By Claire Beutter
First published on the Global Anticorruption Blog
John Doe is a whistle-blower who provided critical information to the US Securities and Exchange Commission (SEC) regarding an international bribery scheme, assisting the agency in bringing a successful enforcement action. Doe timely filed an application for reward under a provision of federal law that directs the SEC to pay an award to whistle-blowers who voluntarily provide original information to the agency, contingent on such information leading to a successful SEC enforcement action with monetary sanctions exceeding $1-million.
Yet, in Doe’s case, the SEC denied his application for a reward—and the courts upheld this denial—because Doe himself had already pleaded guilty to bribery charges related to the same scheme he helped expose. Under the relevant statute, the SEC is barred from paying an award to any whistle-blower who is convicted of a criminal violation “related to the [enforcement] action for which the whistle-blower otherwise could receive an award.” In other words, if a whistle-blower provides the SEC with information on a particular corruption scheme but is convicted of a crime related to that same scheme, as in Doe’s case, they are ineligible for reward.
What about whistle-blowers who are culpable in the unlawful scheme they help expose, but who have not been criminally convicted in connection with that scheme? The SEC has explicitly declined to institute a rule barring culpable but non-convicted whistle-blowers from receiving an award. Therefore, participants in an unlawful scheme, including a bribery scheme, may still receive an award if they blow the whistle on the offence, so long as they are not convicted for their role.
The SEC’s position has been criticised as both unfair and potentially harmful. During the agency’s rulemaking process, several commenters, including a group of senior corporate executives and the American Bar Association, advocated for a more stringent rule in order to avoid incentivising violations of securities laws. Recently, a Bloomberg Law article branded the program as “enrich[ing] fraudsters,” reflecting the continuing sentiment that no culpable whistle-blower should be eligible for reward.
These criticisms are misplaced. While it is undoubtedly important to ensure that whistle-blowers cannot profit from their own wrongdoing, it would be unwise to implement a more stringent standard than the one set out in the SEC’s current rule.
A rule barring a larger class of culpable whistle-blowers from receiving a reward would likely decrease the pool of potential whistle-blowers, thereby delaying or even preventing the discovery of misconduct. It is often difficult for law enforcement authorities to detect and prosecute corruption cases, particularly those involving sophisticated bribery schemes, without assistance from insiders. In fact, the SEC has acknowledged the “early and invaluable assistance” insiders regularly provide in detecting violations, increasing the efficiency of investigations, and providing key evidence for enforcement actions.
Individuals with the level of access necessary to expose complex corruption schemes are likely to be long-term employees, putting them at great professional risk if they blow the whistle. Therefore, incentives such as monetary rewards play a key role in getting them to make disclosures. If a more stringent rule is implemented, a greater number of potential whistle-blowers will be excluded from eligibility for reward, rendering them unlikely to take the risk of blowing the whistle. Furthermore, creating a standard for culpability that is not based on criminal conviction may create uncertainty with regard to who is considered culpable, broadly discouraging anyone in an “insider” position from blowing the whistle.
While the SEC may have declined to institute a blanket rule barring all culpable whistle-blowers from reward, it has instituted other provisions significantly limiting the amount that can be awarded to a culpable whistle-blower:
- First, the SEC retains a substantial amount of discretion in deciding how much to award a whistle-blower, so long as the final award amount falls between 10% and 30% of the monetary sanctions imposed. In practice, the SEC regularly reduces whistle-blower awards due to culpability.
- Second, in determining whether the minimum threshold of $1-million has been met, the SEC does not take into account any penalties that the whistle-blower himself is ordered to pay, or that are ordered against any entity “whose liability the whistle-blower directed, planned or initiated.” If the required minimum of $1-million in monetary sanctions would not be reached in the absence of such penalties, the whistle-blower will not qualify for a reward. This provision is particularly salient in cases where the whistle-blower “directed, planned, or initiated” an entity’s illegal activity—since the entity involved often pays all or a large portion of the penalties, it is highly unlikely that the requisite $1-million amount will be reached if these penalties are not counted, rendering the culpable whistle-blower ineligible for reward.
- Third, even if the SEC determines that the whistle-blower is eligible for an award, any penalties paid by the whistle-blower will not be included in the SEC’s calculation of the “amounts collected for purposes of making [reward] payments.” Subtracting penalties paid by the whistle-blower from the total amount of penalties collected translates directly to a reduced award, since awards are calculated as a percentage of the total monetary sanctions imposed.
On its face, the idea that no culpable whistle-blower should be allowed to profit from their role in a corruption scheme seems reasonable. Yet a rule barring a large segment of culpable whistle-blowers from reward risks inhibiting the discovery and prosecution of corruption, since insiders who can help bring down complex corruption schemes are unlikely to report to the SEC without a monetary incentive. Furthermore, other SEC provisions take culpability into account in determining a whistle-blower’s eligibility for reward and, if they are eligible, calculating the award amount that they will receive.
Therefore, whistle-blowers who played a significant role in illegal activity are highly unlikely to profit from their actions through the SEC’s reward program. The SEC’s current practice draws a clear, easily enforceable line when it comes to culpability, striking a balance between incentivising those with information to disclose corruption and preventing the most culpable parties from making money by reporting their own wrongdoing.
Going further, as the critics have urged, would disrupt this balance and put the SEC whistle-blower reward program’s broad success—with over $6.3-billion in monetary sanctions resulting from whistle-blower information so far—at risk.