The Securities and Exchange Commission (SEC) whistleblower program is considered one of the more successful government initiatives around—especially when it comes to financial institutions and investing. It’s been so successful that Congress has created other whistleblowing programs closely modeled after the SEC’s. Despite the fanfare, many financial executives, corporate CEOs, and most main street investors may not be aware of the history of the whistleblowing program—especially why it was created in the first place. But it’s worth spending time to address because the history of the program impacts how it operates today.
In this first post, we’ll discuss the evolution of the program. In the next, we’ll look at the ways the SEC program’s origins continue to impact whistleblowers today.
The Catalyst For The SEC Whistleblowing Program
In December 2008, disgraced financier Bernard Madoff was arrested for running a multi-billion Ponzi scheme. Just two months later, news broke that another multi-billion Ponzi scheme was being run by Alan Stanford. Madoff’s and Stanford’s malfeasance ruined lives and leveled institutions.
Adding insult to injury was the fact that insiders had been contacting the SEC for years, warning them about both men’s fraud. The SEC largely ignored these reports.
After the two high-profile arrests, the SEC’s Inspector General found that between June 1992 and December 2008, the SEC had received six credible complaints asserting that Madoff’s hedge fund was a Ponzi scheme in disguise. The reports came from Madoff’s staff, investors, and industry insiders, and they brought specific analyses of trades, strategies, and documents to support their allegations. Even when the SEC suspected wrongdoing, the overly narrow scope of the agency’s investigation meant that it disregarded red flags and sometimes even failed to understand the complainants’ analyses.
For example, a 1992 SEC investigation meant to determine whether Madoff’s operations were a Ponzi scheme focused on only one employee rather than the larger organization. The IG believes that if officials had looked at the organization more broadly, they would have uncovered the Ponzi scheme that year.
The same thing happened with the Stanford Ponzi scheme: The SEC received multiple complaints about Stanford’s operation and noted red flags that cast doubt on their legitimacy, yet neglected to investigate further.
Implementation Of The SEC Whistleblower Program
Dodd-Frank defined who was covered as a whistleblower for the purposes of the SEC program and established the basis for whistleblower awards. It allowed whistleblowers to submit tips confidentially and outlawed retaliation against them. And it required the SEC to establish rules to effectuate this program, including setting up a protocol and staff to handle tips.
In compliance, new SEC leadership reorganized much of the agency’s enforcement branch, to make sure whistleblower complaints were sent to lawyers and investigators with the expertise to understand the issues at hand.
The SEC’s final rules to establish the whistleblower program were approved on May 25, 2011, and took effect on August 12, 2011—but the agency began accepting tips a full year earlier, starting on July 22, 2010.
The SEC Revises The Whistleblower Program
The program proved to be an astonishing success when it came to helping injured investors. Whistleblower tips had led to enforcement actions yielding more than $2.5 billion in financial remedies within its first eight years, with most of the funds going to harmed investors. At the same time, 97 whistleblowers had received $523 million in awards—including awards as large as $50 million.
A few problems still hindered the program’s efficacy. For example, whistleblowers weren’t clear about the awards they might be entitled to. Many found the long processing time for awards unfair. And too many people were filing frivolous complaints.
In response, the Commission amended the program’s rules, effective December 7, 2020.
Among Amended Rule 21F-6(c)’s changes is the presumption that SEC whistleblowers receiving an award of $5 million or less would receive the statutory maximum, unless there were negative factors that went against the maximum award. For those entitled to more than $5 million, the SEC would now presume an award in the top third of the range, unless negative criteria warranted a reduction.
Another significant change was that the whistleblowers’ awards would no longer be adversely impacted if the SEC deferred prosecution or reached a settlement with the wrongdoers. Going forward, whistleblowers would be entitled to the same award in these cases as they would if the wrongdoers had been convicted in a judicial or administrative proceeding.
The revised SEC rules also now bar anyone who submits a frivolous complaint from filing again in the future.
Further revisions, announced in August 2022, provide even more incentives for whistleblowers. These latest changes allow the SEC to compensate whistleblowers who cooperate with other agencies’ efforts, not just the SEC’s own investigations. Additionally, the SEC can look at extenuating circumstances to determine whether a whistleblower’s award should be increased.
In our next post, we will address how the history of the whistleblowing program impacts current whistleblowers. In the meantime, if you’re considering becoming a whistleblower and have questions about the process, the Silver Law Group and the Law Firm of David Chase have created a strategic alliance to represent SEC whistleblowers like you.
With years of experience representing SEC whistleblowers, led by a former SEC Enforcement lawyer on our team, we have an in-depth understanding of the SEC Whistleblower Program. We understand what the SEC is looking for. We can help you submit a tip that is more likely to result in a successful covered action. We are here to help whistleblowers maximize their opportunity to receive a financial bounty. For a free, confidential consultation, contact us by email or call us today at (800) 975-4345.