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Record-Breaking $279 Million SEC Whistleblower Award Underscores the Role of Whistleblowers in Regulatory Enforcement

Introduction

On May 5, 2023, the U.S. Securities and Exchange Commission (SEC) made an unprecedented move by granting a single whistleblower an award of $279 million. This staggering amount not only marks the largest individual whistleblower award in the SEC's history but also surpasses the total annual whistleblower awards in every fiscal year except 2021. While the SEC has traditionally been tight-lipped about the specifics of the whistleblower's disclosure, the sheer size of the award implies that the case in question was one of the SEC's most consequential enforcement actions.

The Whistleblower's Contribution

According to a heavily redacted SEC order, the whistleblower furnished invaluable information through a series of written submissions, dialogues, and interviews. These contributions were related to a "covered action" and two "related actions." It's worth noting that the whistleblower's information was not the catalyst for the SEC's initial investigation. The SEC staff had already commenced an investigation into potential misconduct before the whistleblower came forward. However, the information provided by the whistleblower was instrumental in broadening the scope of the SEC's investigation, thereby saving the agency considerable time and resources.

The Evolving Landscape of Whistleblower Awards

This latest award brings the SEC's total whistleblower payouts for the current year to over $430 million, setting the stage for a potential new record, surpassing the $564 million awarded in 2021. Interestingly, the number of individuals receiving awards is projected to decrease by more than 20% compared to the past two years. This suggests a shift in the SEC's approach, focusing on granting larger awards to fewer whistleblowers. This trend underscores the pivotal role whistleblowers play in the SEC's most high-profile cases, serving not just as initial informants but also as invaluable guides during ongoing investigations.

Implications for Corporate Governance

The magnitude of this award is likely to act as a catalyst for increased whistleblowing activity, a development the SEC undoubtedly welcomes. However, this raises important considerations for corporate entities. Given the SEC and the Department of Justice's emphasis on prompt self-reporting to earn cooperation credit, it is imperative for companies to cultivate an internal culture that encourages employees to report concerns internally before going to regulatory bodies. Effective measures to achieve this include setting a strong ethical tone at the executive level, establishing secure channels for anonymous reporting, expeditiously investigating and addressing complaints, and adopting a strict no-retaliation policy against whistleblowers.

Key Takeaways

1. The SEC's record-breaking award highlights the agency's commitment to aggressive enforcement and the critical role of whistleblowers in this endeavor.
2. Companies should be proactive in fostering an environment that encourages internal reporting of potential misconduct, allowing for internal investigation and possible self-reporting to regulatory authorities.
3. The trend toward larger awards to fewer whistleblowers indicates a strategic shift by the SEC, emphasizing the importance of whistleblowers in not just initiating but also guiding significant investigations.

In light of these developments, companies should reassess their compliance programs to ensure they are adequately designed to detect, investigate, and remediate any potential issues that may arise. The decision to self-disclose potential corporate misconduct to the SEC is complex and should be made on a case-by-case basis, taking into account a multitude of factors, including but not limited to, existing SEC policies.

For further information or guidance on how these developments may impact your business, please contact Lucosky Brookman LLP.