SEC Whistleblowing

Remember that old saying “snitches get stitches”? Well, the Securities and Exchange Commission has decided to change that, at least in the world of federal securities laws. Based off the new SEC ruling of May 31, 2011, a better saying now may as well be “the snitch gets rich,” as whistleblowers will receive up to thirty percent of any penalty exceeding one million dollars that is imposed.

While preventing illegal white-collar activity is important, the implications of the new SEC legislation are far reaching with possible damaging effects. In addition to the potentially high award to be received, the ruling lowered the standard for which information provided is considered relevant enough for an award. According to the Securities and Exchange Commission’s website, instead of requiring that information “would not have otherwise been obtained and was essential to the success of the action,” the SEC is requiring that information simply “significantly contribute” to the investigation.

“So what?” you may be saying, “The whistleblowers are simply reporting violations of securities laws and being rewarded accordingly.” However, this hefty reward system lures whistleblowers away from internal compliance procedures designed to prevent firms from paying large fines from the SEC. Add the large sum of money to be received with the fear of being labeled a “disgruntled employee” and this leaves very little reason for an employee to report his or her concerns internally.

The minimum reward a whistleblower will be eligible for in a settlement is ten percent on settlements over a million dollars. That translates into a nifty hundred thousand for information that “significantly contributes” to an investigation. And that’s just the minimum. Multi-million settlements will kick back ten to thirty percent of those sums in awards for whistleblowers once the dust settles. The US Chamber of Commerce claims the large awards create a “bounty program” that will lure “amateur sleuths in search of a big payday” and are currently threatening legal action to block the SEC’s decision. Other opponents fear that in the hope of obtaining these massive awards unnecessary whistles will be blown and the SEC will be flooded with useless tips.

Obviously, firms will seek to avoid fines from the Securities Exchange Commission. The simplest way for a firm to avoid being forced to pay these hefty fines is to prevent illegal actions from within. However, as has been shown, this is easier said then done. This is where fully capable internal compliance procedures come into play. However, even the best laid foundations for internal compliance are threatened by the awards the SEC proposes, as more whistleblowers will skip internal compliance and go straight to where the cash is. Now competing directly with the SEC, internal compliance needs to modify its tactics to keep matters within the firm. Choosing between a considerable award and a pat on the back from their boss, one can only assume which most would choose.

In a firm’s best interests, action must be taken to handle violations within through internal compliance. A possible course of action for firms wishing to keep matters within the company could be to simply lure whistleblowers with a more competitive payout than that which the SEC offers. While expensive, this can still prove less costly than the large fine the SEC would assign the company. For example, instead of a whistleblower receiving thirty percent of a million dollar fine, a firm can provide a more competitive cut, perhaps at forty-five percent of a million, if it is dealt with internally. The firm would end up only having to pay this award to the whistleblower when handled internally, rather than the fine in its entirety to the SEC. The firm would end up being forced to pay less than if the SEC had placed a fine on the company. Of course, this assumes that internal compliance can accurately assess the value of the fine the SEC would place on the violation. In this scenario, the whistleblower and the firm end up benefiting, the employee in the form of an award, and the employer in the form of avoiding a hefty SEC fine.

Greed may continue to corrupt corporate America, but the Securities Exchange Commission plans to use that same principle of greed itself to sniff out violations. The infamous ideology of Gordon Gekko in the 1987 film “Wall Street” is echoed today, showing us that “greed is good”. Well, according to the SEC, as long as it is used to fight that which is illegal.

The edited version for Ka Leo may be found here.


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