The Securities and Exchange Commission told most government employees last week that they too should apply for whistleblower rewards if they bring information that leads to an enforcement action.
A $2.5 million award announced by the SEC last week didn’t include the name of the agency where the person worked, the company involved in the misconduct or the nature of the conduct involved, but lawyers representing tipsters and companies in whistleblower cases drew lessons from a footnote attached to the order. The footnote delineated who, among government employees, is eligible: Anyone who works for a local, state or federal agency, other than those at regulatory agencies or a law-enforcement organization.
Jordan Thomas, a former SEC official who led the development of the agency’s whistleblower program and now chairs the whistleblower representation practice at the law firm Labaton Sucharow, said the program was designed to ensure that virtually everyone aware of wrongdoing would be able to report it. Though certain individuals, such as regulators or compliance professionals, “have higher hurdles” before they can become eligible, he said “it isn’t surprising” that the SEC, when interpreting the program’s scope, “would take a broad view of eligible government employees.”
“The SEC doesn’t want another Madoff scandal, where knowledgeable individuals remain silent. It would be particularly unfortunate if a person remained silent if they worked for another government agency,” he said.
The SEC, as of July 27, has awarded 46 whistleblowers a total of about $158 million for providing the agency with information that led to an enforcement action with a penalty of more than $1 million. The program, launched in 2011 out of the Dodd-Frank Act, has led to nearly $1 billion in financial remedies, the SEC says on its website.
Stuart Meissner, an independent whistleblower attorney representing tipsters, said the award merely confirms that any company has to look over its shoulder when doing something that violates securities laws. He said he wouldn’t expect the SEC to deny an award based on the tipster’s employment if they hold a government job.
“They should be encouraged, just like anyone else, to come forward,” he said.
The award was surprising “at first blush,” said Thomas White, a partner at the firm WilmerHale, but he added that it really isn’t so shocking upon further review of the order’s footnote.
“The SEC’s interpretation may encourage other government employees to provide information about possible legal violations to the SEC,” he said.
But the footnote in the order troubled Jason Schwartz, a litigation partner at the firm Gibson Dunn & Crutcher. Mr. Schwartz said he was concerned about what he called “hairsplitting” over eligible law-enforcement organizations, because the footnote said that the exclusion doesn’t apply to agencies that have law enforcement “components” but where enforcement isn’t the agency’s overall mission.
“That’s a scary threading of the needle to get the outcome they want,” said Mr. Schwartz.
“They know people are reading this for guidance, and that those words have significance beyond the case,” he said.
By Samuel Rubenfeld
Aug 1, 2017 2:00 pm ET