S. Securities and Exchange Commission’s disgorgement and penalties deposit fund.

In the U.S. Securities and Exchange Commission’s fiscal year 2013 apportionment, nearly $452 million was still available in Investor Protection Fund. Since its establishment the Investor Protection Fund’s balance has not fallen below $300 million and no additional qualifying collections have been deposited into it.

If the Investor Protection Fund balance drops below $300 million, Enforcement will replenish it by identifying qualifying receipts for deposit.

Currently, the fund is earning interest through short-term investments with the Bureau of Public Debt.

Freedom of Information Act exemption

There are nine Freedom of Information Act exemptions the Commission and other federal agencies can use to deny the release of certain information the public may request. Exemption 3, 5 U.S.C. Section 552(b)(3)(B) or (b)(3) pertains to information that is prohibited from disclosure by another federal law.

Forms

SEC form TCR to submit information to the SEC Fax (703) 813-9322
WB-APP SEC Whistleblower Award Application to collect a reward from the SEC Fax (703) 813-9322

External links

Also see

Meet the SEC's 6500 Whistleblowers

References

  1. ↑ https://www.linkedin.com/pub/christopher-ehrman/5/b3b/ba
  2. ↑ http://blogs.wsj.com/riskandcompliance/2013/10/18/qa-christopher-ehrman-director-cftcs-whistleblower-office/
  3. ↑ http://www.cftc.gov/PressRoom/PressReleases/pr6647-13
  4. ↑ "Frequently Asked Questions :: SEC Office of the Whistleblower". Sec.gov. 2010-07-21. Retrieved 2013-06-21.
  5. ↑ http://dealbook.nytimes.com/2013/04/23/hazy-future-for-s-e-c-s-whistle-blower-office/?_r=0
  6. ↑ McCranie, Finch (2011-02-18). "SEC Whistleblower Office Has First Director-Sean McKessy". Whistleblower Lawyer Blog. Retrieved 2013-06-21.
  7. ↑ McCranie, Finch (2011-02-18). "SEC Whistleblower Office Has First Director-Sean McKessy". Whistleblower Lawyer Blog. Retrieved 2013-06-21.
  8. ↑ http://www.pli.edu/Content/Faculty/Sean_McKessy/_/N-4oZ1z12w61?ID=PE663271
  9. ↑ http://www.sec.gov/News/PressRelease/Detail/PressRelease/1365171482232#.VBxbndiBHX4
  10. ↑ "Sean McKessey, Chief of the SEC Office of the Whistleblower, Discusses the SEC’s Process for Handling Tips From Whistleblowers - Shapiro Haber & Urmy LLP". Shulaw.com. Retrieved 2013-06-21.
  11. ↑ http://www.forbes.com/sites/erikakelton/2013/06/26/sec-officials-on-whistleblower-rewards-the-best-is-yet-to-come/ Forbes.com: SEC Whistleblower Rewards: Larger Ones Are Coming Soon
  12. ↑ SEC Whistleblower Rewards: Larger Ones Are Coming
  13. ↑ http://www.huffingtonpost.com/2012/05/31/sec-whistleblower-reward-payout_n_1560044.html SEC Whistleblowers Waiting For Big Payouts As Rumors Of First Award Mount
  14. ↑ http://www.sec.gov/about/offices/owb/owb-final-orders.shtml Final Orders of the Commission
  15. ↑ "SEC Announces Largest-Ever Whistleblower Award". SEC.gov. SEC. Retrieved 29 September 2014.
  16. ↑ http://www.sec.gov/rules/other/2014/34-72947.pdf
  17. ↑ http://www.sec.gov/rules/other/2014/34-72727.pdf
  18. ↑ http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370542578457#.U93eqNiBHX4
  19. ↑ http://www.sec.gov/rules/other/2014/34-72652.pdf| Release No. 72652 | July 22, 2014 | WHISTLEBLOWER AWARD PROCEEDING
  20. ↑ http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370541980219#.U4_LRNgnIfg SEC Awards $875,000 to Two Whistleblowers Who Aided Agency Investigation
  21. ↑ http://www.sec.gov/rules/other/2012/34-67698.pdf
  22. ↑ http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370541413136#.U3PAadgnK74 SEC Announces Additional $150,000 Payment to Recipient of First Whistleblower Award
  23. ↑ http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370540158194#.UnPCFnzn8fg SEC Rewards Whistleblower With $150,000 Payout
  24. ↑ http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370539854258#.Ukuaskrn9jo| SEC whistleblower awarded 14 million
  25. ↑ http://www.sec.gov/rules/other/2013/34-70554.pdf| SEC Order on the award
  26. ↑ http://www.sec.gov/litigation/admin/2012/ia-3520.pdf
  27. ↑ http://www.law.com/corporatecounsel/PubArticleCC.jsp?id=1202606819891&Another_SEC_Whistleblower_More_On_the_Way&slreturn=20130521211324
  28. ↑ http://www.sec.gov/news/press/2012/2012-162.htm whistleblower will receive nearly $50,000
  29. ↑ http://www.sec.gov/rules/other/2012/34-67699.pdf The Preliminary Determination that the Commission should deny award
  30. ↑ http://www.sec.gov/rules/other/2013/34-69749.pdf ORDER DETERMINING WHISTLEBLOWER AWARD CLAIM
  31. ↑ http://www.sec.gov/rules/other/2014/34-72727.pdf
  32. ↑ http://www.brokeandbroker.com/2735/sec-oig-owb/> SEC Whistleblower Program Is A Black Hole Of Despair (BrokeAndBroker.com Blog, April 9, 2015)