The Securities Exchange Commission (SEC) has been granting a record number of awards to whistleblowers alerting the authorities to securities fraud. To sweeten the deal, the awards (especially lately) tend to be in the tens of millions, and they’re only going to increase along with the amount of recovered monetary sanctions. This provides other whistleblowers with an incentive to do the same, but the problem is that not everyone is familiar with what constitutes securities fraud or how to go about reporting it when they see it.
As it turns out, the answers are in the footnotes. The clearest guidance on the facts and rules of securities fraud are to be found in the SEC’s footnotes of orders it has written for whistleblowers who have filed a claim for an award. Of course, going through all those footnotes is a considerable undertaking, so we’ve compiled the highlights for you into 4 articles, of which this is the first.
Although the SEC often makes its orders granting and denying requests for awards public, most of the text is heavily redacted, leaving the footnotes as the most valuable evidence of their process for determining who gets and award and how much.
The first requirement for an award is that the whistleblower must have provided the relevant information voluntarily. This means the SEC has not requested or demanded the information from the whistleblower, and that the whistleblower has no prior or existing contract with the SEC that requires them to report such information to the Commission.
The exception to this rule would be the whistleblower contacting another government agency about the alleged misconduct, whereupon the SEC might follow up by requesting information from the whistleblower.
The information provided by the whistleblower must be information the whistleblower has independently of anyone else, or a conclusion they reached using their own, independent analysis. The information cannot have been taken from a publicly available source, unless the whistleblower was the one who originally provided that information. That means providing anything from the internet or the news does not qualify as original information because it’s all publicly available.
People who got information as a result of being in a position of trust, such as lawyers, public accountants, directors, officers, and compliance and internal audit professionals are also largely ineligible to receive awards for whistleblowing, with a couple rare exceptions. For example, a compliance/internal audit professional reporting the misconduct up the ladder at least 120 days before going to the SEC would be one valid exception. Another example would be a compliance/internal audit professional who warned the person or entity engaging in fraud of the misconduct at least 120 days before going to the SEC. When the person or entity committing fraud failed to remedy the situation in the allotted time, the proper thing would be to go to the SEC. The final exception would be someone in a position of trust who reported the fraud to the SEC because he had reason to believe that, if he didn’t report it, the fraud was going to cause considerable financial harm to the entity involved and/or its investors.
Government employees are also exempt from being able to collect whistleblower awards, but only if they work in certain areas of government. For example, those working for certain regulatory or law enforcement authorities at the time they bring the information to the SEC are not eligible for a whistleblower award because alerting the SEC is considered to be part of their job. The SEC clarified that only employees of governmental agencies directly responsible for law enforcement are not eligible to collect whistleblower awards. There are governmental agencies with subdivisions responsible for law enforcement, but only those employees working within such subdivisions are exempt from being able to collect whistleblower awards.
There are six more requirements whistleblowers have to meet in order to be eligible to collect a claim, so be sure to check Part 2 for that information.
The consumer and tax payer rights law firm of Lubin Austermuehle represents whistleblowers who are pursuing qui tam lawsuits at any level of government or for violations of the securities laws and IRS code, including claims under the Illinois Whistleblower Act, the Chicago whistleblower ordinance, the Dodd-Frank Act and the federal False Claims Act. Based in Chicago and Oak Brook, Ill., our Evanston and Naperville area qui tam and False Claims Act lawyers stand ready to represent whistleblowers throughout the United States — regardless of whether prosecutors have decided to join the lawsuit. If you know about fraud against a government agency and you’re ready to speak up, you can learn more about whistleblower lawsuits at a free, confidential consultation. To set one up, please contact Lubin Austermuehle online or call 630-333-0333 today.
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