Whistleblowers and their attorneys have been closely following the SEC’s
new program to reward people who report securities fraud violations. In
my last blog entry,
SEC Hands Out Its Second Award to Whistleblowers, I talked about the announcement that the SEC isawarding $25,000 to whistleblowers. The award will be split among three whistleblowers who alerted the SEC
to fraud by Locust Offshore Management and its CEO, Andrey Hicks.
Given how few awards the SEC has given out under the new program, as a
whistleblower attorney I have to pore over the little information we do
have in order to advise my clients about how the SEC will handle their
With the newest award, the SEC has dropped several clues about how it will
handle these cases. First, the case against Locust Offshore Management
and Hicks shows that the SEC is committed to compensating whistleblowers
even when a defendant is prosecuted criminally. Hicks was prosecuted criminally
for the fraud at Locust Offshore. He pled guilty to wire fraud, and as
part of the deal he cut with prosecutors, he forfeited his interest in
property amounting to $170,000 in the criminal case. The SEC is giving
the whistleblowers credit for the money that was collected in the criminal
action against CEO Hicks. Noting that “a provision in the whistleblower
rules allows whistleblowers” to request an award from money collected
in a “related action,” the SEC awarded the whistleblowers
15% (split 3 ways) of the amount that Hicks forfeited in the criminal
Since a criminal prosecution could siphon off most or all of the defendants’
money, it was critical that the SEC assure whistleblowers that it would
not undermine their awards via a criminal prosecution. The whistleblower
is entitled to a percentage of the amount the Government collects in any
agency proceeding – criminal or otherwise — for good reason.
Whistleblowers often fear losing their job and careers if they blow the
whistle, and they will be far less likely to risk coming forward if they
has little or no prospect of compensation that could make up for his financial
losses. And, from the defendants’ perspective, it would be dangerous
to allow the Government to eliminate the whistleblower’s award by
prosecuting a case criminally, because it could incentivize the Government
to prosecute cases criminally instead of working out civil penalties.
The SEC’s latest award also demonstrates that the SEC will split
an award if several people blow the whistle on a single company. In the
Locust Offshore Management case, three different whistleblowers approached
the SEC with information, and this latest award is to be split among all
three. According to the SEC’s press release, two of the whistleblowers
provided information that led to the opening of the case, and the third
identified key witnesses.
Third, the SEC has the option of giving up to 30% of what is collected
to the whistleblower, and it did so in its first award (the only other
given to date). In this case, however, the SEC gave the minimum award
of 15%, and that amount must be divided among three people who provided
Fourth, in neither of the first two awards did the SEC name the whistleblowers
who had provided the information. The point is very encouraging to whistleblowers,
who often are afraid to come forward for fear they could damage their
job prospects within their industries.
The SEC Office of the Whistleblower was begun in the wake of Enron, after
the SEC was heavily criticized for ignoring tips from Enron employees.
The SEC not only did not reward the Enron whistleblowers, it blatantly
ignored them. The result was devastating for Enron shareholders, and the
ill effects rippled through our economy.
Congress passed the Dodd-Frank Act on July 21, 2010, in order to help the
SEC reward whistleblowers who report securities fraud. Under the statute,
the SEC enacted a set of rules and set up the SEC “Office of the
Whistleblower.” The Office’s mission is to vet tips about
securities fraud, and to reward people who report fraud and violations
of SEC regulations.