When Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010, the creation of the SEC Office of the Whistleblower was heralded as a positive step in curbing fraud in federal securities transactions. Yet, in the three years since its inception, the SEC has paid out only four relatively meager awards, despite thousands of claims pouring in to the office. Although the SEC Whistleblower Program is undeniably new in comparison with the Lincoln-era False Claims Act, patience with this seemingly slow start has been thin as the program has found itself under fire for the lack of immediate results.
As a result, some whistleblowers have understandably questioned whether to file a claim and potentially jeopardize their professional careers with little chance of an ultimate award. While more than 3,000 claims were filed in 2012, there is no way to count how many claims were not filed by reluctant whistleblowers unwilling to travel down a seemingly endless path.
Just last week, the Director of the SEC Office of the Whistleblower, Chief Sean McKessy, responded to these concerns with optimism for the program and promises of more awards on the horizon. Chief McKessy’s interview, as reported by Rachel Ensign of the Wall Street Journal’s Risk & Compliance Journal, is attached below.
I find Chief McKessy’s statements to be motivating and evident of his commitment to ensuring that the SEC Whistleblower Program succeeds. An unfortunate reality to almost any whistleblower case, whether brought through the False Claims Act or an individual government department, is that the process is slow and may take many years to reach a final resolution. There is no reason to expect any less from the SEC program, which, by nature, will be faced with complex allegations and investigations. I anticipate that, as rewards begin to be announced, the number of filed complaints will increase exponentially beyond the 3,000 that were filed last year. For this reason, it remains important for potential whistleblowers to seek counsel and get their claims on file with the SEC as quickly as possible.
The James Hoyer law firm has many years of experience representing whistleblowers and advocating on their behalf, including claims submitted anonymously to the SEC. If you believe you have information regarding a possible violation of federal securities laws or regulations and are considering submitting your information to the SEC, please contact James Hoyer for an evaluation of your claims. Click here for more information about the firm and to submit your information electronically, or you may contact our office at 813-397-2300.
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By Rachel Louise Ensign, Wall Street Journal
Chief Sean X. McKessy
When Sean McKessy took the helm of the Securities and Exchange Commission’s new whistleblower office in early 2011, many businesses feared the program would destroy internal compliance efforts. Those concerns have subsided, he said, and the tips have started flowing in–3,001 of them in fiscal year 2012, to be exact. Now the big question is: when will the big whistleblower bounties start being awarded?
Risk & Compliance Journal spoke with Mr. McKessy about his experience launching the office and his plans for the future, which include enforcing the anti-retaliation provisions of the 2010 Dodd-Frank financial overhaul law, the legislation that established the SEC’s new whistleblower program.
We keep hearing that there’s a flood of whistleblower awards on their way. Can you be any more specific as to what to expect and when?
Mr. McKessy: I think it’s a fair question to ask, and I don’t hide from the question of “how come you have made only four payouts and when will you really start making more?” But I don’t really have a prediction for you.
Rather than characterize it as a flood of additional awards, I would say that logically speaking, the longer we get away from the statute that created the program, which was July 21, 2010, the more time we have for whistleblower tips to actually ripen into investigations, and those investigations to ripen into litigation and litigation to ripen into successful actions where we get over a million dollars in sanctions, all of which are required before we have any ability to pay anyone.
How do you decide which whistleblower tips to pursue?
Mr. McKessy: There are two sides of the scale, which are easy to deal with. Some tips that come in are extraordinarily specific, timely and credible. You don’t have to spend a lot of time realizing that those are good tips and you should find a home for additional enforcement resources. On the other end of the spectrum, sometimes we get tips that are clearly either nonsensical or don’t relate to anything we have the authority to pursue.
It’s really the ones that are in that middle ground that become a little bit more difficult. In connection with those kinds of tips, we have our office of market intelligence, which is comprised of upwards of 50 lawyers, accountants and market professionals whose job it is to read intelligence including whistleblower tips and decide which ones merit additional enforcement resources.
Are you planning to enforce the anti-retaliation whistleblower provisions of Dodd-Frank?
Mr. McKessy: Yes. I think our office has a role to play in pursuing cases where we think companies have not acted in good faith with respect to people who have reported to us.
Obviously I can’t go into any details, but I will say that we are working with enforcement staff and our general counsel’s office on a number of matters that at least have the initial indicia of a fact-pattern that shows that a company didn’t treat their employees in good faith when a report was made to us.
The commission has the authority to enforce the anti-retaliation provisions in Dodd-Frank. We are actively looking for ways to be proactive in pursuing, under appropriate circumstances, a retaliation claim, either as an add-on to an instance where there was substance to the underlying report, but also if we are given evidence that a person reported to us in good faith and it turned out that they were wrong, but they had reason to believe that what they reported to us was true and the company took unfortunate employment action just because they reported to us.
I myself am asking our enforcement staff to be on the lookout for one of these stand-alone retaliation cases.
What has the process been like for deciding whether a whistleblower deserves an award and how much of an award they should get?
Mr. McKessy: The process of deciding whether a whistleblower deserves an award I would characterize as more of a science than an art, since the rules set forth various eligibility criteria. But the rules provide an extraordinary amount of discretion to our office when deciding the size of the award. That I would characterize as the art part.
In the first award, we awarded a [maximum] 30% payout. The whistleblower was very persistent in reporting to us and making sure we were paying attention to the conduct, then worked with us throughout the proceedings and helped us get to the finish line in a very efficient manner. We thought it met a paradigm of the ideal whistleblower.
The second award, we had three whistleblowers, and awarded 15% to be split evenly. That was an instance where we had whistleblowers that had some very important information which put us on the investigation, but they weren’t in the position where they could give us ongoing assistance. It fell short of the maximum award, but they each did more than the minimum.
I would be lying if I said it was a very mathematical, scientific, step-by-step process. Where it becomes a bit of a challenge is when you have to make these calls: what does a 30% case look like versus a 10% case versus a 13% case versus a 28% case?
Did your years in the private sector play a role in the way you’ve set up and run the whistleblower program?
Mr. McKessy: Only when you have worked in-house do you know what it means to be an employee of a company. I think I have a tremendous amount of sympathy for our potential whistleblowers and understand some of the headwinds. Your instincts are to be loyal to your company and not to necessarily report wrongdoing externally.
I also had a perspective on internal compliance functions. I was in house when Sarbanes-Oxley was passed and I was tasked with building a number of the compliance enhancements in light of the requirements of Sarbanes-Oxley. So I also have an appreciation for some of the anxiety when a regulator sets up a new process or a new regime.
Companies were wary of your program before it began. Does that sentiment remain?
Mr. McKessy: I believe that some of that anxiety has subsided. What I’m hearing is contrary to the concern that we would be destroying internal compliance.
What I hear is that companies are generally investing more in internal compliance as a result of our whistleblower program so that if they have an employee who sees something, they’ll feel incentivized to report it internally and not necessarily come to us.
The vast majority of people who come to us about their current or former company do say they tried to report internally.
Similarly, the concern that we would be inundated with a bunch of nonsense and we didn’t have the resources to handle the tips that came in, so far I think has proven to be unfounded.
