On Friday August 29, 2014, the Securities and Exchange Commission (“SEC”) awarded a corporate audit and compliance employee $300,000 for ‘whistleblowing,’ the first such award to be handed out by the SEC. The award represents 20 percent of the $1,500,000 fine against the employer, which was the result of an enforcement action brought by the SEC against the employer.
In 2011, the SEC initiated a ‘whistleblower’ program that is designed to reward novel information that leads to enforcement actions that surpass $1,000,000 in penalties. The awards, which can be as much as 30 percent of those penalties collected in a case, are generally reserved for those employees outside the compliance and internal audit departments. This case represents the first time a compliance employee has received this award, utilizing the exception carved out for the employee who first reports the violation to internal personnel in an effort to correct it, and then waits 120 days before notifying the SEC. According to the SEC, the employee in this case reported the inconsistencies to both the appropriate personnel and his supervisor. However, the company failed to take any action within 120 days.
There is an additional exception to the internal reporting requirement, whereby a compliance employee can first report the incident directly to the SEC if he or she believes that internal disclosure might lead to substantial financial injury or conduct that would impede an investigation. By law, the SEC is obligated to withhold the identity of the whistleblower, or any information that could directly or indirectly reveal his or her identity.
The Chief of the SEC’s Office of the Whistleblower, Sean McKessy, stated that, “[i]ndividuals who perform internal audit, compliance, and legal functions for companies are on the front lines in the battle against fraud and corruption. They often are privy to the very kinds of specific, timely, and credible information that can prevent an imminent fraud or stop an ongoing one.” He continued, “[t]hese individuals may be eligible for an SEC whistleblower award if their companies fail to take appropriate, timely action on information they first reported internally.”
Lax & Neville LLP has nationally represented small broker-dealers, financial services professionals and securities industry companies in regulatory matters and securities-related and commercial litigation. Additionally, Lax & Neville has extensive experience in successfully handling whistleblower litigation. Please contact our team of attorneys for a consultation at (212) 696-1999.