The SEC’s Whistleblower Program: Its First Birthday Approaches
by Steve Korotash
Since the inception of the SEC Whistleblower program in September 2011, the SEC has not revealed a great deal about its operation. Particularly, there has been little light shed upon two areas of corporate concern: whether the SEC’s response to whistleblower allegations will prove unduly burdensome for companies; and whether costly Sarbanes-Oxley mandated compliance programs will be circumvented. This article attempts to illuminate these areas. .
The agency provided its first insight into the program’s workings in a 2011 end-of-year report to Congress, revealing the receipt of 334 Whistleblower tips during the program’s initial 7 weeks of operation. The tips came from 37 states and numerous foreign countries. The most common complaints were market manipulation (16.2 percent), offering fraud (15.6 percent), and corporate disclosures and financial statements (15.3 percent).
Significantly, whistleblower activity has not diminished since the report. Sean McKessy, head of the SEC’s Office of the Whistleblower, has advised staff members that the volume of tips being received is continuing at the level initially reported, and according to officials, the tips are improving. In April, SEC Enforcement Director Rob Khuzami noted that “the quality of tips has increased” over time, citing a greater level of detail and supporting documentation. He attributed the improvement to whistleblowers increasingly retaining counsel.
SEC Assistant Director Michael King, a supervisor in the Commission’s Foreign Corrupt Practices Act (FCPA) Specialization Group, recently echoed Khuzami’s point. At a gathering of Houston oil company compliance leaders, King noted that whistleblowers’ attorneys have made detailed presentations to the enforcement staff. These presentations sometimes include PowerPoint materials that outline evidentiary support for the whistleblowers’ claims. He also cited an instance in which attorneys brought their whistleblower client from overseas to participate in the presentation to the SEC.
It also appears that the prospect of whistleblowers circumventing internal reporting mechanisms at their companies may have been exaggerated. According to SEC officials, the vast majority of whistleblowers have reported their information internally prior to filing tips with the SEC. Their motivation for doing so is likely explained by the fact that internal reporting can increase the amount of award they receive, a consideration not overlooked by whistleblowers’ counsel.
In remarks before Congress, Khuzami talked about insuring that groundless tips do not create undue burdens on companies. And although numerous SEC supervisors maintain that the staff is handling whistleblower tips in the same manner as it does other forms of tips and complaints—that appears not to be the case universally. Anecdotal accounts provided by defense counsel contradict the contention that whistleblower complaints are not receiving a higher level of scrutiny.
According to a Dallas attorney who is handling a matter that he is certain was triggered by a whistleblower, the staff is “looking under every rock, clearly trying to document their extraordinary diligence.” He is convinced, “that with the memory of Madoff still in the air, the staff is afraid that they will be second-guessed if they miss anything brought to them by a whistleblower.” He added, “So what companies may be facing is predictable overkill.”
That sentiment was repeated by a defense attorney who represented a publicly traded company in an SEC informal inquiry. “It was clear that the inquiry was originated by a whistleblower complaint. We produced evidence demonstrating that the matter being examined wasn’t material and, ordinarily, the inquiry would have ended right there. Instead, the company was required to produce voluminous documents, prepare summary reports and submit its officials for interviews.” The burden on the company, he said “was significant and not justified.”
Moreover, another securities defense attorney related her recent experience with an apparent whistleblower tip, explaining that SEC examiners, armed with a very detailed allegation, “hit the doors of a regulated entity like it was D-Day. They clearly had been told that money was missing, and they were all set to shutter the doors.” She added, “They saw there had been no misapplication of funds, but since they were there, they began combing the place for technical deficiencies.”
Whether these accounts portend rough going for companies and their legal teams remains to be seen. One prediction is safe, however: when the SEC makes its first whistleblower award, it will trumpet the news far and wide, hoping to make it universally known that a financial windfall awaits those who blow the whistle to the SEC. The result likely will be a strong spike in whistleblower complaints and some long nights for general counsel.
Steve Korotash works in K&L Gates’ Dallas office. Prior to joining the firm, he served as an associate director of the SEC’s Enforcement Division, leading the SEC’s enforcement efforts in the Southwest. He can be reached at Stephen.Korotash@klgates.com.