Zombie Whistleblowers and Other New Developments in the SEC’s Dodd-Frank Whistleblower Program
In past issues, we have reported on the SEC’s Dodd-Frank whistleblower program. As we previously noted, under this program the SEC can pay a whistleblower who provides original information leading to SEC monetary remedies of more than $1 million between 10 and 30 percent of the amount the SEC collects. There were several developments with this program in the third quarter of 2014.
First, on Aug. 29, 2014, the SEC announced its first ever whistleblower award to an employee with a compliance function at a company. The announcement stated that the SEC awarded the compliance and audit employee $300,000 under the program. Under SEC Rule 21F-4(b)(4)(v), 17 C.F.R. 240.21F-4(b)(4)(v), compliance employees are generally barred from receiving whistleblower awards except when: (1) the employee has a reasonable basis to believe that the company is engaging in conduct that will harm investors or the entity; 2) the company is engaging in conduct that is obstructing an investigation of the misconduct; or (3) when 120 days have elapsed since the employee reported the conduct internally. In the case announced on Aug. 29, the SEC said that the compliance employee reported the matter internally but the company took no action. This underscores the importance of conducting an investigation or reasonable inquiry in the event that compliance or audit personnel, or any other employees, bring a matter to the attention of management.
Second, on Sept. 22, 2014, the SEC SEC announced that it made an award of $30 million to a whistleblower, its largest award ever. The SEC commented that the award might have been higher had the employee come forward earlier. Also of note is that the whistleblower resided outside the United States. Although such foreign whistleblowers are eligible for awards under the SEC program, they do not enjoy the protections of Dodd-Frank’s anti-retaliation provisions, according to the 2nd Circuit Court of Appeals’ Aug. 14, 2014 decision in Liu v. Siemans AG. The Liu case is discussed more fully elsewhere in this briefing.
Third, just in time for Halloween, the SEC argued before the 2nd Circuit on Sept. 29, 2014, that so-called “zombie” whistleblowers are not entitled to awards under the SEC program. In this case, the whistleblower, Larry Stryker, provided information to the SEC prior to enactment of the Dodd-Frank whistleblower law on July 21, 2010, and claims entitlement to an award. The 2nd Circuit’s ruling will determine, at least within its jurisdiction, whether such zombie whistleblowers can come back to life and claim entitlement to awards from the SEC.