reporting without regrets - energy bar association · reporting without regrets: the sec...

Reporting Without Regrets: The SEC Whistleblower Handbook Page 01

Reporting Without Regrets:The SEC Whistleblower Handbook

In addition to the information contained in this Handbook, we encourage readers to visit our website here to review Frequently Asked Questions about the program, the reporting process and our Firm.

www.secwhistlebloweradvocate.comPage 02

Table of contents

Introduction .................................................................................................................1

Anonymous reporting .................................................................................................2

Employment protections ............................................................................................3

Monetary awards ........................................................................................................6

Common securities violations ...................................................................................11

Restrictive employment agreements ........................................................................14

Early success of the SEC Whistleblower Program ....................................................15

Conclusion .................................................................................................................16


Introduction

At Labaton Sucharow, we work to protect and empower SEC whistleblowers, so they can successfully report securities violations—without personal or professional regrets. As first-hand witnesses to wrongdoing, whistleblowers are a formidable opponent to corruption. Their courageous actions safeguard jobs and investors, ensure fair markets and facilitate capital formation. When courageous individuals speak out against wrongdoing, we stand up, we step closer and use every tool in our arsenal to make their voices heard.

This handbook is a guide to this revolutionary process.

The Birth of the SEC Whistleblower ProgramBy 2010, a long series of corporate scandals had harmed numerous companies and countless individuals. Investor confidence was devastated. As the country debated how to break the cycle of fraud and corruption, financial watchdogs agreed on two fundamental truths: the investor protection status quo was failing and law enforcement could not effectively and efficiently police the marketplace without the help of individuals with actionable intelligence.

In response, Congress enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act, one of the most significant financial reforms since the Great Depression. Under the statute, the SEC developed a revolutionary bounty program through which eligible whistleblowers can receive significant monetary awards, employment protections, and the ability to report anonymously. To qualify, an individual or group of individuals must voluntarily provide the SEC with original information that results in a successful enforcement action in which the SEC collects over $1 million in sanctions. Depending on various factors, the individual or group would receive a financial reward between 10% – 30% of the sanctions collected.

Days before the final rules were implemented in 2011, we predicted that history would reveal that in crafting the whistleblower provisions of Dodd-Frank, Congress and the SEC created a potent system to fight misconduct. Today, we can say with absolutely certainty that the SEC Whistleblower Program is one of the most successful public-private partnerships in history. The Commission has reported consistent increases in the volume and quality of tips. And, as of this writing, the SEC has awarded more than $153 million to courageous whistleblowers and secured more than $1 billion in monetary sanctions for injured investors.1

The ability to report possible misconduct anonymously is one of the most important pillars of the SEC Whistleblower Program.


In the past, fear of retaliation and blacklisting prevented corporate whistleblowers from reporting wrongdoing in the workplace. Corporate cultures of silence and complicity developed writ large and intimidated those who would speak out against misconduct. As a result, law enforcement and regulatory authorities were often unable to detect and prosecute securities violations, especially in earlier stages. Too often, hidden fraud and misconduct would fester and grow until they were discovered in the midst of a complete corporate collapse—leaving employees and companies devastated. To minimize risk of retaliation, the SEC Whistleblower Program empowers whistleblowers by allowing anonymous reporting. The vast majority of Labaton Sucharow clients, who are often senior executives, elect this option.

The ability to report possible misconduct anonymously is one of the most important pillars of the SEC Whistleblower Program To anonymously report possible violations to the SEC, a whistleblower must be represented by an attorney and must provide counsel with a copy of the whistleblower submission signed under the penalty of perjury.2 The attorney will verify the identity of the whistleblower before submitting any information to the SEC; serve as an intermediary between the SEC and whistleblower during any investigation and related enforcement action; and advocate for the highest potential monetary award if the submission results in a successful SEC enforcement action. Prior to receiving any monetary award, for eligibility, tax and other reasons, whistleblowers must disclose their identity to the SEC.

Over the years, the SEC has carefully guarded the anonymity of whistleblowers, and is required to make every effort to protect any sensitive identifying information. In Fiscal 2016, nearly 65% of SEC Whistleblower award recipients were company insiders and almost one quarter of the award recipients submitted their information anonymously through counsel.

Anonymous Reporting

$368mBALANCE OF INVESTOR

PROTECTION FUND FROM

WHICH AWARDS ARE PAID

(AS OF FY 2016)

$153mSEC WHISTLEBLOWER

AWARDS PAID TO DATE

4,218NUMBER OF

SEC WHISTLEBLOWER

SUBMISSIONS IN FY 2016


Dodd-Frank also established powerful anti-retaliation protections for whistleblowers, including a new private right of action for employees subjected to retaliation by their employer. The Act also significantly improved existing whistleblower-protection laws, most notably the related provisions of the Sarbanes-Oxley Act of 2002 (SOX). Many whistleblowers may also be eligible for other federal and state whistleblower protections.

Anti-Retaliation Protections for SEC WhistleblowersUnder the SEC Whistleblower Program, an employer may not discharge, demote, suspend, threaten, harass, or take any other retaliatory action against an employee who:

provides information about his or her employer to the SEC in accordance with the whistleblower rules;

initiates, testifies in, or assists in an investigation or judicial or administrative action; or

makes disclosures that are required or protected under SOX, the Exchange Act, and any other law, rule, or regulation subject to the jurisdiction of the Commission.3

If retaliation occurs, the employee is granted an automatic private right of action in federal court, without the need to exhaust administrative remedies prior to filing.4 In addition, some courts have held that the private right of action extends to disclosures even if an employee does not provide the information to the SEC. While the law is currently unsettled on this question,5 the view of the majority of federal district and appellate courts is that Dodd-Frank does confer protection from retaliation for internal reporting of possible securities violations, even if the employee would not otherwise qualify as a whistleblower for purposes of receiving an award.6 Both the SEC and Labaton Sucharow have advocated for this favorable legal interpretation.7

The remedies available include reinstatement to the same seniority, double back pay, and litigation costs (including attorneys’ fees and expert witness fees). An employee suing under this section must file the claim no later than six years from the retaliatory conduct or three years from when the employee knew, or reasonably should have known, of the retaliatory conduct, but in no event to exceed 10 years after the date of the violation.

To qualify for these anti-retaliatory protections, the whistleblower must possess a “reasonable belief” that the information provided relates to a possible securities violation. The SEC has explained that a “reasonable belief” is a subjectively genuine belief that the information demonstrates a possible violation, and that this belief is one that a similarly situated employee might reasonably possess.8 Furthermore, the information must demonstrate a “possible violation,” which eliminates frivolous

submissions from eligibility.

Employment Protections

TThe SEC Whistleblower Program was specially designed to protect courageous whistleblowers and severely

punish companies that retaliate against them.


Enhancement of SOX Anti-Retaliation ProtectionsDodd-Frank also enhanced anti-retaliation protections established by SOX, expanding coverage beyond public companies to employees of affiliates and subsidiaries of publicly traded companies.9 This includes foreign subsidiaries and affiliates of U.S. public companies.10

The largest award in the history of the SEC Whistleblower Program—more than $30 million—was paid to an international whistleblower.

Through these enhancements, Dodd-Frank now provides broad extraterritorial reach in actions brought by the SEC and the Justice Department.11 The SEC’s whistleblower program was designed with an understanding of the nature of the global economy. Since the program’s initiation, the SEC has received whistleblower tips from individuals in more than 100 countries outside the United States. Furthermore, Dodd-Frank expands SOX coverage to employees of nationally recognized statistical ratings organizations, such as Moody’s Investors Service Inc., A.M. Best Company Inc., and Standard & Poor’s Ratings Service.12

Finally, Dodd-Frank doubles the statute of limitations for SOX whistleblower claims from 90 to 180 days; provides for a jury trial for claims brought under SOX whistleblower protections; and declares void any “agreement, policy form, or condition of employment, including a predispute arbitration agreement” which waives the rights and remedies afforded to SOX whistleblowers.13

New Anti-Retaliation Protections for Financial Service EmployeesCongress also created the Consumer Financial Protection Bureau through Dodd-Frank. The Dodd-Frank extends whistleblower protection to employees of financial products or services companies. Some examples of such companies include those that conduct the following: extend credit or services or brokers loans; provide real estate settlement services or perform property appraisals; provide financial advisory services to consumers relating to proprietary financial products (including credit counseling); or collect, analyze, maintain, or provide consumer report information or other account information in connection with decisions regarding the offering or provision of a consumer financial product or service.14

Employees of such companies cannot be retaliated against for any of the following:

(i) testifying or expressing the willingness to testify in a proceeding for administration or enforcement of Dodd-Frank;

(ii) filing, instituting or causing to be filed or instituted, any proceeding under any federal consumer financial law; or

(iii) objecting to, or refusing to participate in any activity, practice, or assigned task that the employee reasonably believes to be a violation of any law, rule, standard, or prohibition subject to the jurisdiction of the Bureau.15

A financial services employee who experiences retaliation must file a complaint within 180 days of the retaliatory conduct with the Secretary of Labor, and may seek de novo review in federal district court within 120 days of the Secretary of Labor’s determination (or 210 days after filing with the Secretary of Labor). The sole requirement for filing a claim is to demonstrate, by a preponderance of the evidence, that the protected conduct was a “contributing factor” to the retaliation.16 Upon such a showing, the burden shifts to the employer to show, by clear and convincing evidence, that it would have taken the same action regardless of the employee’s protected activity.17

In 2016, Labaton whisteblowers spurred a $415 million penalty against Merrill Lynch.


New SEC Power to Enforce the Anti-Retaliation ProvisionsTo further protect SEC whistleblowers, Dodd Frank empowered the SEC to bring enforcement actions for wrongful retaliation.18 Concerning this Rule, the SEC has stated:

Rule 21F-2(b)(2) states that Section 21F(h)(1) of the Exchange Act, including any rules promulgated thereunder, shall be enforceable in an action or proceeding brought by the Commission. Because the anti-retaliation provisions are codified within the Exchange Act, we agree with commenters that we have enforcement authority for violations of Section 21F(h)(1) by employers who retaliate against employees for making reports in accordance with Section 21F.19 A number of recent cases demonstrate the SEC’s expansive view on whistleblower protections, and its determination to fight back against retaliation.

The SEC has recently begun to wield its anti-retaliation authority in earnestThe SEC is keenly aware that in order to protect and encourage whistleblowers, it must fight against measures designed to stymie transparency. A number of recent cases demonstrate the SEC’s expansive view on whistleblower protections, and its determination to fight back against retaliation.

In the case of Paradigm Capital Management, Inc.,20 the whistleblower was Paradigm’s head trader and a Labaton Sucharow client. He reported to the SEC that the firm and its owner had engaged in principal transactions that created an undisclosed conflict of interest with a client. After the firm learned of the whistleblowing, it reassigned the head trader to full-time compliance assistant, stripped him of his supervisory responsibilities, and otherwise marginalized him. Paradigm agreed to settle this case for $2.2 million, and the whistleblower received the statutory maximum award.21

In another landmark case, the SEC brought a stand-alone enforcement action for retaliation against International Gaming Technology, even though IGT was not found to have violated any other securities laws—including those which were the subject of the whistleblower’s reports.22

Most recently, the SEC settled charges, including a retaliation charge, brought against SandRidge Energy. This case was notable because it involved internal reporting only.23 Office of the Whistleblower Chief, Jane Norberg stated the following in the press release announcing the settlement: “Whistleblowers who step forward and raise concerns internally to their companies about potential securities law violations should be protected from retaliation regardless of whether they have filed a complaint with the SEC.”24

Knowing that the SEC has your back, makes doing the right thing a lot easier.


In determining who qualifies for an SEC whistleblower award, there are four general criteria. It is important to note that certain threshold requirements are set forth in the Whistleblower Program and there are certain types of individuals that are either ineligible or are subject to additional procedural requirements before they can receive an SEC whistleblower award.25

Qualifying for a Reward as a Whistleblower Typically, the Whistleblower Program provides for a monetary award to any eligible individual or group of individuals (a company or other entity is not eligible), regardless of citizenship, who:

voluntarily provide the Commission;

with original information about a possible violation of the federal securities laws;

that leads to a successful enforcement action;

resulting in monetary sanctions exceeding $1,000,000.26

Due to their importance, we examine each of these four main criteria for qualifying for a whistleblower award in greater detail.

Voluntarily ProvideTo qualify for an award as a whistleblower, the first requirement is that the individual “voluntarily provide” the information to the SEC. Information is provided voluntarily if it is provided “before a request, inquiry, or demand” for such information: (i) by the SEC; (ii) by the Public Company Accounting Oversight Board or any self-regulatory organization in connection with an investigation, inspection or examination; or (iii) in connection with an investigation by Congress, the Federal Government, or a state Attorney General or securities regulatory authority.27 The submission also will not be considered voluntary if the whistleblower was required to provide the information to the SEC as a result of a pre-existing legal duty to the Commission, or a contractual duty owed to the Commission or to one of the other authorities enumerated in the previous sentence, or pursuant to a duty that arises out of a judicial or administrative order.28Only a request, inquiry, or demand made on an individual whistleblower will be considered in connection with the question of whether a submission is voluntary.

A request, inquiry or demand on the organization for which a whistleblower is employed, for example, will have no bearing. Thus, if an employee is aware that a demand for information was made to his or her employer or that the employer is being investigated, and that employee provides the SEC with information about a possible securities violation, the submission could still be deemed voluntary. But an issue could arise if the employee provides the same information to the Commission that the Commission received as part of its investigation of the company (or would have received even if the employee had not provided the information to her employer during the investigation). That could affect the determination of whether the employee’s submission led to a successful enforcement action, another required element for an SEC whistleblower award.

Another important caveat is that a submission to the SEC may be deemed voluntary, even if made after receiving a request, inquiry, or demand from the SEC, if the information was voluntarily provided to another law enforcement or regulatory authority prior to the SEC’s request or inquiry.

Monetary Awards


Original InformationThe second requirement for receiving an award is that the individual provide original information. To be considered original, the information must be:

derived from independent knowledge or independent analysis;

not already known to the SEC from any other source;

not exclusively derived from an allegation made in a judicial or administrative hearing, in a governmental report, hearing, audit, or investigation, or from the media, unless the whistleblower was the original source for the information; and

provided to the SEC after July 21, 2010.29

Independent Knowledge and Independent Analysis. The Commission defines independent knowledge as factual information in the individual’s possession that is not derived from publicly available sources.30 Significantly, the information could be gained from experiences, communications, and observations in business or social interactions. In other words, the individual need not have first-hand knowledge of the possible violation, but could have learned of the facts from a third party.

Independent analysis is defined as an individual’s own examination and evaluation of information that may be publicly available, such as financial reports, but which reveals information that is not generally known or available to the public.31

There are a number of important circumstances in which the SEC will not consider information to be derived from independent knowledge or analysis. These exclusions generally apply to narrow categories of individuals, such as lawyers, consultants, and other third parties who acquire information as part of their work on behalf of a client, or company insiders who learn of the information in connection with their role in an internal investigation into wrongdoing, as well as information acquired illegally. Specifically, information is excluded in the following circumstances:

when the information is subject to the attorney-client privilege, unless disclosure of that information would otherwise be permitted by an attorney pursuant to § 205.3(d)(2), the applicable state attorney conduct rules, or otherwise;

the information was obtained in connection with the legal representation of a client, and the lawyer seeks to make a whistleblower submission for his or her own benefit, unless disclosure of that information would otherwise be permitted by an attorney pursuant to § 205.3(d)(2), the applicable state attorney conduct rules, or otherwise;

the information was obtained because the individual was (a) an officer, director, trustee, or partner of an entity and was informed of the allegations by another person, or learned of the allegations in connection with the entities internal process for identifying and reporting violations of law; (b) an employee whose duties involve compliance or internal audits, or an employee of a firm retained to perform compliance or internal audit; (c) employed by a firm retained to conduct an internal investigation; or (d) an employee of a public accounting firm and the information was obtained during an engagement; or

the information was obtained by means determined by a United States court to violate federal or state criminal law.32

There are a few important exceptions to the third category of exclusions—individuals who are insiders and third parties retained to perform legal, audit, or investigative work. This exclusion will not apply if the whistleblower has a reasonable basis to believe disclosure is necessary to prevent the entity from engaging in conduct that will cause substantial injury to the entity or the investing public, or that the relevant entity is engaging in conduct that will impede an investigation. In addition, the exclusion will not apply if more than 120 days have elapsed since the whistleblower provided the information to the entity’s audit committee, chief legal or compliance officer, or his or her supervisor.33


Original Source. As stated above, for information to be considered original, it cannot already be known to the SEC from any other source. There are two exceptions to this rule. First, the SEC will consider a whistleblower the original source of information that was previously received by the SEC from another source if that source obtained the information from the whistleblower or the whistleblower’s representative in the first place (and the information otherwise satisfies the definition of original). Second, the SEC will consider a whistleblower to be the original source of information if that information derives from the whistleblower’s independent knowledge or analysis and materially adds to the information already known to the Commission.34

Successful Enforcement ActionThe third requirement is that the whistleblower’s voluntarily provided, original information must lead to a successful enforcement action. The applicable rules set forth three circumstances constituting a successful enforcement action:

The information provided to the Commission caused the Commission to commence an examination, open an investigation, reopen a previously-closed investigation, or inquire about different conduct as part of a current investigation, and the Commission brings a successful action based in whole or in part on the original information provided;

The original information relates to a conduct that is already under investigation by the Commission (or other federal authority) and significantly contributes to the success of an enforcement action based on that conduct; or

The information is provided by an employee through his or her employer’s internal reporting procedures before or at the same time the employee submits the information to the Commission, and the employer then provides the employee’s information (or the results of an internal investigation) to the SEC, which leads to a successful enforcement action (the employee will get the full credit for providing the information to the SEC).35

This last category was not in the original rules proposed by the SEC, and many comments expressed the concern that whistleblowers would completely bypass organizations’ internal reporting mechanisms.36 This provision was therefore added, along with other procedural incentives to encourage individuals to utilize internal compliance programs, and further encourage the use of these programs in facilitating compliance with the securities laws.

In addition, the SEC will pay an award based on sanctions collected in a related proceeding brought by the Attorney General of the United States, a regulatory authority or self-regulatory organization, or a state attorney general, that is based on the same information that led to the Commission’s successful enforcement action.37

TOP WHISTLEBLOWER TIPS RECEIVED IN FY 2016

USA 4,218CANADA 68

UNITED KINGDOM 63

53 AUSTRALIA

35 CHINA

20 INDIA


Monetary Sanctions Exceeding $1,000,000Generally, the monetary sanctions must exceed $1 million in a single judicial or administrative action. In some circumstances, however, the SEC will aggregate the sanctions collected in two or more proceedings if the proceedings arise out of a common nucleus of operative facts.38 In such cases, once this threshold is met, a whistleblower is eligible for a monetary award based upon all monetary sanctions collected in related enforcement actions—regardless of amount.

Procedures for Filing an SEC Whistleblower SubmissionRegulation 21F provides two methods for submitting information to the SEC: (1) online using the Commission’s Tip, Complaint or Referral Portal (http://www.sec.gov), or (2) by mailing or faxing a Form TCR to the SEC Office of the Whistleblower.39 The whistleblower must declare under penalty of perjury that the information contained in the submission is true and correct to best of his or her knowledge.40 Additionally, if the whistleblower wishes to remain anonymous, his or her submission must be made by an attorney in accordance with the same procedures just described.41

While the procedures for making a whistleblower submission to the SEC are relatively simple, it is essential that they be followed correctly, or a potential whistleblower might be disqualified from receiving an award or be ineligible for the anti-retaliation protections provided by Dodd-Frank.42 Moreover, due to the SEC’s limited resources and the high-volume of tips it receives, successful SEC whistleblowers often file sophisticated and detailed submissions. On behalf of its own SEC whistleblowers clients, Labaton Sucharow regularly files 100 page legal and factual whistleblower submissions with supporting exhibits.

Procedures for Filing an SEC Application for AwardAfter a successful enforcement action where the monetary sanctions exceed $1 million is announced, the SEC will post a Notice of Covered Action on its website. To claim an award, SEC whistleblowers and their legal counsel are required to mail or fax a completed application for award, SEC Form WB-APP, to the SEC Office of the Whistleblower, within 90 calendar days of the notice date. If the whistleblower provided his or her original submission anonymously, the whistleblower must disclose his or her identity on the Form WB-APP.43

As a courtesy, the SEC Staff often notifies known SEC whistleblowers or their legal counsel about the successful enforcement action and the opportunity to apply for an award. That being said, SEC whistleblowers are solely responsible for monitoring the SEC’s Notices of Covered Actions, so they do not miss the deadline for filing an application for award. On behalf of our SEC Whistleblower Program clients, Labaton Sucharow regularly monitors these notices and files lengthy applications for awards that address the governing law and highlight their many significant contributions during the SEC investigation and any related prosecution.


Determining the Amount of the AwardIf all conditions are met and a whistleblower is entitled to an award, the amount of that award will be between 10 and 30 percent of the sanctions collected by the SEC or other prosecuting authority.44 Even if there are multiple whistleblowers, the total amount awarded to all whistleblowers will still range between 10 and 30 percent of the sanctions, with the amount of the award for each whistleblower determined on an individual basis. The determination of the specific percentage within the range that will be used to calculate a reward is in the sole discretion of the SEC. There is no ceiling for an SEC whistleblower award.

In reaching its determination of specific award, the SEC considers several factors unique to the circumstances of each case. The factors that may increase a whistleblower’s award include:

the significance of the provided information to the success of the action or related action, including how the information related to the action and the degree to which the information supported one or more successful claims;

the degree of assistance provided by the whistleblower to the Commission in the action or related action, including, among other things, the extent to which the whistleblower explained complex transactions and interpreted key evidence, and assisted the authorities in the recovery of the fruits and instrumentalities of the violation;

law enforcement interest in prosecuting and deterring the type of securities violation involved in the submission; and

whether the whistleblower reported the potential violation internally using organizational compliance procedures.45

Conversely, factors that could reduce the size of a whistleblower’s award are:

the culpability or involvement of the whistleblower in the securities violation, including the whistleblower’s role in and the extent he or she benefited from the violation;

whether the whistleblower unreasonably delayed reporting the potential violation; and

if the whistleblower internally reported the potential violation in accordance with his or her employer’s compliance program, and whether, and the extent which, the whistleblower interfered with or undermined that program.46

As the above indicates, an individual will not automatically be precluded from receiving an award as a whistleblower if he or she had some culpability in the underlying violation. Generally, the extent of the culpability would merely be a factor considered by the SEC in determining the size of the award.

Due to the SEC’s limited resources, the probability of a successful enforcement action and the size of monetary award are dramatically enhanced when whistleblower tips

are supported by expert analysis and assistance.


With the prospect of large financial awards and robust employee protections provided by Dodd-Frank and the SEC Whistleblower Program, it is important that individuals are aware of what constitutes a qualifying violation for the program.

A whistleblower may report any possible violation of the federal securities laws that has occurred, is ongoing, or is about to occur. However, for the SEC to obtain a monetary civil penalty, the relevant securities violation(s) must have occurred, or have remained ongoing, within the past five years, even if the whistleblower did not discover the possible violation until a later date.47

of altering revenues, expenses, earnings, and/or losses for a reporting period. Sometimes these transactions might even be legal, but they are used unlawfully. A violation under this category could also occur when a company fails to speak truthfully when discussing its financial results, in press releases or analyst or investor presentations. Additional examples include undisclosed conflicts of interest, corporate governance/legal matters, or revenue impact of one-time events.

Offering FraudOffering fraud generally occurs when an individual (or group of individuals) makes misrepresentations and/or omissions of material fact to potential investors in a new company.

One example of this type of fraud is individuals contacting potential investors to induce them into investing in a new, unknown company, by making false claims about the company. Another common type of offering fraud is a Ponzi scheme, where investors are paid returns from their own money or from the money invested by subsequent investors, rather than from any actual earned profit. The operator of the scheme induces new investors by paying unusually consistent or abnormally high returns to older investors. Pyramid schemes are also an example of offering fraud.

Common Securities Violations

19% CORPORATE DISCLOSURES AND FINANCIALS 16% OFFERING FRAUD 14% MARKET MANIPULATION 7% INSIDER TRADING 5% TRADING AND PRICING 5% FCPA 3% UNREGISTERED OFFERINGS 3% MARKET EVENT 2% MUNICIPAL SECURITIES AND PUBLIC PENSION 24% OTHER 3% NOT REPORTED

WHISTLEBLOWER TIPS BY ALLEGATION TYPE (AVERAGE)


Market Manipulation Market manipulation is the interference with the free and fair operation of the market by engaging in conduct that creates an artificial price or maintains an artificial price for a security. Examples of market manipulation include:

Pump and Dump: Where owners of a security spread false information so that the price of the security will increase (the pump). When the price of the security does increase based on these false rumors, the owners who spread the false information sell off their shares, making a profit (the dump).

Bear Raid: Attempt by investors to move the price of a stock opportunistically by selling large numbers of shares short. The investors pocket the difference between the initial price and the new, lower price after this maneuver. This technique is illegal under SEC rules, which stipulate that every short sale must be on an uptick.

Wash Trading: Wash trading involves the simultaneous or near-simultaneous selling and repurchase of the same security for the purpose of generating activity and increasing the price.

Matched Orders: Orders to buy or sell securities that are entered with knowledge that a matching order on the opposite side has been or will be entered.

Painting the Tape: Placing successive orders in small amounts at increasing or decreasing prices.

�Spoofing/Layering: A tactic that has been used by high frequency traders to manipulate prices, spoofing is the placing of a bid or offer with the intent to cancel before execution. “Layering” is a form of spoofing in which the trader places multiple orders on one side of the book, in order to create a false impression of heavy buying or selling pressure.

Insider TradingInsider Trading is the buying or selling of a corporate security while in possession of material information that is not known to the public at the time, but which later becomes public and causes the price of the security to rise or fall significantly. Often, this information is obtained by corporate insiders who have access to this material information based on their position inside the organization. That insider then buys or sells the securities based on that information.

Insider trading may also occur when a corporate insider “tips” the nonpublic information to someone outside of the organization, who then buys or sells securities. In that case both the provider and the recipient of the information are liable for illegal insider trading. Insider trading is unlawful because trading while having special knowledge is unfair to other investors who don’t have access to such knowledge. An example of illegal insider trading is when an executive at Company A learned, prior to a public announcement, that Company A will be taken over, and bought shares in Company A knowing that the share price would likely rise.

SEC enforcement cases don’t get better with age. Tips that are over 5 years old are pretty much dead on arrival.


Trading and PricingTrading and pricing violations include any number of trading techniques that are illegal under the securities laws. For example:

�Market�Timing/Late�Trading: This occurs when a mutual fund permits certain customers to purchase shares in the fund after trading has closed for the day. Because mutual fund prices are set once a day, a customer that purchases after trading is closed can do so at that day’s price and not at the following day’s price.

Marking the Close: Buying or selling a security near the close of the day’s trading in order to affect the closing price.

Front Running: The buying or selling of securities while knowing that another investor is about to make a trade that will influence the price of the security. An example would be buying stock in Company A knowing that another investor is about to make a very large purchase of the same stock, causing its price to increase.

Pooling: An agreement among a group of people delegating authority to a single manager to trade in a specific stock, for a specific period of time, and then to share the resulting profits or losses.

Freeriding: Buying a stock in a cash account and selling before paying for it.

�Stock�Parking/Kiting: Forms of collusion between trading parties in which a trade is entered into with a side agreement that the seller will buy back the stock from the buyer at a later time (done to meet/avoid disclosure obligations), or that they will disregard settlement obligations so that one party can exploit the delay and continue to trade based on a position that should no longer be available.

Naked Shorting: Shares are sold short without arrangements made to borrow them to deliver, then seller intentionally fails to deliver within the standard three-day settlement period.

Churning: When a broker engages in excessive buying and selling of securities in a customer’s account chiefly to generate commissions that benefit the broker.

Cherry-Picking: Where an investment professional with both proprietary and management operations delays trade allocations until after results are in, and then allocates in an unfair manner (i.e., takes more successful trades in the proprietary account and sticks the managed accounts with most of the losers).Foreign Corrupt Practices Act (FCPA)

The Foreign Corrupt Practices Act (FCPA)The FCPA prohibits the offer, payment, or promise to pay money or anything of value—i.e., a bribe—to any foreign official in an effort to win or retail business from that foreign official’s government.

It is not a violation of the FCPA, however, if (i) the payments are legal under the written laws of the country in which the payments are made; or (ii) the payment is a reasonable expenditure directly related to the conducting of business with a foreign government.


Unregistered OfferingsWith limited exception, offerings of securities in the U.S. must be registered with the SEC. An offering that is not registered, or that fails to meet or adhere to the requirements for exemption, constitutes a violation (and sales, or attempted sales, are a serious crime).

Non-public offerings are among the more common exceptions to the registration requirement. This exemption, sometimes referred to as the “private placement” exemption, is established by Section 4(a)(2) of the Securities Act, and generally applies to offerings in which purchasers are informed, “sophisticated investors” who have agreed not to resell the securities to the public.

Notwithstanding these general parameters, however, this exemption leaves much to interpretation, and thus a safe harbor is included in Rule 506 of Regulation D. In addition, in Rules 504-504, Regulation D sets forth some other common exceptions to registration, which generally turn on one or more of the following:

the size/duration of the offering (e.g., an offering of $1 million or less over a 12-month time period faces the least restrictions in qualifying for exemption);

the means of solicitation (public advertising is often a hitch);

the level of disclosure provided; and

the characteristics of the investors and/or the securities.

The JOBS Act (discussed in Section I.H., supra) required certain amendments to existing exemptions and creation of new ones to make it easier, particularly for smaller companies, to raise capital without SEC registration.

Market EventsMarket events refer to disruptions or aberrations in the securities markets, such as an unexpected interruption in trading on a securities exchange, a liquidity crisis or a flash crash. While not all such market events represent securities violations, the SEC has brought enforcement actions against exchanges and related entities where the market event was caused or exacerbated by the exchange’s failure to follow relevant SEC or internal rules. The SEC and other federal agencies conduct surveillance of trends and dealer and investor positions to help determine whether market events are indicative of fraudulent activities.

Municipal Securities and Public PensionsMunicipal securities are debt securities issued by state and local governments in the United States and its territories, and are generally used to fund items such as infrastructure, schools, libraries, and other general municipal expenditures. Dealers in municipal securities are required to disclose material information about the securities to investors and, as with any security, securities laws prohibit any person from making a false or misleading statement of material fact, or omitting any material fact in connection with the offer, purchase, or sale of any municipal security. Thus, a failure to comply with these laws in connection with the purchase or sale of municipal securities would be an actionable securities violation subject to SEC enforcement.


In addition to its new authority to bring enforcement actions based on retaliation against employee whistleblowers, the SEC can also pursue companies under Regulation 21F-17 for impermissible secrecy agreements that discourage employees from reporting possible securities violations to the SEC. This has been a particular point of emphasis for the regulator.

The first case brought was the Matter of KBR, Inc., which established that merely failing to make clear that a confidentiality provisions does not restrict reporting to the SEC can run afoul of the law. In that case, KBR required employees participating in an internal investigation to sign a broad confidentiality agreement which prohibited discussing particulars of an interview without the prior authorization of KBR’s legal department upon threat of disciplinary action, including termination of employment. KBR agreed to pay a $130,000 fine and change its confidentiality agreement language going forward.49

Since the KBR case, the SEC has made clear that this is an area of continuing, keen focus. The issue also arose in the SEC’s case against Merrill Lynch, which involved a group of SEC whistleblowers represented by Labaton Sucharow and settled in June 2016 for $415 million. The SEC found that Merrill Lynch had used “improper confidentiality provisions” in severance agreements for departing employees that prohibited them from disclosing confidential information to any outside entity without prior approval from the firm.50

In addition to the KBR and Merrill Lynch cases, there have been no less than seven other recently settled cases involving this issue, including BlueLinx Holdings Inc.,51 Health Net, Inc.,52 InBev,53 NeuStar Inc.,54 the above-discussed Sandridge Energy,55 BlackRock Inc.,56 and HomeStreet Inc.57

Restrictive Employment Agreements

2012

2013

2014

2015

2016

3,001

3,238

3,620

3,923

4,218

7.9%

11.8%

8.4%

7.5%

YEAR/AMOUNT % INCREASE OVER PRIOR YEAR

WHISTLEBLOWER TIPS RECEIVED BY THE SEC


Although the Whistleblower Program has been in effect for less than six years at the time of this writing, and SEC investigations typically take two to four years to complete, it has already had a tremendous impact on the enforcement of securities violations. Each year, the SEC receives more than 20,000 tips, complaints and referrals. Of these, more than 4,000 tips are received through the SEC Whistleblower Program. At any one time, the SEC actively conducts about 2,000 investigations. The SEC has made clear it has no patience for impeding whistleblowing in any form and has warned companies that it will sanction those that step out of line.

The SEC’s Investor Protection Fund, exclusively dedicated to paying whistleblower awards, is richly endowed to continue this important work—with over $368 million in funds, as illustrated in the following chart:

Early Success of the SEC Whistleblower Program

FY 2016

Balance of Fund at beginning of fiscal year $ 400,693,089.56

Amounts deposited into or credited to Fund during fiscal year $ 0.00*

Amount of earnings on investments during fiscal year $ 2,412,788.41

Amount paid from Fund during fiscal year to whistleblowers $ (34,945,648.43)

Amount disbursed to Office of the Inspector General during fiscal year $ (44,222.10)

Balance of Fund at end of the fiscal year $ 368,116,007.44

* Section 4D(a) of the Exchange Act, id. § 78d-4(a).

In addition, the following chart gives a sense of how whistleblower awards have been distributed so far:

September 2014

August 2016

June 2016

September 2013

May 2016

September 2016

May 2016

July 2015

March 2016

April 2015

$30 Million

$22 Million

$17 Million

$5 – $6 Million

$1.4 – $1.6 Million

$14 Million

$4 Million

$3.5 Million

$3 Million

$2 Million

TOP 10 SEC WHISTLEBLOWER AWARDS

To provide a sense of how significant SEC enforcement actions can be, in recent years, the SEC has secured more than $4 billion annually in monetary sanctions, with a number of individual actions exceeding $100 million. For example, some of our clients tipped the SEC about securities violations at Merrill Lynch that recently resulted in a staggering $415 million in sanctions!

The information provided by SEC whistleblowers has led to over $584 million in sanctions for violations or alleged violations.58 These sanctions are commonly used to reimburse victimized investors, and can therefore literally be life-changing for individuals and their families. The program also provides immeasurable societal benefits by fostering orderly markets protecting employees and other vulnerable individuals.

Thus, we have it on good and abundant authority that participation in the whistleblower program by those situated to do so also leads to better sleep at night.

Our partners have had the pleasure of serving—for decades—in senior positions at the SEC and DOJ during both Republican and Democratic administrations. In our experience, unlike financial regulation, white collar law enforcement has been a bipartisan priority for most administrations. Given the program’s early success, long-term potential and relatively low operation cost, we fully expect that the SEC Whistleblower Program will remain substantially unchanged in the years ahead.

ConclusionThe passage of Dodd-Frank and the enactment of the SEC Whistleblower Program were watershed moments in financial regulation and investor protection. Going forward, it is likely that many of the SEC’s most significant enforcement actions will result from whistleblower tips, changing the landscape of securities enforcement for generations. Responsible organizations must carefully and continually evaluate their internal reporting systems and maintain cultures of integrity. However, bad actors may persist. It is vital to the safety and integrity of our markets that potential whistleblowers and their counsel familiarize themselves with the relevant statutory provisions and the rules adopted by the SEC so whistleblowers can properly and safely report and maximize their awards.

The SEC has made clear it has no patience for discourage whistleblowing in any way.

WORK WITH US

An ultra-selective practice. A team with a century of federal law enforcement experience, led by a principal architect of the SEC Whistleblower Program. Exclusively partners working exclusively for SEC whistleblowers.

World-class in-house investigators, accountants and analysts. Precedent-setting whistleblower awards.

A practice like no other.


ENDNOTES1 See https://www.sec.gov/page/whistleblower-100million.2 As set forth in Regulation 21F-7(b), a whistleblower who wishes to submit information to the Commission anonymously must do the following: (1) . . . have an attorney represent [them] in connection with both [their] submission of information and . . . claim for an award, and [the] attorney’s name and contact information

must be provided to the Commission at the time [of] submi[ssion]; (2) . . . follow . . . procedures set forth in [Regulation] 21F-9 [involving, inter alia, attorney certification of certain information about the submission]; and (3) . . . disclose [their] identity to the Commission [which] must be verified [prior to payment of any award].

3 Exchange Act § 21F(h)(1)(A)(i)-(iii).4 Id. at § 21F(h)(1)(B)(i). Victims of wrongful termination are commonly required to bring their claims, in the first instance, to an employment agency such as the Occupational

Safety and Health Administration, the Equal Employment Opportunity Commission or their state Employment Agency. Section 21F(h) dispenses with that requirement.5 Compare Berman v. Neo@Ogilvy LLC, 801 F.3d 145 (2d Cir. 2015) (holding that whistleblowers who report securities law violations internally but not to the SEC are nonetheless

protected under Dodd-Frank from employer retaliation) and Somers v. Digital Realty Trust, Inc., No. 15-17352, 2017 WL 908245 (9th Cir. March 8, 2017) (agreeing with Berman) with Asadi v. G.E. Energy (USA), L.L.C., 720 F.3d 620 (5th Cir. 2013) (holding to the contrary).

6 See Feltoon v. MG2 Corp., No. 2:15-cv-02032, Dkt. 22, slip op. 4-5 (W.D. Wash. Sept. 30, 2016); Lutzeier v. Citigroup, Inc., No. 14-cv-00183, 2015 WL 7306443, at *2 (E.D. Mo. Nov. 19, 2015); Wadler v. Bio-Rad Labs., Inc., No. 15-cv-02356, 2015 WL 6438670, at **14-17 (N.D. Cal. Oct. 23, 2015); Dressler v. Lime Energy, No. 3:14-cv-07060, 2015 WL 4773326, at **4-16 (D.N.J. Aug. 13, 2015); Connolly v. Remkes, No. 5:14-cv-01344, 2014 WL 5473144, at **4-6 (N.D. Cal. Oct. 28, 2014); Peters v. LifeLock Inc., No. 2:14-cv-00576, Dkt. 47, slip op. 6-13 (D. Ariz. Sept. 19, 2014); Bussing v. COR Clearing, LLC, 20 F. Supp. 3d 719, 727-35 (D. Neb. 2014); Yang v. Navigators Group, Inc., 18 F. Supp. 3d 519, 533-34 (S.D.N.Y. 2014); Khazin v. TD Ameritrade Holding Corp., No. 13-4149 (SDWQ)(MCA), 2014 WL 940703, at **3-6 (D.N.J. Mar. 11, 2014); Azim v. Tortoise Capital Advisors, LLC, No. 13-2267-KHV, 2014 WL 707235, at **2-3 (D. Kan. Feb. 24, 2014); Ahmad v. Morgan Stanley & Co., 2 F. Supp. 3d 491, 495-97 n.5 (S.D.N.Y 2014); Rosenblum v. Thomson Reuters (Mkts.) LLC, 984 F. Supp. 2d 141, 146-49 (S.D.N.Y. 2013); Murray v. UBS Securities, LLC, No. 12-5914, 2013 WL 2190084, at *4 (S.D.N.Y. May 21, 2013); Ellington v. Giacoumakis, 977 F. Supp. 2d 42, 44-46 (D. Mass. 2013); Genberg v. Porter, 935 F. Supp. 2d 1094, 1106-07 (D. Colo. 2013); Nollner v. Southern Baptist Convention, Inc., 852 F. Supp. 2d 986, 995 (M.D. Tenn. 2012); Kramer v. Trans-Lux Corp., No. 3:11CV1424 SRU, 2012 WL 4444820, at **4-5 (D. Conn. Sept. 25, 2012); Egan v. TradingScreen, Inc., No. 10 Civ. 8202, 2011 WL 1672066, at *5 (S.D.N.Y. May 4, 2011).

7 See 2016 Annual Report to Congress on the Dodd-Frank Whistleblower Program, at 21-22, available at https://www.sec.gov/whistleblower/reportspubs/annual-reports/owb-annual-report-2016.pdf; see also Labaton Sucharow Petition for Rulemaking, July 18, 2014, available at https://www.sec.gov/rules/petitions/2014/petn4-677.pdf.

8 Implementation Release at 16 (emphasis in original) (citing Livingston v. Wyeth, Inc., 520 F.3d 344, 352 (4th Cir. 2008); Clover v. Total Sys. Servs., Inc., 176 F.3d 1346, 1351 (11th Cir.1999)).

9 Pub. L. 111-203, § 929A.10 Id. at § 929P(b). 11 Id. at § 929P(c).12 Id. at § 922(b).13 Id. at § 922(c). 14 Id. at § 1002(15)(A).15 Pub. L. 111-203, § 1057(a)(1)-(4).16 Id. at § 1057(c)(3)(c).17 Id.18 17 C.F.R. § 240.21F-2(b)(2).19 Implementation Release at 18. 20 Release No. 2014-118 (June 16, 2014), available at http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370542096307#.VAndkPldXxp. 21 Id.; see also Release No. 2015-75 (April 28, 2015), available at https://www.sec.gov/news/pressrelease/2015-75.html. 22 Release No. 2016-204 (Sept. 29, 2016), available at https://www.sec.gov/news/pressrelease/2016-204.html. 23 See Order, Release No. 79607 (Dec. 20, 2016), available at https://www.sec.gov/litigation/admin/2016/34-79607.pdf.24 Release No. 2016-270 (Dec. 20, 2016), available at https://www.sec.gov/news/pressrelease/2016-270.html.25 As set forth in Regulation 21F-8(c), the whistleblower cannot: (1) have been a member, officer, or employee of the Commission, the Department of Justice, an appropriate

regulatory agency, a self-regulatory organization, the Public Company Accounting Oversight Board, or any law enforcement organization at the time they acquired the original information provided to the Commission; (2) have been a member, officer, or employee of a foreign government, any political subdivision, department, agency, or instrumentality of a foreign government, or any other foreign financial regulatory authority as that term is defined in . . . the Exchange Act (15 U.S.C. 78c(a)(52)) at the time they acquired the original information provided to the Commission; (3) be convicted of a criminal violation that is related to the Commission action or to a related action; (4) have obtained the original information through an audit of a company’s financial statements, such that making a whistleblower submission would be contrary to requirements of Section 10A of the Exchange Act (15 U.S.C. 78j-a); (5) be the spouse, parent, child, or sibling of a member or employee of the Commission, or reside in the same household as a member or employee of the Commission; (6) have acquired the original information from a person or persons (i) who would be restricted under #4, above, unless the information is not excluded from their use or is about possible violations by them, or (ii) with intent to evade any provision of these rules; or (7) knowingly and willfully make any false, fictitious, or fraudulent statement or representation, or use any false writing or document knowing that it contains any false, fictitious, or fraudulent statement or entry with intent to mislead or otherwise hinder the Commission or another authority.

26 17 C.F.R. § 240.21F-3.27 Id. at § 240.21F-4(a)(1).28 Id. at § 240.21F-4(a)(3).29 Id. at § 240.21F-4(b).30 Id. at § 240.21F-4(b)(2).31 Id. at § 240.21F-4(b)(3).32 17 C.F.R. § 240.21F-4(b)(4)(i)-(iv).33 Id. at § 240.21F-4(b)(4)(v).34 Id. at § 240.21F-4(b)(5)-(6).35 Id. at § 240.21F-4(c).36 Implementing Release at 101-07.37 17 C.F.R. § 240.21F-3(b).38 Id. at § 240.21F-4(d).39 Id. at § 240.21F-9(a). “TCR” stands for Tips, Complaints and Referrals.40 Id. at § 240.21F-9(b).41 Id. at § 240.21F-4(c).42 Id. at § 240.21F-8(a).43 17 C.F.R. § 240.21F-10(c).44 17 C.F.R. § 240.21F-5(b).45 Id. at § 240.21F-6(a).46 Id. at § 240.21F-6(b).47 See 28 U.S.C. § 2462; Gabelli v. SEC, 133 S.Ct. 1216 (2013).48 See Appendix A of the SEC’s 2016 Annual Report to Congress on the Dodd-Frank Whistleblower Program, available at https://www.sec.gov/whistleblower/reportspubs/annual-

reports/owb-annual-report-2016.pdf.49 Release No. 2015-54 (April 1, 2015), available at https://www.sec.gov/news/pressrelease/2015-54.html. 50 Release No. 2016-128 (June 23, 2016), available at https://www.sec.gov/news/pressrelease/2016-128.html. 51 Release 2016-157 (Aug. 10, 2016) available at https://www.sec.gov/news/pressrelease/2016-157.html. 52 Release No. 2016-164 (Aug. 16, 2016), available at https://www.sec.gov/news/pressrelease/2016-164.html. 53 Release No. 2016-196 (Sept. 28, 2016), available at https://www.sec.gov/news/pressrelease/2016-196.html. 54 Release No. 2016-268 (Dec. 19, 2016), available at https://www.sec.gov/news/pressrelease/2016-268.html. 55 Release No. 2016-270 (Dec. 20, 2016), available at https://www.sec.gov/news/pressrelease/2016-270.html.56 Release No. 2017-14 (Jan. 17, 2017), available at https://www.sec.gov/news/pressrelease/2017-14.html.57 Release No. 2017-24 (Jan. 19, 2017), available at https://www.sec.gov/news/pressrelease/2017-24.html.58 2016 Annual Report to Congress on the Dodd Frank Whistleblower Program, at 1, available at https://www.sec.gov/whistleblower/reportspubs/annual-reports/owb-annual-

report-2016.pdf.


© 2017 Labaton Sucharow LLP

In addition to the information contained in this Handbook, we encourage readers to visit our website here to review Frequently Asked Questions about the program, the reporting process and our Firm.

ChicagoNew YorkWashington DC Delaware

140 BroadwayNew York, NY 10005

Attorneys—in-house and outside counsel alike—often stand at the crossroads of corporate

misconduct. At one time, attorneys’ duty to maintain corporate clients’ confidences was thought to be virtually absolute. But that changed over time, as relevant rules and laws gave lawyers greater discretion to make public disclosures to avert clients’ anticipated or ongoing wrongdoing. And now, following the enactment of the whistleblower provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act, attorneys will sometimes have not only discretion but a financial incentive to blow the whistle, as well as employment protections.

Imagine this scenario: You are in-house counsel to a public corporation. In the course of your legal work, you discover that your employer—your client—is making materially false statements about the corporation’s financial performance in its soon-to-be-filed annual report. You have reported the problem up the issuer’s chain of command and tried to persuade your client to correct the false statements. Can you report your client’s misconduct to the U.S. Securities and Exchange Commission, and what will happen if you do so?

Arguably the most sweeping financial reform effort since the Great Depression, Dodd-Frank was a potent response to a long series of corporate scandals—beginning with Enron and continuing into the current economic crisis—that have defrauded countless investors and shaken the financial markets. One of Dodd-Frank’s key provisions required the SEC to establish a whistleblower program that would offer

significant employment protections and monetary awards to individuals who report possible federal securities violations. Attorneys are eligible to participate in this important investor protection program.

Under Dodd-Frank, the SEC is required to pay monetary awards—between 10 and 30 percent of the total monetary sanctions collected by the SEC and in other related enforcement actions—to individuals who voluntarily provide the SEC with original information leading to an enforcement action in which the agency obtains at least $1 million in sanctions.

The statute also provides robust employment protections that prohibit retaliation against an employee who provides information about possible securities violations to the SEC in accordance with the program’s implementing rules. In the event retaliatory action is taken, it establishes significant remedies, including reinstatement with equivalent seniority, two-times back pay with interest, attorney fees, and other related expenses. Significantly, whistleblowers may report possible violations anonymously if represented by counsel.

Although Dodd-Frank permits attorneys to participate in the SEC Whistleblower Program, their ability to receive monetary awards is limited. Specifically, the implementing rules prohibit attorneys from using information obtained through a communication protected by the attorney-client privilege or through the representation of a client, unless the attorney-client privilege has been waived, or if disclosure of the otherwise confidential information is permitted either by SEC Rule 205.3 or by the applicable state attorney conduct rules.

Rule 205.3 generally requires an issuer’s attorney to report fraud and other material securities violations up the organization’s chain of command. There are three situations, however, in which an attorney is permitted to disclose confidential information to the SEC without the issuer’s consent or without having first reported internally. The attorney may disclose the information if the attorney reasonably believes disclosure is necessary to:

prevent a material violation that is 1. likely to cause substantial financial injury to the issuer or investors;prevent the issuer from committing 2. or suborning perjury, or perpetrating a fraud upon the SEC; orrectify the consequences of a material 3. violation, in the furtherance of which the attorney’s services were used.

State professional conduct rules may also authorize attorneys to report corporate client misconduct. Rules governing confidentiality include exceptions that vary from state to state. Rule 1.6 of the American Bar Association’s Model Rules of Professional Conduct generally permits disclosure of confidential information to prevent a client from committing a serious crime or fraud in which the attorney’s services were used.

Like Rule 205.3, Rule 1.6 also permits disclosures to rectify or mitigate a crime or fraud that has or will cause substantial injury to the financial interests or property of another, and in furtherance of which the attorney's services were used. Many states follow this rule, although some give attorneys broader or more limited discretion to prevent or rectify client misconduct. When the client is an organization, most

Balancing Conscience and Confidentiality for Attorney Whistleblowers

Bruce Green and Jordan Thomas

June 6, 2012

Bruce Green Jordan Thomas

state rules—based on ABA Model Rule 1.13—mandate that the attorney first report any wrongdoing up the organization’s chain of command. Only if the organization fails to take proper action may the attorney then disclose the confidential information as permitted by Rule 1.6.

Rule 205.3 may occasionally conflict with state confidentiality rules. In that situation, an attorney could comply with Rule 205.3 and qualify as an SEC whistleblower, yet seemingly face a state bar disciplinary action. However, Rule 205.3 would almost certainly protect the attorney by preempting the state rule.

Under the federal Supremacy Clause, a regulation duly enacted by a federal agency preempts conflicting state law if its enactment was a valid exercise of congressionally delegated authority, and the federal agency intended to preempt state law when it promulgated the regulation.

There is little doubt that Rule 205.3 was validly enacted by the SEC because Congress required the agency to set minimum attorney-conduct rules in Section 307 of the Sarbanes-Oxley Act. Moreover, Rule 205 clearly manifests the SEC’s intention to preempt conflicting state attorney-conduct rules with the rules set forth in Rule 205, including the disclosure rules of Rule 205.3. Accordingly, our view is that an attorney may disclose confidential information in accordance with Rule 205.3 without regard to conflicting state confidentiality rules.

After making a whistleblower submission to the SEC, an attorney must consider other relevant state professional conduct rules, particularly those governing conflicts of interest. Dodd-Frank does not preempt these rules. Whether an attorney whistleblower has a conflict of interest in the representation of a corporation will depend upon the circumstances. In many situations, the representation would be unaffected by the attorney’s status as whistleblower. But in some situations it would be affected.

For example, if an attorney reports corporate misconduct to the SEC, the attorney could not advise the corporation how to respond to the inquiry, because the attorney could benefit financially if the SEC obtained civil sanctions. Outside counsel

in this situation could simply decline or terminate the representation; in-house counsel could seek reassignment to matters unrelated to the reported violation.

An in-house lawyer denied reassignment would face an interesting quandary. Dodd-Frank’s anonymity provisions generally protect employees from disclosing that they are whistleblowers, but it may be necessary for the attorney to disclose this status if a simple request for reassignment or assertion that “I have a conflict” is ineffective.

Attorneys should view whistleblowing as a last resort and proceed with care. In particular, they should keep in mind the following key points:

In most cases, attorney whistleblowers •will be obligated first to conscientiously report possible securities violations to their corporate clients in accordance with the procedures outlined in Rule 205.3 and state professional conduct rules. Confidentiality is an important professional value, and compliance with the federal securities laws is promoted when individuals and entities work together to root out wrongdoing and discipline those responsible.Although the implementing rules •for the SEC whistleblower program require a whistleblower to have only a reasonable belief that a possible securities violation has occurred, is ongoing, or is about to occur, potential attorney whistleblowers should attempt to confirm the existence of a violation before reporting to the SEC. This practical step will help prevent unnecessary external reporting and minimize the risk of a later determination that reporting was impermissible.Where internal reporting is inappropriate •or has been unsuccessful, potential attorney whistleblowers should consult independent counsel regarding the risks, rewards, and requirements (both ethical and procedural) associated with reporting possible securities violations to the SEC.Even though Rule 205.3 preempts •state confidentiality rules, potential attorney whistleblowers must comply

with other state attorney conduct rules—especially state conflict of interest rules.For those who fear retaliation by •their employers (or unwarranted state ethics proceedings), it may make sense to report possible violations anonymously to the SEC with the assistance of counsel.

In the end, attorney whistleblowers are likely to be rare, but their very existence will represent a fundamental breakdown in corporate governance.

Bruce Green is an ethics professor and the director of the Louis Stein Center for Law and Ethics at Fordham Law School. Jordan Thomas is a partner at Labaton Sucharow and chairs its whistleblower representation practice. He also serves as editor of secwhistlebloweradvocate.com. Previously, he served as an assistant director and assistant chief litigation counsel at the U.S. Securities and Exchange Commission, where he had a leadership role in the development of the agency’s whistleblower program.

Reprinted with permission from the June 6, 2012 edition of CORPORATE COUnSEL © 2012 ALM Media Properties, LLC. This article appears online only. All rights reserved. Further duplication without permission is prohibited. For information, contact 877-257-3382 or [email protected]. # 016-06-12-04

June 6, 2012

Compliance

By Jordan a. Thomas

Without a robust ethical platform, corporate compliance is a post-facto and tactical exercise. In a post-Dodd-Frank environment, the stakes are too high for tactics. Companies need ethical strategists. Any corporate leader who disagrees need only con-sider that, with the new SEC whistleblower provisions enacted by the Dodd-Frank Wall Street Reform and Consumer Protection Act, the federal government has deputized virtually every company employee, vendor, customer (and their second cousins) to serve as their eyes and ears. The scrutiny is, and will grow far more, intense.

It’s time to develop a new paradigm for corporate character. This is particularly important in an eco-nomic downturn, when executives send messages about profit-or-else and fears about job security can supersede ethical decision-making. It’s time for corpo-rate leaders, in-house and outside counsel included, to make principles like doing the right thing and ful-filling responsibilities to investors, customers, and employees a fundamental part of doing business. Given the unprecedented attention the whistleblower provisions of Dodd-Frank have generated, this is a moment of real opportunity.

Beyond Cops and Robbers

Over the years, the field of corporate compliance has undergone a major and positive transformation. A long series of scandals beginning with Enron, regu-latory reform under Sarbanes-Oxley, and favorable dispensation under the sentencing guidelines have all contributed to the growth of strong and indepen-dent compliance functions, often separate from an in-house law department, with direct reporting to the top. These functions, an important first line of

defense, often have impressive arsenals: strong lead-ership; assorted corporate bodies like governance committees and peer review boards; and solid training programs. There are sophisticated internal controls and monitoring systems; ombudsmen, hotlines and investigation teams; and, voluminous employee manu-als, policy statements and memoranda about conduct. Of course, these tools are a vital part of any company’s fight against malfeasance. But do they work?

In 2007, surveying various indicia of misconduct, the Compliance and Ethics Leadership Council deter-mined that, of 45 variables tested, the fear of speak-ing up is the strongest indicator of misconduct. The study found that “companies in which employees are uncomfortable speaking up or fear retaliation have significantly elevated levels of misconduct.”1 Recent related studies are equally troubling. Consider these findings from KPMG’s 2008-2009 Integrity Survey:

• 74 percent of employees surveyed reported that they had personally observed or had first-hand knowl-edge of wrongdoing during the previous 12 months;2

• Only 57 percent of employees surveyed would feel comfortable using a hotline to report misconduct;3 and

• Only 53 percent of employees believed they would be protected from retaliation.4

In light of such statistics, we need to accept as a given that conventional reporting mechanisms are not working. Indeed, the best evidence of the inad-equacy of traditional compliance programs is the long list of distinguished companies that have been the subject of significant SEC enforcement actions, from “white shoe” financial services firms such as Goldman Sachs and Bear Stearns, to corporate giants like Tyco, Siemens and General Electric. Surely these organizations had vigilant compliance officers and sufficient resources to establish state-of-the-art com-pliance programs. However, during the relevant times, what many of these organizations and others like them have lacked was a strong ethical culture.

Too many organizations ignore this fundamental area and focus their energies and resources on the latest compliance trends. With such a limited focus, we’re doomed to a reactive Whack-a-Mole mentality: racing to respond to fraud only after it emerges, with no ability to prevent its occurrence. Apply this sce-nario to a large compliance department with oversight responsibility for tens-of-thousands of employees and it isn’t hard to imagine how fraud escapes detection.

In the end, policies and procedures may create a standard for conduct, and outline penalties for wrong-doing, but they do not adequately prevent it.

Creating a Strong Ethical Culture

Big misconduct often results from long chains of little mistakes; one breakdown in judgment cascades to another breakdown, and then another. It could be smoothing out revenue figures one financial quarter, and then creating nonexistent clients to cover up the prior misconduct the next. In time, isolated and seemingly random bad choices snowball into front-page scandals.

Former SEC Chairman Richard Breeden remarked that “it is not an adequate ethical standard to aspire to get through the day without being indicted.”5 We can take this a step further. It’s not an adequate stan-dard to have good compliance initiatives in place. We need to prevent or deter misconduct, with a better grounding in operational ethics, rendering compli-ance less necessary. With a strong ethical culture, an organization is able to instill in its employees a sense of stewardship and personal accountability that looks beyond the next quarter’s earnings.

For some, the tricky part is determining who is responsible for creating and maintaining an ethical culture. Time after time, we have heard congressional and trial testimony of CEOs who, without apology, have shirked responsibility for misconduct in their organizations because they couldn’t possibly know what their employees were doing all of the time. Similarly, many GCs and chief compliance officers believe that the realm of ethos is best reserved for parents, priests and professors. If an organization receives a Wells Notice from the SEC, will the organi-zation be harmed and who will be held responsible? This is, intellectually and practically, a broad and shared responsibility. Oftentimes, disaster—from SEC fines and shareholder actions to public censure and reputational harm—could have been avoided if the company had operated within a culture where doing the right thing was the only standard.

A New Paradigm

Successful strategies for promoting ethical con-duct involve creating a culture that maximizes an employee’s ethical potential. The details will differ from company to company; some will take a more formal approach to training than others. However, at the end of the day, organizations with a strong ethical culture tend to have the following characteristics:

A Sense of Community. Ethics is a natural out-growth of a healthy work environment where employ-ees have a sense of belonging and are concerned about the well-being of their colleagues, customers, and the organization as a whole. Organizations can foster employee engagement in the workplace and

Monday, noveMber 7, 2011

The Limitations of Corporate Compliance

Jordan a. ThoMas is a partner at Labaton Sucharow and chairs its whistleblower representation practice.

www. NYLJ.com

Establish an ethical culture in an era of scandal.

A FTER MORE than 15 years in federal law enforcement, first as a Trial Attorney at the Department of Justice and later as an

Assistant Director in the Enforcement Division of the U.S. Securities and Exchange Commission (SEC), one thing has become certain about corpo-rate compliance: Many programs, well wrought, thoughtful and expensive as they may be, only address half of the equation. They focus largely on the mechanics of compliance and the practi-cal response to misconduct. A more important and preemptory issue—establishing an ethical culture that deters misconduct—is often absent from the calculus.

With a strong ethical culture, an organization is able to instill in its employees a sense of stew-ardship and personal accountability that looks beyond the next quarter’s earnings.

studies have shown that “trust” and “integrity” were key drivers of employee engagement.6 If employees do not have this emotional or intellectual connec-tion to their work, they are more likely to engage in unethical behavior because they are not constrained by the potential impact of their misconduct on oth-ers. To more effectively promote ethical conduct, invest more time in laying the brick and mortar of the corporate community.

A Compelling Vision. Ethical organizations are driven by a common ethical vision that is clear, understandable and viable. Employees need a set of values, with a related body of rules or Code of Ethics, which they can buy into. This vision should appeal to each employee’s own sense of reason and moral judgment. It will guide employees in making day-to-day decisions and assist them in managing the conflicting interests of multiple constituencies. Successful organizations earn employees’ trust by convincing them that the company’s ethical vision will help them to do the right thing and, at the same time, allow them to succeed in the workplace. Since all potential problems cannot be anticipated or prevented by internal policies and procedures, an organization’s ethical vision is the best compass for employees to navigate the complex and dynamic corporate landscape.

Shared Responsibility. An organization’s ethical vision must apply, and be important, to everyone. Although there is no such thing as top-down ethics, leaders have the added responsibility of ensuring that their organization lives up to its ethical vision in everything it does. They must lead by example and be devoted cheerleaders of this vision, regu-larly and clearly communicating its principles to employees.

Empowered Employees. In order for employees to accept an organization’s ethical vision, they must be trusted to make decisions consistent with the com-pany’s Code of Ethics. Leaders must allow for, and entertain, questions and challenges by employees to earn their moral trust. Studies show that ethics systems which are perceived to be just “window dressing” do no good and actually may be harmful.7 Of course, at every juncture, encourage employees to report possible misconduct and assure them that they will not be subjected to retaliation of any kind. Make such assurances credible with meaningful follow-up with employees who report misconduct.

Integrated Values. Doing the right thing has to be embedded in an organization’s DNA through a deep integration of what it says and does. This ethical vision cannot be a remote, abstract thing that sits bound and dusty on a cubicle shelf. It must be a factor as important to daily decision making as other strategic priorities set by senior leadership. Organizations should develop values-based manuals, compensation structures and per-formance goals that establish and reinforce these principles within the workplace. All employees need to regularly incorporate this vision into their daily activities—everything from hiring to 360 evalua-tions to promotions to strategic partnerships.

Accountability. Since trust is an important factor in establishing employee engagement, organizations must endeavor to be fair and consistent regarding all ethical matters. Leaders should look for innovative ways to encourage employees to report possible unethical conduct—including public recognition and financial incentives. Organizations should be prepared to investigate, in a timely manner, reports of misconduct. When legal or ethical violations are

discovered, violators should be held accountable, regardless of their position in the organization and in a manner consistent with others similarly situated. Any potential benefits for employees that report possible violations should also be dispensed in an equitable fashion.

Transparency. If “sunshine is the best disinfec-tant,” in an organization, more transparency will generate more credibility and trust. To this end, it is critical that organizations communicate more often and more effectively. Too often companies bury in the corporate vault how they dealt with reports of misconduct. This practice significantly undermines employees’ confidence in their organization’s commit-ment to ethics, leads to unnecessary whistleblower submissions, and misses a crucial opportunity to stand against and deter misconduct. A key driver of ethical conduct is the perception of what is accept-able behavior—so shaping the normative view of conduct is important to establishing a powerful and lasting ethical culture. One powerful way to establish an organization’s commitment to creating an ethical culture (and to earn cooperation credit) is to self-report significant violations to the SEC and other law enforcement organizations.

Ethics Training and Support Programs. Like any other skill set, an employee’s ability to make ethical decisions is enhanced with ongoing training and support programs. Beyond avoiding corporate scandals, studies have shown that ethics training can lead to a boost in workforce morale, an increased work ethic, and a higher quality product or service. Savvy organizations make long-term investments in ethics training and support programs. For well-regarded training and other practice resources, consult the Ethics Resource Center or the Ethics and Compliance Officer Association.

Commitment to Continuous Improvement. Ethi-cal organizations continuously seek ways to improve the manner in which they do business. Leaders chal-lenge employees and themselves by asking: What more can be done to empower employees to make good decisions? Do we encourage employees to speak up and out against wrongdoing? Do the busi-nesses we associate with operate with the highest ethical standards? Do we hold individuals and entities accountable when unethical conduct is discovered? What more can we do to protect investors? Equally important, and often overlooked, removing obstacles to desired behaviors—by modifying internal proto-cols—can be more effective than developing newer and more complex policies and procedures.

Some great examples of innovative and effective initiatives that build upon these common charac-teristics include:

• The standards handbook and training programs of the AeroSpace Corporation;

• Employee empowerment strategies at the Ford Motor Company;

• The mandatory ethics component in annual performance appraisals at United Technology Cor-poration;

• The Talent Sustainability and the “Internal Audit methodology” at the Pepsi Company;

• The ethical partnership strategies at Star-bucks;

• The Best Buy ethics blog that is open to employ-ees and the public; and

• The monthly ethical surveys and Tone from the Top strategies at Xerox;

Read up on them. Mirror them. Become a model organization.

Ambivalence Has a New Price Tag

Never doubt that 10 years of financial scandals can ignite a crusade. From federal and state law enforce-ment to potential whistleblowers and the ordinary citizens who are disgusted by the greed and miscon-duct pervading the commercial marketplace, there are new and formidable armies poised and ready to root out bad behavior. Some are protesting on Wall Street and others are sitting in board rooms or working in offices down the hall. This new reality presents organizations and their leaders with a criti-cal and urgent question: How committed are they to establishing an ethical culture?

History will show that, with respect to the whistle-blower provisions of Dodd-Frank, Congress and the SEC got it right. The genius of Dodd-Frank is that it recognized that law enforcement authorities cannot effectively and efficiently police the marketplace with-out the assistance of private individuals and entities. Now, for the first time, individuals have significant protections to come forward and report violations of the federal securities laws. In the coming years, whistleblowers will revolutionize securities enforce-ment and strengthen investor confidence in our mar-kets. It would not be farfetched to predict that many of the SEC’s most significant cases will be the direct result of whistleblowers.

Sophisticated organizations will embrace this change and look for innovative ways to recognize employees for exposing unethical behavior. Since the probability of detection has dramatically increased, legal and compliance officers will now have a compel-ling argument for increased resources and support in establishing strong ethical cultures and state-of-the-art compliance programs. As a result, their organizations will receive tips that they would not have otherwise received. More securities violations will be detected and stopped earlier. Investors will be protected. And their organizations’ invaluable reputations will be preserved.

Unsophisticated organizations will remain stead-fast to a flawed status quo and treat employees who expose unethical behavior as disloyal or opportu-nistic, a costly mistake that will result in future SEC whistleblower submissions.

•••••••••••••••••••••••••••••

1. The Compliance and Ethics Leadership Council Identifies Leading Indicators of Misconduct at Large Organizations (Aug. 8, 2007), executiveboard.com.

2. Significantly, 46 percent of these employees reported that what they observed could cause a significant loss of public trust if discovered—with that number growing to 60 percent for employ-ees working in the banking and financial services industries.

3. In practice, only 3 percent of reports of misconduct are made to hotline telephone numbers. Ethics Resource Center, 2009 Na-tional Business Ethics Survey.

4. Disturbingly, 15 percent of employees who observed and reported misconduct perceived retaliation as a result. Ethics Re-source Center, 2009 National Business Ethics Survey.

5. “Managing for Organizational Integrity,” Harvard Business Review, L.S. Paine, March-April 1994.

6. Employee Engagement: A Review of Current Research and Its Implications, John Gibbons, The Conference Board, Inc. (Novem-ber 2006).

7. “Ethical Culture Building: A Modern Business Imperative,” Ethics Resource Center (2009).

Monday, noveMber 7, 2011

Reprinted with permission from the November 9, 2011 edition of the NEW YORK LAW JOURNAL © 2011 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited. For information, contact 877-257-3382 or [email protected]. # 070-11-11-16

Wall Street’s New Enforcers Aim to Muzzle Whistle-Blowers

By JORDAN THOMAS and TOM DEVINEJuly 21, 2014 7:38 am

Jordan Thomas is chairman of the whistle-blower representation practice at Labaton Sucharowand was a former assistant director in the enforcement division of the Securities and ExchangeCommission. Tom Devine is legal director of the Government Accountability Project and co-author of “The Corporate Whistleblower’s Survival Guide: A Handbook for Committing theTruth.”

Welcome to Wall Street, where the unwritten rule has always been that you don’t talk aboutillegal or unethical activities with law enforcement or regulatory authorities. Of course, this typeof code of silence is not new. What is new is that this corporate omerta is being enforced bylawyers wielding gag orders.

In the wake of the economic crisis, our country debated how to break the cycle of corporatescandals that have plagued financial markets. Our financial watchdogs landed on two simple,fundamental truths: the investor protection status quo wasn’t working; and those responsible forlaw enforcement could not effectively and efficiently police the marketplace without help fromprivate individuals.

Consequently, four years ago this Monday, the Dodd-Frank financial overhaul was signed intolaw. Among its many provisions, the statute established the Securities and ExchangeCommission’s whistle-blower program, which offers eligible whistle-blowers significantemployment protections, monetary awards and the ability to report possible securities violationsanonymously. Potential monetary awards can be substantial because the agency secures over $3billion a year in monetary sanctions and whistle-blowers are entitled to 10 to 30 percent of thesanctions collected as a result of their tips.

Although public debate on Dodd-Frank continues, few have questioned the whistle-blowerprogram’s early success and potential to protect investors. The $8.9 billion settlement with BNPParibas, although not reported through the S.E.C. program, is the latest example of how whistle-blowers can help law enforcement detect, investigate and prosecute corporate wrongdoing.

Mary Jo White, the S.E.C. chairwoman, said last year that the program “has rapidly become atremendously effective force-multiplier, generating high quality tips and, in some cases, virtualblueprints laying out an entire enterprise, directing us to the heart of an alleged fraud.”

As Dodd-Frank has steadily increased the probability of detection, companies have become moresophisticated and aggressive in their efforts to discourage employees from reporting possible

violations to the S.E.C. and other authorities. The legal countermeasures being deployed includea variety of employment, severance and settlement agreements that weaken both new andexisting whistle-blower programs.

It was no isolated aberration that KBR, one of the nation’s largest government contractors,required employees seeking to report fraud to sign internal confidentiality agreementsprohibiting them from reporting violations to law enforcement authorities. Rather, it reflects agrowing trend of companies trying to silence whistle-blowers, at the same time Congressstrengthens their rights.

Examples include: failing to educate employees about the S.E.C. whistle-blower program andtheir rights, unlike other corporate, state and federal programs; preventing employees fromconsulting legal counsel through the use of nondisclosure agreements, effectively eliminatingtheir ability to file anonymously in accordance with S.E.C. rules; exploiting corporate whistle-blowers’ fear of retaliation and blacklisting by requiring notice of external reporting, in violationof their right under Dodd-Frank and S.E.C. rules to report anonymously; de-incentivizing tips bymaking employees sign agreements waiving any future monetary awards for blowing the whistle;and intimidating potential whistle-blowers with lawsuits to enforce secrecy agreements, a battlefew whistle-blower have the desire and resources to fight.

To be sure, the vast majority of companies want to do the right thing. Many need guidance onlawful boundaries for standard employment agreements. Others appear to be intentionallycrossing the line and using gag orders to chill external reporting. While no court has issued anopinion on the legality of these agreements in light of Dodd-Frank, many of them are clearly atodds with public policy, not justified by a legitimate corporate interest and inconsistent withprinciples of employment, contract and securities law. Because of the systemic nature andcontinuing harm, we have just filed a petition with the S.E.C. that will provide companies cleardirection regarding these troubling agreements.

We are joined by a broad and growing coalition, representing more than 250 organizations andnearly two million citizens, including Americans for Financial Reform, the NationalEmployment Lawyers Association, the International Brotherhood of Teamsters and otherprominent groups. This coalition has also submitted a petition, urging the S.E.C. to hold a seriesof hearings around the country to discuss the problem of workplace retaliation and explore newways to increase reporting, internally and externally. It also asks the agency to create an advisorycommittee on whistle-blower reporting and protection to recommend program improvements andbest practices; and engage in appropriate rule-making to clarify and strengthen whistle-blowerprotections.

With whistle-blowers beginning to break Wall Street’s code of silence, it would be a historicmistake if the S.E.C. and other authorities allowed corporations to systematically dismantle thislandmark investor protection reform through private agreements and legal bullying. If their rightsare protected, in the coming years, enforcement records will be broken and many of the S.E.C.’smost significant cases will come from courageous whistle-blowers. More important, whistle-blowers will become the enforcers of a new culture of integrity on Wall Street that deters futureviolations and restores the public’s trust in our financial system.

Column: How Wall Street creates criminals USA Today: By Lynn Stout and Jordan Thomas

It is time to admit that Wall Street has lost its moral compass. Each day brings a new story of banks misleading clients, hedge funds' insider trading or investment banks manipulating prices. In one breathtakingly brazen scandal, Barclays and many of the largest banks in the U.S. and the U.K.— including Bank of America, Citigroup, HSBC, JPMorgan Chase and Royal Bank of Scotland— are being investigated for possibly rigging the Libor interbank lending interest rate that determines the interest charged on countless credit cards and bank loans. The tsunami of scandals cannot be explained away as the work of a few "bad apples." Our financial services industry is in ethical crisis. To assess the depth of the problem, Labaton Sucharow, a law firm where one of us works, commissioned an anonymous survey of 500 financial services professionals in the United States and United Kingdom. The results are alarming. More than a quarter of respondents reported they had personally observed or had firsthand knowledge of wrongdoing in the workplace. (Given the human tendency to underreport bad behavior, the true figure is likely higher.) Nearly 40% believed their competitors had engaged in illegal or unethical behavior; 24% thought you have to break rules to be successful. An astonishing 16% admitted that they'd engage in illegal insider trading if they would not be caught. Waiting for a chance When 16% of people working in financial services readily admit they would commit a crime if they could get away with it, alarm bells should be going off at the Securities and Exchange Commission and other financial regulators. True, Wall Street might attract more than its share of Gordon Gekko-like criminal personalities. But behavioral science suggests more is at work. The financial services industry has become a "criminogenic"environment that tempts otherwise ethical, conscientious people into criminal conduct they would never indulge in outside the workplace. Consider the tragic case of Rajat Gupta, a Goldman Sachs director and noted philanthropist who seemed a pillar of the community until he was recently convicted of insider trading. How does the financial service industry transform otherwise ethical individuals into criminals? The modern infatuation with "incentives" has played a role — 30% of survey respondents reported that their bonus or compensation plans created pressure to engage in unethical or illegal behavior. (The dirty underbelly of pay for performance, rarely acknowledged by economists or compensation experts, is that it is almost impossible to design a compensation metric that can't be met through illegal behavior.) Why stay silent? But a more disturbing part of the story lies in the question of why financial services professionals who observe illegal behavior and don't stand to personally profit from it nevertheless remain silent. Like bank robberies, corporate scandals are rarely one-man jobs, and there are almost always witnesses. It is highly unlikely that more than $1 billion of client funds could disappear at MF Global, or that Libor could be manipulated by Barclays, without many people knowing about it. If more than a quarter of the individuals in the financial industry have firsthand knowledge of illegal or unethical activity, as the survey found, why aren't they reporting this? Where are the whistle-blowers?

http://content.usatoday.com/topics/topic/Places,+Geography/Landmarks,+Landforms/Wall+Street

http://www.bloomberg.com/news/2012-08-15/jpmorgan-barclays-said-among-banks-to-get-libor-subpoenas.html

http://content.usatoday.com/topics/topic/U.S

http://content.usatoday.com/topics/topic/U.K

http://content.usatoday.com/topics/topic/Organizations/Companies/Banking,+Financial,+Insurance,+Law/Bank+of+America

http://content.usatoday.com/topics/topic/Organizations/Companies/Banking,+Financial,+Insurance,+Law/HSBC

http://content.usatoday.com/topics/topic/Organizations/Companies/Banking,+Financial,+Insurance,+Law/JPMorgan+Chase

http://content.usatoday.com/topics/topic/Organizations/Companies/Banking,+Financial,+Insurance,+Law/Royal+Bank+of+Scotland

http://i.usatoday.net/news/_photos/2012/09/04/Column-How-Wall-Street-creates-criminals-SJ278VR9-x-large.jpg

http://i.usatoday.net/news/_photos/2012/09/04/Column-How-Wall-Street-creates-criminals-SJ278VR9-x-large.jpg

http://www.labaton.com/en/about/press/Labaton-Sucharow-announces-results-of-financial-services-professional-survey.cfm

http://content.usatoday.com/topics/topic/Places,+Geography/Countries/United+States

http://content.usatoday.com/topics/topic/Places,+Geography/Countries/United+Kingdom

https://www.google.com/search?sugexp=chrome,mod=11&sourceid=chrome&ie=UTF-8&q=forty+percent+believed+their+competitors+had+engaged+in+illegal+or+unethical+behavior#hl=en&sclient=psy-ab&q=define:+criminogenic&oq=define:+criminogenic&gs_l=serp.3..0l3j0i30.161262.163883.0.164126.11.11.0.0.0.0.90.745.11.11.0.les%3B..0.0...1c.EY-TID0cdwQ&pbx=1&bav=on.2,or.r_gc.r_pw.r_cp.r_qf.&fp=4c4e4dd9cacdc02d&biw=1366&bih=643

http://www.usatoday.com/money/industries/brokerage/story/2012-06-15/gupta-goldman-insider-trading-guilty/55615984/1

http://content.usatoday.com/topics/topic/Organizations/Companies/Banking,+Financial,+Insurance,+Law/Goldman+Sachs

http://content.usatoday.com/topics/topic/MF+Global

penskyj

Stamp

Answering this question could be essential to figuring out how to cure the ethical rot that's eating away at many financial services firms. Even in the best of environments, some people will engage in misconduct when the opportunity for personal gain becomes too great to resist. But when a substantial percentage of financial services professionals tolerates misconduct by others, that speaks to a deeper problem. In the language of social science, the financial world is a "social context" that tolerates and encourages illegal or unethical behavior. In lay terms, the problem is Wall Street's culture. Culture — the mélange of social signals we receive about what our superiors expect, what our peers are doing and how our acts harm or help others in our "in-group" — can be hard to change. But though changing culture is hard, it's by no means impossible. Obvious first steps include giving the SEC and other regulators greater resources; making sure that whistle-blowers are rewarded and protected from retaliation, and that potential whistle-blowers are aware of those rewards and protection; and examining pay-for-performance plans with a skeptical eye to make sure they aren't really pay-for-misconduct schemes. But as we recently passed the second anniversary of the Dodd-Frank Wall Street Reform and Consumer Protection Act, it's time to recognize that regulation won't work alone. The first step the financial services industry needs to take toward recovery is to admit it has a corporate ethics problem. Otherwise, we should brace ourselves for the next scandal.

http://content.usatoday.com/topics/topic/Consumer+Protection+Act

http://content.usatoday.com/topics/topic/Consumer+Protection+Act

De Facto Gag Clauses:The Legality of EmploymentAgreements That UndermineDodd-Frank’s WhistleblowerProvisions

Richard Moberly,* Jordan A. Thomas,** &Jason Zuckerman***

I. Introduction

In 2010, in the wake of the financial crisis, Congress passed theDodd-Frank Wall Street Reform and Consumer Protection Act1

(Dodd-Frank or Act), which established a new whistleblower programfor the U.S. Securities and Exchange Commission (SEC or Commis-sion) to more effectively detect, investigate, and prosecute the kindof financial misconduct that has caused repeated and substantialharm to investors.2 Dodd-Frank’s whistleblower provisions implement

* Richard Moberly is the Associate Dean for Faculty and Professor of Law at theUniversity of Nebraska College of Law, where he teaches employment law. He has spo-ken extensively and published numerous articles on whistleblowing and retaliation. TheSecretary of Labor appointed him to serve on OSHA’s Whistleblower Protection AdvisoryCommittee in 2012 and reappointed him in 2014.

** Jordan A. Thomas is Chair of the Whistleblower Representation Practice at La-baton Sucharow LLP, New York, NY. He represents federal securities laws whistle-blowers internationally. Previously, he served as an Assistant Director in the Enforce-ment Division of the U.S. Securities and Exchange Commission, where he had aleadership role in the development of the SEC Whistleblower Program.

*** Jason Zuckerman is the founder of Zuckerman Law, where he represents em-ployees and whistleblowers. Previously, he practiced employment law at a nationallaw firm, served as Senior Legal Advisor to the Special Counsel at the U.S. Office of Spe-cial Counsel (the federal agency charged with protecting whistleblowers in the federalgovernment) and was appointed by the Secretary of Labor to serve on OSHA’s Whistle-blower Protection Advisory Committee.

1. Pub. L. No. 111-203, 124 Stat. 1376 (2010) (codified as amended in scattered sec-tions of 7, 12, & 15 U.S.C.).

2. See 15 U.S.C. § 78u-6 (2012). Dodd-Frank created a similar program for theCommodity Futures Trading Commission (CFTC). See Commodity Whistleblower Incen-tives and Protection, 7 U.S.C. § 26 (2012). This Article focuses on the SEC WhistleblowerProgram because of its greater visibility and potential impact; however, the Article’s con-clusions can be applied equally to the CFTC whistleblower program given the similarityin the programs’ statutory and regulatory authority. Compare 15 U.S.C. § 78u-6 (2012)and 17 C.F.R. § 240.21F.1 et seq. (2013) (SEC Program), with 7 U.S.C. § 26 (2012) and17 C.F.R. § 165.1 et seq. (2013) (CFTC program).

87

ABA Journal of Labor & Employment Law, Volume 30, Number 1, Fall 2014. © 2014 by the American Bar Association.

Originally published in ABA J. Labor & Employment Law, Vol. 30, No. 1 © 2014 by the American Bar Association.

three incentives to encourage whistleblowers to report securities fraudto the SEC: the availability of substantial monetary awards for report-ing,3 the ability to remain anonymous when reporting to the SEC,4 andbroad protection from employment retaliation.5 The basic idea of thisincentive structure is simple: rewarding and protecting whistle-blowers will motivate more individuals to report potentially relevantinformation about securities violations.6

In response, some companies are now seeking to counteract Dodd-Frank by drafting and enforcing a variety of agreements with employ-ees that significantly reduce or eliminate the congressional incentivespromoting SEC whistleblowing. These agreements—which seek toalter the statutory risks and rewards of whistleblowing—may haveprofound consequences not only for current and prospective whistle-blowers, but also for the success of the Dodd-Frank whistleblower pro-gram itself. The stakes are just as high for employers, who may findthemselves facing civil—or, in extreme cases, criminal—liability ifthey are too aggressive in attempts to shield information from govern-ment authorities.

This Article discusses the enforceability of these increasinglyprevalent contractual restrictions on whistleblowing, which fall intothree broad categories.7 First, some agreements require an employeeto report possible misconduct internally before disclosing misconductto the SEC.8 Second, some agreements require an employee to waiveany monetary award received from blowing the whistle under Dodd-Frank’s whistleblower bounty provisions.9 Both of these types ofagreements could significantly limit employees’ desire to communicatewith the SEC regarding employer misconduct.

In a third type, employers impose general confidentiality provi-sions in agreements when employment commences or after receivingsome benefit, such as a severance package. Although such confidenti-

3. See 15 U.S.C. § 78u-6(b) (2012).4. See 15 U.S.C. § 78u-6(d)(2), (h)(2) (2012); 17 C.F.R. §§ 240.21F-7, -9(c) (2013).5. See 15 U.S.C. § 78u-6(h)(1) (2012).6. SEC. & EXCH. COMM’N, RELEASE NO. 34-64545, IMPLEMENTATION OF THE WHISTLE-

BLOWER PROVISIONS OF SECTION 21F OF THE SECURITIES EXCHANGE ACT OF 1934, at 101n.222 (2011) [hereinafter ADOPTING RELEASE].

7. These examples summarize actual provisions several of the authors and other em-ployment attorneys have frequently seen during the course of representing SEC whistle-blowers. See, e.g., Letter from Katz, Marshall & Banks, LLP to the U.S. Sec. & Exch.Comm’n, at 4–6, 8–10 (May 8, 2013), available at http://kmblegal.com/wordpress/wp-content/uploads/130508-Letter-to-SEC-Commissioners.pdf (provisions in employee sever-ance and settlement agreements that impede reporting); see also Scott Higham & KaleyBelval, Workplace Agreements Appear to Violate Federal Whistleblower Laws, WASH.POST (June 29, 2014), http://m.washingtonpost.com/investigations/workplace-secrecy-agreements-appear-to-violate-federal-whistleblower-laws/2014/06/29/d22c8f02-f7ba-11e3-8aa9-dad2ec039789_story.html.

8. Higham & Belval, supra note 7.9. Id.; see also Letter from Katz, Marshall & Banks, supra note 7, at 4–8.

88 30 ABA JOURNAL OF LABOR & EMPLOYMENT LAW 87 (2014)


ality agreements are usually not problematic and frequently serve le-gitimate corporate interests, the potential conflict with Dodd-Frankarises when companies use these types of agreements as the basisfor a breach of contract claim against a whistleblower. Employersmay argue that the whistleblower violated the confidentiality provi-sion in the process of disclosing possible misconduct to the govern-ment. This use of a confidentiality agreement not only punishes anemployee after the whistle is blown, but also chills the willingness ofemployees to blow the whistle in the future due to fear of being suedby a current or former employer.

We label these agreements “de facto gag clauses,” and courts, theSEC, and counsel on both sides of the employment bar are grapplingwith the question of whether they are lawful and enforceable in theface of Dodd-Frank’s statutory and regulatory requirements. This de-termination requires a careful balancing of public, personal, and busi-ness interests. While no court has ruled on the legality of de facto gagclauses in the Dodd-Frank whistleblower context, we argue that SECrules and key principles of contract, qui tam, employment, and secu-rities law strongly suggest that courts will, and should, refuse to en-force agreements that preclude voluntary cooperation with the SECor materially diminish the whistleblower incentives created byDodd-Frank.

Part II briefly explains the SEC’s Dodd-Frank whistleblower pro-gram. Part III examines whether the use of the three categories of con-tractual restrictions on whistleblowing violate Dodd-Frank’s publicpolicy purpose. We conclude that courts would find many currentlyused provisions unenforceable as against public policy. Part IV pro-poses practical steps that both employers’ and employees’ attorneyscan take to avoid the risks posed by these provisions and, even moreimportantly, the specific action that the SEC, as well as the Occupa-tional Safety and Health Administration (OSHA), can take to amelio-rate the problems these provisions pose to the effectiveness of theSEC’s Dodd-Frank whistleblower program. Given the immediatethreat that de facto gag clauses pose to the whistleblower program—even if ultimately found unenforceable by courts—we argue that gov-ernment agencies should not wait for courts to act. Rather, the SECand OSHA should immediately act to protect the whistleblower pro-gram by clarifying its regulations invaliding agreements that, even in-directly, undermine employees’ willingness to disclose wrongdoing tothe SEC.

II. The SEC Whistleblower Program

Section 922 of Dodd-Frank created the SEC’s current whistleblowerprogram (the SEC Whistleblower Program) as part of Congress’s re-sponse to the sweeping financial crisis that came to the public’s attention

De Facto Gag Clauses 89


in 2008.10 The SEC Whistleblower Program is a unique blend of ap-proaches taken in previous laws to encourage corporate insiders toreport misconduct and to protect them when they do. First, Dodd-Frank adopted a “bounty” model by creating a reward program toincentivize reporting wrongdoing to the SEC.11 Whistleblowers areeligible to receive a monetary award when they “voluntarily” providethe SEC with “original information” that “leads to successful enforce-ment” by the Commission, resulting in the recovery of total sanctionsin that enforcement action and any related actions that exceed$1 million.12 If all eligibility criteria are met, the Commission awardsthe whistleblower an amount equal to ten to thirty percent of thetotal sanctions collected.13

Second, Dodd-Frank incorporates the more commonplace anti-retaliation model by providing a cause of action for corporate whistle-blowers who suffer retaliation for disclosing securities violations.14

The Commission itself may also bring a retaliation action against anemployer,15 a procedure that recently resulted in one company payinga settlement of more than $2.2 million.16

Finally, Dodd-Frank incorporated a “structural” model to encour-age whistleblowers to report by providing a defined reporting chan-nel.17 To receive an award under the Act, employees must provideinformation directly to the SEC.18 The Act required the SEC to estab-

10. See S. REP. NO. 111-176, at 2 (2010) (the bill that would become Dodd-Frank “isa direct and comprehensive response to the financial crisis that nearly crippled the U.S.economy beginning in 2008”).

11. See Richard E. Moberly, Sarbanes-Oxley’s Structural Model to Encourage Cor-porate Whistleblowers, 2006 BYU L. REV. 1107, 1108–09 & n.5 (2006) (the Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley or SOX) utilizes several models to encourage whistle-blowing, including a “bounty” model, an “anti-retaliation model,” and a “structural”model). Prior to Dodd-Frank, the bounty model had been used only to reward whistle-blowers who reported misconduct that affected the government. See id. at 1108 n.5.Dodd-Frank, by contrast, rewards whistleblowers who report wrongdoing directed at pri-vate corporations and shareholders.

12. 17 C.F.R. § 240.21F-3 (2013). “Voluntarily,” “original information,” and “leads tosuccessful enforcement” are defined terms. See id. § 240.21F-4.

13. Id. § 240.21F-5.14. See 15 U.S.C. § 78u-6(h) (2012).15. 17 C.F.R. § 240.21F-2(b)(2) (2013).16. Paradigm Capital Mgmt., Inc., Exch. Act Release No. 72,393, Inv. Advisers Act

Release No. 3857 (June 16, 2014).17. See Moberly, supra note 11, at 1131–41 (the structural model of many whistle-

blower laws requires the identification and provision of a specific disclosure channel forwhistleblowers). Other laws use the structural model, including Sarbanes-Oxley, whichrequires corporations to implement a channel for whistleblowers to report misconductdirectly to independent directors on the corporation’s audit committee of the board of di-rectors. See 15 U.S.C. § 78j-1(m)(4)(A) (2012). Also, the Civil Service Reform Act of 1978created the Office of Special Counsel to receive whistleblower disclosures from federalemployees. See 5 U.S.C. § 1101 (2012).

18. Dodd-Frank defines a “whistleblower” as one who provides “information relat-ing to a violation of the securities laws to the Commission, in a manner established, byrule or regulation, by the Commission.” 15 U.S.C. § 78u-6(a)(6) (2012). The SEC’s



lish a new office to fulfill this obligation and to administer the re-ward program.19 Subsequently, the SEC created the Office of theWhistleblower,20 which receives whistleblower disclosures, workswith the SEC’s enforcement staff regarding those disclosures, anddetermines whether to make awards for eligible enforcement ac-tions.21 The Act and its regulations also explicitly provide for anon-ymous whistleblowing.22

The SEC promulgated extensive regulations to implement section922.23 In addition to detailing the three whistleblower models incorpo-rated into Dodd-Frank, the regulations also expressly preclude par-ties, including employers, from interfering with those whistleblowerprograms. Specifically, Rule 21F-17(a) states:

No person may take any action to impede an individual from commu-nicating directly with the Commission staff about a possible securi-ties law violation, including enforcing, or threatening to enforce, aconfidentiality agreement . . . with respect to such communications.24

While the SEC has not yet brought an enforcement action basedon Rule 21F-17, the chief of the SEC’s Office of the Whistleblower,Sean McKessy, publicly warned that “we are actively looking for exam-ples of confidentiality agreements, separat[ion] agreements, employeeagreements that . . . in substance say ‘as a prerequisite to get this ben-efit you agree you’re not going to come to the commission or you’re notgoing to report anything to a regulator.’ ”25 McKessy further cautionedthat “if we find that kind of language, not only are we going to go tothe companies, we are going to go after the lawyers who drafted it,”possibly by revoking those attorneys’ right to practice before theCommission.26

McKessy’s remarks and Rule 21F-17 make it clear that employersmay not compel employees to waive their whistleblowing rights inexchange for a monetary payment or other benefit. Yet, despite Rule21F-17, whistleblowers and their counsel continue frequently to

regulations further acknowledge that a whistleblower who reports wrongdoing inter-nally before reporting to the SEC may still be eligible for a reward, if the whistleblowerultimately discloses the misconduct to the SEC within 120 days of the whistleblower’sinitial internal report. See 17 C.F.R. § 240.21F-4(c)(3) (2013).

19. See 15 U.S.C. § 78u-7(d) (2012).20. See 17 C.F.R. § 240.21F-1 (2013).21. See U.S. SEC. & EXCH. COMM’N, 2013 ANNUAL REPORT TO CONGRESS ON THE DODD-

FRANK WHISTLEBLOWER PROGRAM 5–7 (2013), available at http://www.sec.gov/about/offices/owb/annual-report-2013.pdf.

22. See 15 U.S.C. § 78u-6(d)(2), (h)(2) (2012); 17 C.F.R. §§ 240.21F-7, -9(c) (2013).23. See ADOPTING RELEASE, supra note 6.24. 17 C.F.R. § 240.21F-17(a) (2013).25. Brian Mahoney, SEC Warns In-House Attys Against Whistleblower Contracts,

LAW360 (Mar. 14, 2014), http://www.law360.com/articles/518815/sec-warns-in-house-attys-against-whistleblower-contracts.

26. Id.



encounter agreements limiting or discouraging whistleblowing inmore subtle, yet often equally pernicious, ways, including the threetypes of de facto gag clauses identified above.27

These agreements raise the important question of how far Rule21F-17 extends. Does it merely prohibit confidentiality agreementspurporting to completely restrict all communications with the SEC,or does it also prohibit agreements technically allowing communica-tions with the SEC, but indirectly impeding whistleblowing by makingit harder, riskier, or otherwise less desirable?

Absent any SEC enforcement actions under Rule 21F-17, or pri-vate litigation directly addressing the enforceability of such clauses,courts are very likely to rely on existing contract law to balance thepublic and private interests that these agreements implicate. This re-liance is particularly likely in private litigation between whistle-blowers and their employers (as opposed to SEC enforcement actionsbrought under Rule 21F-17), because—although a court is very likelyto find that any contract that violated Rule 21F-17 would be unen-forceable—Rule 21F-17 does not supply employees with a privateright of action.28

Accordingly, the next part of this Article examines whether thetypes of de facto gag clauses companies use would be enforceableunder existing law. Specifically, we conclude that such agreementsshould not be enforced in the SEC whistleblower context becausethey violate Dodd-Frank’s public policy. Additionally, while preexistinglaw does not define the limits of Rule 21F-17, a court could find a con-tract void based on the plain language of the Rule.

III. De Facto Gag Clauses Violate Dodd-Frank’s PublicPolicy

A. The Public Policy Limitation on Contractual EnforcementThe most logical starting point for analyzing the enforceability of

agreements affecting an employee’s ability to participate in the SECWhistleblower Program, or to obtain benefits for doing so, is the bed-rock principle that contracts between private individuals may bevoid if they violate public policy.29 In Town of Newton v. Rumery, the

27. See Letter from Katz, Marshall & Banks, supra note 7, at 4 (“While companiesand their counsel are largely avoiding attempts to prohibit outright an individual’s com-municating with the SEC, our law firm and other [sic] that represent SEC whistle-blowers are nonetheless seeing an increase in proposed settlement language that is in-tended to achieve the same result in a more roundabout and crafty manner.”).

28. See 17 C.F.R. § 240.21F-17 (2013).29. See Town of Newton v. Rumery, 480 U.S. 386, 392 (1987); RESTATEMENT (SECOND)

OF CONTRACTS § 178(1) (1981) (“A promise . . . is unenforceable on grounds of public policyif . . . the interest in its enforcement is clearly outweighed . . . by a public policy againstthe enforcement of such terms.”); Alan Garfield, Promises of Silence: Contract Law andFreedom of Speech, 83 CORNELL L. REV. 261, 294–95 (1998) (“The power of courts to deny



Supreme Court provided a framework for applying this long-standingprinciple, concluding that contracts may not be enforceable under fed-eral common law when the public policy considerations againstenforcement outweigh any interests supporting enforcement.30 Ac-cordingly, it is not enough merely to establish that an agreement iscontrary to some public policy; instead, Town of Newton requires iden-tifying the public interests that militate both for and against enforce-ment, and comparing those interests to each other.31

Courts have applied Town of Newton—or the common law princi-ples upon which Town of Newton is based—to numerous types of con-tracts purporting to prohibit individuals from communicating withgovernment authorities about violations of law. They have repeatedlyfound such blanket bans unenforceable. Courts have rarely hesitatedto strike down contracts that conceal crimes, which many SEC viola-tions also are, or suppress evidence.32 The normal justifications forcontractual enforcement—facilitating economic activity and meetingparty expectations by encouraging reliance on promises33—do notovercome the powerful public desire for law enforcement.34 In fact, acontract that conceals a crime not only is unenforceable, but alsomay constitute the state law crime of “compounding”35 or the federalcrime of obstruction of justice.36

Even outside the criminal context, courts have often rejectedagreements purporting to prohibit voluntarily reporting to the govern-ment possible civil violations. For example, in EEOC v. Astra U.S.A.,Inc.,37 the First Circuit invalidated provisions in settlement agree-ments prohibiting employees from communicating with the EqualEmployment Opportunity Commission (EEOC).38 The court explicitly

enforcement to a contract on public policy grounds is not only indisputable, but alsoopen-ended.”).

30. See 480 U.S. at 392 (“The relevant principle is well established: a promise is un-enforceable if the interest in its enforcement is outweighed in the circumstances by apublic policy harmed by enforcement of the agreement.”); Garfield, supra note 29, at295; RESTATEMENT (SECOND) OF CONTRACTS § 178(1).

31. 480 U.S. at 392.32. See Garfield, supra note 29, at 307–08.33. See Terry Morehead Dworkin & Elletta Sangrey Callahan, Buying Silence, 36

AM. BUS. L.J. 151, 174 (1998) (public policy benefits of enforcing contracts).34. Cf. Richard Moberly, The Supreme Court’s Antiretaliation Principle, 61 CASE W.

RES. L. REV. 375, 378 (2010) (a common theme of the Supreme Court’s retaliation juris-prudence is the principle that “protecting employees from retaliation will enhance theenforcement of the nation’s laws”).

35. Generally, “compounding” is defined as accepting consideration for a promisenot to report a crime. See Garfield, supra note 29, at 307–08.

36. 18 U.S.C. § 1505 (2012); see also Stephen Gillers, Speak No Evil: SettlementAgreements Conditioned on Noncooperation Are Illegal and Unethical, 31 HOFSTRA L.REV. 1, 15 (2002).

37. 94 F.3d 738 (1st Cir. 1996). See also EEOC v. Cosmair, Inc., L’Oreal Hair CareDiv., 821 F.2d 1085, 1091 (5th Cir. 1987).

38. See Astra, 94 F.3d at 743.



balanced the impact of those agreements on the EEOC’s ability to in-vestigate systemic discrimination against the impact that invalidatingthe provisions would have on private dispute resolution,39 concludingthat limiting the ability of employees to communicate with the EEOCwould “sow[] the seeds of harm to the public interest.”40 Similar deci-sions have been reached when employers use contractual promises ofsilence to impede government investigations of securities violations,41

unfair labor practices,42 and investment advisor misconduct.43

These cases confirm that there is a strong public policy in favor ofreporting possible violations of the law to the government, which canoutweigh competing interests in protecting confidential informationand promoting private dispute resolution. Certainly, these cases indi-cate that any provision designed to prevent an employee from making“any complaint” about the company—as some general releases do—should not and would not be enforced to block communications aboutpossible unlawful activity with the SEC or other law enforcementagencies. They also suggest that courts should give heightened scru-tiny to provisions that make reporting to the SEC more onerous to en-sure that they do not indirectly pursue a goal that could not be soughtdirectly.44

But, as instructive as these cases are, they do not fully answer thequestion of whether, and to what extent, companies can use agree-ments that allow whistleblowing, but decrease or eliminate congressio-nal incentives for doing so. To answer that question, it is necessary tolook not only to the broad public policies animating Astra and its prog-eny, but also to the specific public policy underlying, and supported by,Dodd-Frank.

39. See id. at 744.40. Id.41. See SEC v. Lipson, No. 97 C 2661, 1997 WL 801712, at *2 (N.D. Ill. Oct. 28,

1997) (agreement not to speak with SEC without a subpoena void as against publicpolicy).

42. See D’Arrigo Bros. of Cal. v. United Farmworkers of Am., 169 Cal. Rptr. 3d 171,181–83 (Cal. App. 2014) (contractual language purporting to prohibit union from cooper-ating with government investigation of unfair labor practices unenforceable).

43. See Cariveau v. Halferty, 99 Cal. Rptr. 2d 417, 423–24 (Cal. App. 2000) (“Theuse of confidentiality agreements that purport to restrict a registered member’s custom-ers from reporting improper conduct to the [National Association of Securities Dealers(NASD)] serves to perpetuate the improper conduct and is condemned by NASDpolicies.”).

44. Courts have repeatedly rejected contract interpretations that allow parties todo indirectly what they could not do directly. See, e.g., Century Marine Inc. v. UnitedStates, 153 F.3d 225, 230 (5th Cir. 1998) (“To allow such recovery would permit Centuryto do indirectly what it could not do directly.”); Safran v. United Steel Workers of Am.,AFL-CIO, 678 F. Supp. 1178, 1181 (W.D. Pa. 1988) (“We decline to permit the plaintiffsto do indirectly what they could not contractually do directly.”); Ables v. United States,2 Cl. Ct. 494, 501 (1983), aff’d, 732 F.2d 166 (Fed. Cir. 1984) (“What they could not dodirectly they certainly should not be allowed to do indirectly under the guise of an in-tended third party beneficiary.”).



1. Identifying Dodd-Frank’s Public PolicyDodd-Frank’s text and legislative history make clear that one of

its primary public interests is better protection for investors and thefinancial markets themselves following the financial crisis in 2008.45

In particular, the whistleblower provisions’ purpose is to assist theSEC in detecting, investigating, and prosecuting serious securities vi-olations to further the public policy goal of protecting investors and themarkets.46 In this respect, Dodd-Frank also evinces a strong publicpolicy interest in whistleblowing and private cooperation with publiclaw enforcement.

As the First Circuit’s decision in Astra indicates, however, ananalysis of a statute’s public policy aims encompasses more than eval-uating its general purpose; it also requires a court to assess the specificstatutory scheme designed to further that purpose.47 In Astra, thecourt examined not just the public policy behind Title VII but alsohow Congress intended to protect and advance that public interestby giving the EEOC the power to investigate both individual and sys-temic discrimination.48

Dodd-Frank’s statutory scheme reflects an important public policyjudgment: incentives are needed to promote whistleblowing because“whistleblowers often face the difficult choice between telling thetruth and the risk of committing ‘career suicide.’ ”49 The SEC, too, rec-ognized that incentives are an integral part of Dodd-Frank’s investor-protection scheme:

[T]he broad objective of the whistleblower program is to enhance theCommission’s law enforcement operations by increasing the financialincentives for reporting and lowering the costs and barriers to poten-tial whistleblowers, so that they are more inclined to provide theCommission with timely, useful information that the Commissionmight not otherwise have received.50

In particular, Congress developed three primary incentives tocounterbalance the profound personal and professional risks thatwhistleblowers often face, and to support the public policy of encourag-ing whistleblower reports to the SEC.51 First, of course, is the provi-sion of financial awards to whistleblowers. As the Senate Committee

45. See S. REP. NO. 111-176, at 36 (2010) (“During the crisis, it became apparentthat investors needed better protection . . . and the SEC need[ed] assistance.”).

46. Id.47. EEOC v. Astra U.S.A., Inc., 94 F.3d 738, 743–44 (1st Cir. 1996).48. Id. at 744.49. S. REP. NO. 111-176, at 111.50. ADOPTING RELEASE, supra note 6, at 105.51. See id. at 197 (“The Congressional purpose underlying Section 21F of the Ex-

change Act is to encourage whistleblowers to report possible violations of the securitieslaws by providing financial incentives, prohibiting employment-related retaliation, andproviding various confidentiality guarantees.”).



on Banking, Housing and Urban Affairs noted in its report on Dodd-Frank, “the minimum payout that any individual could look towardsin determining whether to take the enormous risk of blowing the whis-tle in calling attention to fraud” is “the critical component of theWhistleblower Program,” particularly because it helps counter the eco-nomic harm that whistleblowers may face as a result of employment-related retaliation or blacklisting.52

Second, Dodd-Frank and the SEC Whistleblower Rules allowwhistleblowers to report possible misconduct to the SEC anony-mously.53 The importance of anonymity can be seen throughoutDodd-Frank’s statutory provisions and the implementing regulations.Both the statute and regulations prohibit the SEC from “disclos[ing]any information . . . which could reasonably be expected to revealthe identity of a whistleblower,” except in narrow circumstances.54

Whistleblowers also benefit from the fact that all SEC investigationsremain confidential until the Commission files a complaint or beginsan administrative proceeding.55 The anonymity continues even afterthe SEC issues an award; none of the fourteen whistleblower awardsissued as of December 2014 have identified the recipients or providedpotentially identifying information.56

These anonymity safeguards are significant because they drama-tically decrease the risk that whistleblowers will become known to oth-ers, in turn decreasing the risk that they will face retaliation orblacklisting. Moreover, the SEC has emphasized that the anonymityprotection provides essential encouragement for a whistleblower tocome forward, and that fewer people would blow the whistle without

52. S. REP. NO. 111-176, at 111. Indeed, although the Program’s results still cannotfully be assessed because of the program’s relative newness and the length of time beforean award can be issued, it seems to be successfully encouraging whistleblowers to pro-vide tips to the SEC. The SEC has received thousands of complaints under the programeach year since it began in 2011. See U.S. SEC. & EXCH. COMM’N, 2013 ANNUAL REPORT,supra note 21. As of December 1, 2014, the Program has made awards to fourteenwhistleblowers, including one award the SEC estimates will be between $30 and $35 mil-lion. See Final Orders of the Commission, U.S. SEC. & EXCH. COMM’N, OFF. OF THE WHISTLE-

BLOWERS, http://www.sec.gov/about/offices/owb/owb-final-orders.shtml (last visited Dec. 1,2014).

53. See 15 U.S.C. § 78u-6(d)(2), (h)(2) (2012); 17 C.F.R. §§ 240.21F-7, -9(c) (2013).54. 15 U.S.C. § 78u–6(h)(2) (2012); 17 C.F.R. § 240.21F-7(a) (2013). Pursuant to 17

C.F.R. § 240.21F-7(b), whistleblowers reporting anonymously must file their complaintthrough an attorney, follow prescribed certification procedures, and disclose their iden-tities to the Commission only for verification before receiving any award.

55. See, e.g., ADOPTING RELEASE, supra note 6, at 126 (“As a general matter, it is theCommission’s policy and practice to treat all information obtained during its investiga-tions as confidential and nonpublic.”). The SEC is entitled to disclose nonpublic informa-tion in narrow circumstances, including to other government entities, self-regulatoryorganizations, and bankruptcy trustees. See 17 C.F.R. § 240.24c-1(b) (2013).

56. See SEC. & EXCH. COMM’N, OFFICE OF THE WHISTLEBLOWER, FINAL ORDERS OF THE

COMMISSION, available at http://www.sec.gov/about/offices/owb/owb-final-orders.shtml(last visited Dec. 1, 2014) (whistleblower award notices).



it.57 Common sense and social science research also support the con-clusion that “individuals are more willing to state a dissenting view-point if they can do so anonymously.”58

Third, Dodd-Frank provides robust remedies to whistleblowerswho face retaliation for reporting suspected violations to the SEC.59

In particular, the statute gives whistleblowers who experience retalia-tion the right to seek reinstatement, double back pay, and legal fees.60

The Dodd-Frank protections have procedural advantages as well be-cause a whistleblower can bring a retaliation claim directly to federalcourt for up to six years after retaliation occurs,61 while many otherfederal anti-retaliation provisions require whistleblowers to bring anadministrative claim before filing a court action, often within 180days.62 These enhanced remedies are particularly important becauseaccording to a recent survey, more than twenty percent of employeesreporting workplace misconduct experience some form of retribution.63

In short, in Dodd-Frank Congress identified a strong public inter-est in protecting investors and determined that this interest isadvanced by (a) protecting from retaliation whistleblowers who reportsecurities violations, (b) allowing whistleblowers to report anony-mously, and (c) giving whistleblowers the chance to obtain significantmonetary awards. Thus, any balancing of public policy interests underTown of Newton must take into account the role that Dodd-Frank’s in-centives play in protecting investors and, conversely, the potential im-pact that removing or undercutting these incentives would have oninvestors.

57. See ADOPTING RELEASE, supra note 6, at 198 (whistleblowers would be “less in-clined to report possible securities law violations” if they believed the SEC would disclosethe whistleblower’s identity to the corporation being investigated).

58. Moberly, supra note 11, at 1139, 1143 n.168; see also ASS’N CERTIFIED FRAUD EX-

AMINERS, REPORT TO THE NATION ON OCCUPATIONAL FRAUD AND ABUSE 17 (2010); TERANCE D.MIETHE, WHISTLEBLOWING AT WORK: TOUGH CHOICES IN EXPOSING FRAUD, WASTE, AND ABUSE

ON THE JOB 54–57 (1999); CASS R. SUNSTEIN, WHY SOCIETIES NEED DISSENT 20 (2003). Butsee MARCIA P. MICELI, WHISTLE-BLOWING IN ORGANIZATIONS 158 (2008) (“[T]here is scant ev-idence that anonymity promotes whistle-blowing.”).

59. See Richard Moberly, Sarbanes-Oxley’s Whistleblower Provisions: Ten YearsLater, 64 S.C. L. REV. 1, 14–16 (2012) (Dodd-Frank was one of several new anti-retaliationprovisions that “take Sarbanes-Oxley as a baseline and improve upon it”).

60. 15 U.S.C. § 78u-6(h)(1)(C) (2012).61. See 15 U.S.C. § 78u-6(h)(1)(B)(i) (2012) (whistleblowers may file claims in fed-

eral district court); 15 U.S.C. § 78u-6(h)(1)(B)(iii) (2012) (claims must be filed within sixyears after retaliation occurs or within three years of when the employee should havereasonably known about the facts material to the right of action, but not more thanten years after the date of the violation).

62. See Richard Moberly, Protecting Whistleblowers by Contract, 79 UNIV. COLO. L.REV. 975, 1004–05 (2008).

63. See National Business Ethics Survey of the U.S. Workforce, ETHICS RES. CTR. 1,13 (2013), http://www.ethics.org/nbes.



2. Contracts That Undermine Dodd-Frank’s WhistleblowerProgram

With this analytical framework in mind, we turn to the variouscontractual provisions companies use that may interfere with theSEC Whistleblower Program. As noted above, many of these provi-sions do not directly bar whistleblowing to the SEC—which would bea clear violation of Astra and Rule 21F-17—but instead alter thecosts and benefits of whistleblowing, thus changing the likely behaviorof prospective whistleblowers. In particular, we will analyze the com-peting public and private interests raised by three types of commonlyobserved clauses: (1) provisions that require employees to disclosetheir communications with the SEC to employers in some manner,(2) provisions waiving employees’ ability to obtain an award underthe SEC Whistleblower Program, and (3) general confidentiality provi-sions that may be used to bring a breach of contract claim should awhistleblower disclose confidential information or documents to theSEC.

A. CONTRACTS REQUIRING DISCLOSURE OF SEC COMMUNICATIONS

The first general category of contractual provision is designed toelicit information about whether employees have, or plan to, reportpossible wrongdoing to the SEC or other government authorities.One particularly common variant allows employees to blow the whistleto the SEC but provides that they must first report the wrongdoing in-ternally, or otherwise alert the company that they have disclosed, orplan to disclose, information to the SEC. Applying Town of Newton,64

it is clear that some legitimate interests weigh in favor of enforcingsuch provisions. Employers may contend that, because information de-rived through the course of a party’s employment generally belongs tothe employer, they should be able to control this information, providedthey do not use a confidentiality agreement to conceal unlawful con-duct from the government.65 In particular, obtaining the relevant in-formation before the whistleblower discloses it to the SEC allows theemployer to self-report violations, which can minimize the sanctionsit faces in any SEC enforcement action.66 It also helps the company

64. Town of Newton v. Rumery, 480 U.S. 386, 392 (1987).65. See Diamond v. Oreamuno, 248 N.E. 2d 910, 912 (N.Y. 1969) (“As a general

proposition, a person who acquires special knowledge or information by virtue of a con-fidential or fiduciary relationship with another is not free to exploit that knowledge orinformation for his own personal benefit, but must account to his principal for any profitsderived therefrom.”); see also RESTATEMENT (SECOND) OF AGENCY § 388 (1958).

66. See, e.g., Press Release, Sec. & Exch. Comm’n, SEC Announces Non-Prosecution Agreement with Ralph Lauren Corporation Involving FCPA Misconduct(Apr. 22, 2013) (“ ‘When they found a problem, Ralph Lauren Corporation did the rightthing by immediately reporting it to the SEC and providing exceptional assistance inour investigation,’ said George S. Canellos, Acting Director of the SEC’s Division of En-forcement. ‘The NPA in this matter makes clear that we will confer substantial and



understand the problem, prepare for a possible SEC investigation, andtake quicker remedial action. Indeed, because of these reasons, somecommentators suggest that internal whistleblowing is preferable to ex-ternal whistleblowing.67

Additionally, employers may argue that such provisions pose rela-tively few risks to whistleblowers in light of SEC Rule 21F-4(c)(3),which provides that a whistleblower may be considered the source of“original information,” and therefore remain eligible for a monetaryaward, when that information is first reported internally by thewhistleblower and then self-reported to the SEC by the company.68

In other words, the whistleblower can still reap the monetary benefitsof the SEC Whistleblower Program, even by reporting internally first.

Whistleblowers, on the other hand, are likely to argue that theseprovisions impede whistleblowing and, in so doing, undercut Dodd-Frank’s public policy. Most significantly, these provisions take directaim at the statutory anonymity protections.69 Employees cannot re-main anonymous if they have to inform the company of their plan toreport, or that they have reported, to the SEC. Even if employeesneed only internally disclose the violation and not their intention of re-porting to the SEC, the employer can easily trace any subsequent SECinquiry back to the internal reporter, making Dodd-Frank’s guaranteeof anonymity an empty promise.

For this and other reasons, the SEC considered, but rejected, man-dating internal reporting as a prerequisite for the recovery of a mone-tary award, concluding that any internal reporting requirement wouldundermine Dodd-Frank’s anonymity mandates.70 Likewise, the SECfound that “a general requirement that employees report internally . . .would impose a barrier that in some cases would dissuade potential

tangible benefits on companies that respond appropriately to violations and cooperatefully with the SEC.’ ”).

67. See Dworkin & Callahan, supra note 33, at 190. Dworkin and Callahan suggestthat the law should enforce confidentiality agreements that require internal reportingfirst:

The employer could fashion an agreement which requires that the employeefirst disclose any information internally. This gives it the advantage of cor-recting the situation without the confidence being breached. The companycan also designate the appropriate recipient to ensure that the informationis handled correctly. Since these measures do not thwart whistleblowingand have the advantage of allowing for earlier correction of any wrongdoing,the courts are likely to uphold these promises.

Id.68. 17 C.F.R. § 240.21F-4(c)(3) (2013).69. S. REP. NO. 111-176, at 111 (2010).70. See ADOPTING RELEASE, supra note 6, at 105–06 n.230 (“[I]n some cases an anon-

ymous whistleblower’s identity can be gleaned from the facts and circumstances sur-rounding the whistleblower’s complaint. . . . [R]equiring the whistleblower to report in-ternally would be in tension with . . . Section 21F that we protect information that couldreasonably be expected to reveal the identity of a whistleblower.”).



whistleblowers from providing information to the Commission, con-trary to the purpose of the whistleblower provision.”71 Instead, theSEC included in the rules features designed to “incentivize whistle-blowers to utilize their companies’ internal compliance and reportingsystems when appropriate,”72 including expanding the definition of“original information” and treating internal reporting as a positive fac-tor when determining monetary awards.73 These provisions reflect theSEC’s judgment that investor protection is best served by allowing, butnot mandating, internal reporting.74

Section 301 of the Sarbanes-Oxley Act of 200275 (Sarbanes-Oxleyor SOX) reflects a similar public policy judgment in favor of confidentialreporting. That provision requires employers to implement channelsfor employees to report illegal conduct to a corporate board of directorsanonymously, without the knowledge of their direct supervisors ormanagers.76 In fact, the Department of Labor’s (DOL) AdministrativeReview Board (ARB) has recognized that a company that publicly iden-tifies a whistleblower may have committed an adverse action againstthe whistleblower and be liable under Sarbanes-Oxley’s anti-retaliation provision.77 In Menendez v. Halliburton, the ARB noted:

The reason for requiring audit committees to create confidential and/or anonymous disclosure procedures is evident. Employee whistle-blowers are one of the most effective sources of information concern-ing questionable accounting and auditing matters as well as fraudand corporate crime. Since employees are more willing to identifymisconduct if they can do so anonymously, it stands to reason thatanonymous and/or confidential reporting mechanisms encourage in-ternal reporting of corporate misconduct. Furthermore, the confiden-tiality that Section 301 provides allows employees to report problemsdirectly to the independent audit committee and thus effectively totheir employer, while at the same time permitting the whistleblow-ing employee to avoid possible retaliation from supervisors or high-ranking company managers who may be defensive about wrongdoing

71. Id. at 105.72. Id. at 5.73. See 17 C.F.R. § 240.21F-6(4) (2013).74. See Brief of the Sec. & Exch. Comm’n, Amicus Curiae in Support of the Appel-

lant, Liu Meng-Ling v. Siemens AG, No. 13-4385, 2014 WL 663875, at *2 (2d Cir. Feb. 20,2014). (“Throughout the rulemaking process, the Commission considered the ‘significantissue’ of how to ensure that the whistleblower program does not undermine the willing-ness of individuals to make whistleblower reports internally at their companies beforethey make reports to the Commission.”); see also ADOPTING RELEASE, supra note 6, at90–91 (“The objective of this provision is to support, not undermine, the effective func-tioning of company compliance and related systems by allowing employees to taketheir concerns about possible violations to appropriate company officials first whilestill preserving their rights under the Commission’s whistleblower program.”).

75. 15 U.S.C. § 78j-1(m)(1) (2012).76. See id.77. See Menendez v. Halliburton, Inc., ARB Nos. 09-002, 09-003, ALJ No. 2007-

SOX-005, at 23-24 (ARB Sept. 13, 2011).



in which they might be implicated. Congress well recognized the im-portance of encouraging the reporting of accounting irregularitiesand potential fraud by means of confidential disclosures.. . .

Since the purpose of confidentiality is to encourage employees tocome forward with information about SOX violations, permittingan employer to indiscriminately expose the identity of an employeewho presents information concerning questionable accounting or au-diting matters would most assuredly chill whistleblower-protectedactivity.78

In addition to implicating Dodd-Frank’s anonymity provisions,agreements purporting to require internal reporting may also under-cut the statute’s anti-retaliation protections. Several courts, includingthe Fifth Circuit, have held that the Act does not protect internalwhistleblowers because its statutory definition of “whistleblower” re-quires a report to the SEC.79 This result is controversial, and severalother courts have reached the opposite conclusion for a variety of rea-sons.80 However, to the extent the Fifth Circuit’s view prevails, itwould be anomalous to permit an employer to require a whistleblowerto report internally before reporting to the SEC because the employerwould then have a defined window in which it could retaliate withoutfacing any Dodd-Frank penalties.81 This result seems likely to dis-suade prospective whistleblowers from coming forward, particularlyas reported retaliation rates remain strikingly high.82

The potentially profound effect of these “internal reporting” agree-ments on Dodd-Frank’s anonymity and anti-retaliation protections—and the corresponding centrality of these dual protections to the stat-ute’s overall investor-protection scheme—indicates that they should,and very likely will, be found unenforceable under Town of Newton.An employer’s desire to learn of potential problems cannot justifythe risk that fewer whistleblowers will come forward if private con-

78. See id.79. See Asadi v. G.E. Energy (USA), L.L.C., 720 F.3d 620, 630 (5th Cir. 2013); see

also Banko v. Apple Inc., No. 13–02977, 2013 WL 7394596, at *1 (N.D. Cal. Sept. 27,2013); Wagner v. Bank of Am. Corp., No. 12-CV-00381, 2013 WL 3786643, at *1 (D.Colo. July 19, 2013).

80. See, e.g., Bussing v. COR Clearing, LLC., No. 8:12-CV-238, 2014 WL 2111207,at *12 (D. Neb. May 21, 2014); Rosenblum v. Thomson Reuters (Markets) LLC, No. 13Civ. 2219, 2013 WL 5780775, at *3–5 (S.D.N.Y. Oct. 25, 2013); Ellington v. Giacoumakis,No. 13-11791, 2013 WL 5631046, at *2–3 (D. Mass. Oct. 16, 2013); Murray v. UBS Sec.,LLC, No. 12 Civ. 5914, 2013 WL 2190084, at *3–7 (S.D.N.Y. May 21, 2013); Genberg v.Porter, 935 F. Supp. 2d 1094, 1106–07 (D. Colo. 2013); Kramer v. Trans-Lux Corp., No.11 Civ. 1424, 2012 WL 4444820, at *3–5 (D. Conn. Sept. 25, 2012); Nollner v. S. BaptistConvention, Inc., 852 F. Supp. 2d 986, 993–95 (M.D. Tenn. 2012); Egan v. TradingScreen,Inc., No. 10 Civ. 8202, 2011 WL 1672066, at *5 (S.D.N.Y. May 4, 2011).

81. Sarbanes-Oxley clearly would protect this internal whistleblower from retalia-tion, but as mentioned above, its procedures and remedies are not as favorable towhistleblowers as Dodd-Frank’s provisions.

82. See ETHICS RES. CTR., supra note 63, at 9.



tracts can dismantle these two pillars of Dodd-Frank’s statutoryscheme. Instead, public policy favors preserving the delicate balancethat the SEC, after public comments and deliberation, struck with re-spect to internal reporting.83

This result would be consistent not only with congressional andadministrative intent, but also with prior case law recognizing as un-enforceable contractual provisions that burden, but do not completelybar, communications with the SEC.84 For example, in SEC v. Lipson,an Illinois district court refused to enforce a provision that wouldhave limited the extent to which employees could communicate withthe SEC without a subpoena, reasoning that

Neither the fact that [the] SEC remains free to subpoena the signa-tories to the agreement with Mr. Lipson, nor the possibility that thelanguage of the agreement might be construed narrowly by the sig-natories to permit informal discussions with SEC personnel on cer-tain topics, satisfies this court that the challenged provisions areharmless.85

As in Lipson, the question is not whether employees might still beable to communicate with the SEC despite their contractual restric-tions, but instead whether those restrictions threaten material harmto the SEC’s investigative abilities. Here, as in Lipson, the answer isthat they do, and therefore should not be enforceable.

B. CONTRACTS REQUIRING RELINQUISHMENT OF A DODD-FRANK REWARD

Equally common, and equally troubling, are contractual provi-sions that preserve employees’ right to report possible securities viola-tions to the SEC, but mandate that the employee waive, decline, oragree not to seek a monetary award. Such a provision might state,for example, “[n]othing in this agreement is intended to prevent Em-ployee from communicating or cooperating with a government agency,except Employee agrees that Employee will not be entitled to any in-dividual monetary payment or relief resulting from any administra-tive claim or investigative proceeding.”

Some employers may argue that such provisions are voluntarywaivers of a statutory right, which courts typically permit unless ex-pressly prohibited by statute. Thus, these employers would contend,the provision is exempt from analysis under Town of Newton.86 Em-ployers are likely to point to the fact that, while Dodd-Frank amendedSOX to include such an express prohibition on statutory waivers, it

83. See generally ADOPTING RELEASE, supra note 6.84. See SEC v. Lipson, No. 97 C 2661, 1997 WL 801712, at *2 (N.D. Ill. Oct. 28,

1997).85. Id.86. See United States v. Mezzanatto, 513 U.S. 196, 201 (1995) (“[A]bsent some af-

firmative indication of Congress’ intent to preclude waiver, we have presumed that stat-utory provisions are subject to waiver by voluntary agreement of the parties.”).



included no such prohibition with respect to Dodd-Frank’s ownwhistleblower provisions.87 In the face of the Sarbanes-Oxley amend-ment, employers may argue that congressional silence about waiver inDodd-Frank whistleblower provisions implies that Congress intention-ally permitted employees to waive their bounty right.

However, the Supreme Court has noted that the absence of ananti-waiver provision is not dispositive when “legislative policywould be thwarted by permitting” contractual waivers of statutoryrights.88 The Court has applied a similar public policy test as describedin Part III.A, supra, by voiding a contractual waiver provision when itwas “inconsistent with the provision creating the right sought to be se-cured.”89 Thus, whether an agreement to relinquish a Dodd-Frankaward is viewed as a waiver of a statutory right or a standard contractunder Town of Newton, the relevant question remains the same: wouldenforcement of the agreement impermissibly undercut the public pol-icy goals of the relevant statute?

Employers are likely to contend that the answer is no becausesuch provisions allow whistleblowers to communicate with the SECon a voluntary and anonymous basis. The employee does not faceany punishment or penalty for whistleblowing; the employee simplycannot receive an award for doing so. Employers are also likely toargue that the potential harm to the SEC is low because the Commis-sion retains its traditional investigative tools, including the ability tospeak to witnesses without a subpoena.

In support of this argument, employers may analogize agreementswaiving Dodd-Frank awards to similar provisions used in employmentseverance or settlement agreements. These typically permit an em-ployee to file a discrimination claim with the EEOC but not to obtainpersonal damages or other monetary relief. In other words, employeescould notify the EEOC of possible discrimination, allowing the EEOCto investigate potentially systemic or continuing discrimination, butwould release individual claims to relief.

Although certain EEOC offices are beginning to challengesuch provisions,90 they have so far been routinely enforced by

87. See 18 U.S.C. § 1514A(e)(1) (2012) (“The rights and remedies provided for in[SOX] may not be waived by any agreement, policy form, or condition of employment.”).

88. Brooklyn Sav. Bank v. O’Neil, 324 U.S. 697, 713 (1945).89. New York v. Hill, 528 U.S. 110, 116 (2000); see also Brooklyn Sav. Bank, 324

U.S. at 704 (in determining that the right to liquidated damages under the Fair LaborStandards Act is not waivable, the Court noted: “Where a private right is granted inthe public interest to effectuate a legislative policy, waiver of a right so charged or col-ored with the public interest will not be allowed where it would thwart the legislativepolicy which it was designed to effectuate.”).

90. See, e.g., Complaint, EEOC v. CVS Pharmacy, Inc., No. 14-cv-863, 2014 WL540344 (N.D. Ill. Feb. 7, 2014); Complaint, EEOC v. Baker & Taylor, Inc., No. 13-cv-03729 (N.D. Ill. May 20, 2013).



courts.91 The Supreme Court considered a similar issue in EEOC v.Waffle House92—whether an arbitration agreement can prevent theEEOC from litigating on an employee’s behalf in court—and concludedthat the EEOC could bring claims in court despite the employee’s ar-bitration agreement, but that “[the employee’s] conduct may havethe effect of limiting the relief that the EEOC may obtain.”93 Employ-ers are likely to argue that the same rule should apply in the Dodd-Frank context; that is, that agreements may not validly waive employ-ees’ rights to make a Dodd-Frank disclosure, but they may waive em-ployees’ rights to benefit personally from that disclosure.

This comparison, while superficially appealing, ignores the sub-stantial differences between the public policy goals of Title VII andDodd-Frank, and the two statutes’ enforcement schemes. The EEOCenforces antidiscrimination laws by investigating claims of alleged dis-crimination victims, who may prosecute their claims directly by inter-vening in an EEOC action or, when the EEOC declines to bring anaction, by filing their own private lawsuits.94 Damages obtained byan employee in an EEOC action are based primarily on the EEOC’svindication of the employee’s own rights.95 Therefore, failing to enforcethe waiver in an EEOC action would typically result in a double recov-ery for the employee, who would receive both the consideration givenfor the waiver and the damages from the EEOC action.96 As the Su-preme Court has made clear, “courts can and should preclude doublerecovery by an individual.”97

The same logic does not apply to Dodd-Frank’s unique statutoryscheme, in which the SEC is not seeking to vindicate the personalrights of a whistleblower—who may not have suffered any injury asa result of the reported securities violations—but is instead bringing

91. See, e.g., EEOC v. Cosmair, Inc., L’Oreal Hair Care Div., 821 F.2d 1085, 1091(5th Cir. 1987) (“[A]lthough an employee cannot waive the right to file a charge withthe EEOC, the employee can waive not only the right to recover in his or her own lawsuitbut also the right to recover in a suit brought by the EEOC on the employee’s behalf.”);EEOC v. Goodyear Aerospace Corp., 813 F.2d 1539, 1543 (9th Cir. 1987); EQUAL EMP’T OP-

PORTUNITY COMM’N, ENFORCEMENT GUIDANCE ON NON-WAIVABLE EMPLOYEE RIGHTS UNDER

EQUAL EMPLOYMENT OPPORTUNITY COMM’N (EEOC) ENFORCED STATUTES (Apr. 10, 1997),available at http://www.eeoc.gov/policy/docs/waiver.html (“[T]he Commission notes thateven though an individual who has signed a waiver agreement or otherwise settled aclaim subsequently files a charge with the Commission based on the same claim, the em-ployer will be shielded against any further recovery by the charging party . . . .”).

92. 534 U.S. 279 (2002).93. Id. at 296 (citations omitted).94. See generally 42 U.S.C. § 2000e et al. (2012).95. Id.96. See Waffle House, 534 U.S. at 297; Goodyear Aerospace Corp., 813 F.2d at 1543

(while injunctive relief against employer would serve the public good, any back payawarded to EEOC would “go directly to [the employee]” and is therefore not recoverableif previously waived).

97. Waffle House, 534 U.S. at 297.



claims on behalf of the government, for the ultimate benefit of inves-tors. Typically, the whistleblower only has the right to seek a Dodd-Frank award, which compensates the whistleblower for information,not injury. Therefore, a whistleblower award cannot be duplicative ofthe consideration that an employee may have received from the em-ployer in exchange for a release of the claims that the employeecould have brought directly against the employer.98

Given these distinctions, the enforceability of Dodd-Frank awardwaivers should not rest on EEOC precedent. Instead, a more apt,though still imperfect, analogy for the SEC whistleblower program isthe qui tam regime of the False Claims Act99 (FCA). The FCA resem-bles Dodd-Frank by providing a reward for whistleblowers who reportemployer misconduct100 and by involving claims in which the injurybeing vindicated also belongs to the government rather than thewhistleblower.101 Unlike Dodd-Frank, though, FCA whistleblowers,or “relators,” bring these claims by filing their own lawsuit againstthe company, in which the government may or may not intervene.102

FCA waiver cases typically arise when an employee signs an agree-ment releasing all claims against an employer, and then subsequentlyfiles an FCA complaint.103

Consistent with Town of Newton104 and Lipson,105 courts assessingthe enforceability of FCA waivers have sought to balance the “public in-terest in having information brought forward that the governmentcould not otherwise obtain” with the public interest in “encouragingparties to settle disputes.”106 Significantly, courts have recognized

98. This rationale would also prevent an employer from suing a whistleblowerunder a more general release of claims against the employer. Because the SEC awardis not based on any whistleblower claim against the employer, it should not be includedin a general release.

99. 31 U.S.C. §§ 3729–3733 (2012).100. See id. § 3730(d).101. See id. §§ 3729–3733. See also Geoffrey Christopher Rapp, Mutiny on the

Bounties? The Attempt to Reform Wall Street by the New Whistleblower Provisions ofthe Dodd-Frank Act, 2012 BYU L. REV. 73, 76–77 (2012) (“Dodd-Frank drew some ofits inspiration from the False Claims Act,” but Dodd-Frank is inferior because it doesnot adopt the qui tam aspect of the FCA that allows “whistleblowers to litigate cases in-dependently from federal action”) (emphasis added); id. at 132–43 (differences betweenthe reward programs of the False Claims Act and Dodd-Frank).

102. 31 U.S.C. § 3730(b) (2012).103. See, e.g., United States ex rel. Radcliffe v. Purdue Pharma L.P., 600 F.3d 319,

329 (4th Cir. 2010); United States ex rel. Ritchie v. Lockheed Martin Corp., 558 F.3d1161, 1168–69 (10th Cir. 2009); United States ex rel. Gebert v. Transp. Admin. Servs.,260 F.3d 909, 916 (8th Cir. 2001); United States ex rel. Hall v. Teledyne Wah Chang Al-bany, 104 F.3d 230, 231–33 (9th Cir. 1997); United States ex rel. Green v. Northrop Corp.,59 F.3d 953, 966 (9th Cir. 1995); United States ex rel. Nowak v. Medtronic, Inc., 806F. Supp. 2d 310, 336–37 (D. Mass. 2011).

104. 480 U.S. 386 (1987).105. No. 97 C 2661, 1997 WL 801712 (N.D. Ill. Oct. 28, 1997).106. Hall, 104 F.3d at 233.



that the dispositive question here is not whether an employee could stillhave the right to blow the whistle if the damage waiver or release wereenforced, but whether enforcement of the waiver would substantiallyreduce the efficacy of the statute’s incentive structure.107 As theNinth Circuit noted in United States ex rel. Green v. Northrop Corp.:

[A]lthough, as Appellees maintain, enforcing the Release at issue inthis case would not prohibit a relator from coming forward with in-formation concerning Appellees’ alleged misconduct, our analysis ofthe structure and purposes of the Act demonstrates that this consid-eration is not dispositive. If the qui tam provisions never had beenenacted, presumably whistleblowers still could come forward. TheAct reflects Congress’s judgment that incentives to file suit were nec-essary for the government to learn of the fraud or to spur govern-ment authorities into action; permitting a prefiling release whenthe government has neither been informed of, nor consented to,the release would undermine this incentive, and therefore, frustrateone of the central objectives of the Act.108

Under Green and its progeny, a waiver of an incentive award would beinvalid if it frustrated a statute’s central objectives.

As Green reflects, courts applying this reasoning in FCA waivercases have typically refused to enforce prefiling releases when the gov-ernment was unaware of the alleged misconduct until the relator filedthe claim, on the theory that enforcing such releases would limit the gov-ernment’s ability to detect wrongdoing. On the other hand, some courtshave agreed to enforce FCA waivers when the government was alreadyaware of the alleged misconduct before the filing of the complaint be-cause “the public interest in having information brought forward thatthe government could not otherwise obtain [was] not implicated.”109

Applying this rationale to the Dodd-Frank context suggests that asimilar, but not identical, outcome should prevail. First, given the cen-trality of monetary awards to the SEC Whistleblower Program, itseems clear that the “central objectives” of Dodd-Frank’s whistle-blower provisions would be substantially frustrated if courts enforcedaward waivers executed when the SEC did not already know the un-derlying information. As in the FCA context, enforcement of suchwaivers would decrease willingness to report misconduct and decreasethe flow of potentially valuable information to the SEC. Indeed, one ofthe key concerns behind the statute was that the SEC was not receiv-ing or generating sufficient information about possible securities viola-

107. See United States ex rel. Head v. Kane Co., 668 F. Supp. 2d 146, 152 (D.D.C.2009); United States ex rel. Grandeau v. Cancer Treatment Ctrs. of Am., 350 F. Supp. 2d765, 773 (N.D. Ill. 2004); X Corp. v. Doe, 805 F. Supp. 1298, 1310 n.24 (E.D. Va. 1992).

108. Green, 59 F.3d at 965.109. United States ex rel. Radcliffe v. Purdue Pharma, L.P., 600 F.3d 319, 332 (4th

Cir. 2010) (citing Hall, 104 F.3d at 233).



tions prior to Dodd-Frank.110 Significantly, allowing the waiver ofDodd-Frank awards would not only dissuade employees subject tothe waiver from coming forward, but also decrease the SEC’s abilityto use awards to build program awareness, encourage others to comeforward,111 and deter future securities violations,112 all of which arecrucial programmatic interests of Dodd-Frank and the SEC whistle-blower rules.

Unlike the prevailing FCA rule, however, applying this rationaleto the SEC Whistleblower Program suggests that Dodd-Frank waiversshould not be enforced even if they are executed after the SEC haslearned of the potential misconduct. First, there is a basic distinctionbetween the mechanics of Dodd-Frank and the FCA. In an FCA case,the whistleblower brings a claim against the company in court and hasan opportunity to receive a share of any resulting settlement or judg-ment. Thus, it makes more sense to allow for the private resolution ofclaims between the relator and the company, provided that it does notresult in violations of law being concealed from the government. TheSEC whistleblower, on the other hand, has no direct claim againstthe company and is not a party to enforcement actions. Likewise,the SEC whistleblower award is not paid by the company in anyway, but instead is paid from a separate fund established by Con-gress.113 Therefore, there is no actual dispute or claim between theemployee and the employer with respect to the award, and the publicinterest in promoting settlement of disputes is simply not implicated.It makes little public policy sense to allow employers to insert them-selves into this award scheme, regardless of whether the SEC isaware of the misconduct.

Moreover, a rule allowing the enforcement of waivers when theSEC has independently learned of the misconduct rests on the incor-rect assumption that subsequent whistleblower assistance will nothave significant investigative value to the SEC. In practice the SEC

110. See SEC. & EXCH. COMM’N, PROPOSED RULES FOR IMPLEMENTING THE WHISTLE-

BLOWER PROVISIONS OF SECTION 21F OF THE SECURITIES EXCHANGE ACT OF 1934, RELEASE

NO. 34-63237 (Nov. 17, 2010) (“More frequent reporting of high-quality information pro-motes greater deterrence by enhancing the efficiency and effectiveness of the Commis-sion’s enforcement program.”).

111. See 17 C.F.R. § 240.21F-6(a)(3)(ii) (2013) (a factor in any award amount deter-mination is “[t]he degree to which an award encourages the submission of high qualityinformation from whistleblowers by appropriately rewarding whistleblowers’ submissionof significant information and assistance”).

112. See 15 U.S.C. § 78u-6(c)(1)(B)(III) (2012) (a factor in any award amount deter-mination is “the programmatic interest of the Commission in deterring violations of thesecurities laws by making awards to whistleblowers who provide information that lead[s]to the successful enforcement of such laws”); 17 C.F.R. § 240.21F-6(a)(3) (“The Commis-sion will assess its programmatic interest in deterring violations of the securities lawsby making awards to whistleblowers who provide information that leads to the successfulenforcement of such laws.”).

113. See U.S. SEC. & EXCH. COMM’N, 2013 ANNUAL REPORT, supra note 21, at 16.



often obtains valuable information and assistance from whistleblowerseven after it has begun to investigate an alleged violation and the SECactively solicits follow-up complaints from whistleblowers who have al-ready filed complaints.114 In fact, an important factor that mayincrease the amount of a whistleblower’s award is the level of “[a]ssis-tance provided by the whistleblower.”115 Enforcing waivers when theSEC has already learned of the general misconduct would limit thisflow of potentially useful information and assistance, impeding a fed-eral interest. Accordingly, a balancing of public policy interests dic-tates that waivers of a Dodd-Frank whistleblower award should notbe enforced, regardless of when and how the SEC learns of the under-lying securities violation.

C. USING CONFIDENTIALITY AGREEMENTS TO IMPEDE DODD-FRANK

WHISTLEBLOWING

In addition to contractual provisions that directly limit or condi-tion an individual’s ability to report misconduct to government agen-cies, or to receive personal benefits for doing so, many whistleblowersalso face more general confidentiality agreements, which could argu-ably prohibit some communication with the SEC.116 Employment,compliance, and separation agreements frequently include terms pro-viding, for example, that “Employee shall not disclose, and representsthat Employee has not disclosed, any confidential company informationto any third party.” These agreements often define confidential infor-mation broadly to encompass any information that employees learnedduring the course of their employment at the company. These provi-sions are particularly significant because they can be used by an em-ployer to bring, or threaten to bring, a breach of contract claim againsta whistleblower seeking damages beyond the compensation that theemployee received in connection with the contract, a tactic now beingused against FCA whistleblowers with increasing frequency.117

114. As chief of the SEC’s Office of the Whistleblower, McKessy noted in an SECvideo for prospective whistleblowers, “People often call us to ask if they should submitsomething, or submit an update, and we will almost always suggest that you submitit. As I often tell people, you never know what information may be the last piece of a puz-zle for an investigation.” SEC Office of the Whistleblower, What Happens to Tips (Tran-script), available at http://www.sec.gov/about/offices/owb/owb-what-happens-to-tips.shtml (last visited Sept. 28, 2014).

115. See 15 U.S.C. § 78u-6(c)(1)(B)(i)(II) (2012); 17 C.F.R. § 240-21F-6(a)(2) (2013).116. Another similar and troubling practice, beyond the scope of this Article, is the

use of a broad confidentiality agreement that prevents employees from consulting inde-pendent legal counsel, effectively eliminating their ability to file whistleblower com-plaints anonymously in accordance with SEC rules.

117. See, e.g., Walsh v. Amerisource Bergen Corp., Civ. No. 11-7548, slip op. at 13(E.D. Pa. June 16, 2014); see also Marissel Descalzo, Employers Fight Back AgainstWhistleblowers, INSIDE COUNSEL (June 24, 2014), http://www.insidecounsel.com/2014/06/24/employers-fight-back-against-whistleblowers; Ben James, 5 Questions to Ask BeforeSuing over Whistleblower Theft, LAW360 (May 21, 2014), https://www.law360.com/articles/533633/5-questions-to-ask-before-suing-over-whistleblower-theft; Jean F. Kuei & Michael



These commonplace confidentiality provisions implicate impor-tant interests on both sides. Employers have a strong interest in ob-taining such agreements for legitimate employer concerns, such aspromoting research and innovation, protecting trade secrets and cor-porate reputation, and facilitating communication between a principaland its agents.118 For this reason, confidentiality agreements tailoredto protect legitimate interests are enforceable when they are not con-trary to public policy.119

It is equally clear that strictly enforcing such confidentialityagreements to prevent whistleblowers from reporting misconduct tothe SEC would abridge important law enforcement interests. Thiswould contravene Rule 21F-17, which expressly states that confidenti-ality agreements may not be used to impede individuals from commu-nicating with SEC staff.120 It would also be inconsistent with a longline of cases prohibiting secrecy agreements purporting to restrict in-dividuals from reporting violations of law.121 Courts have also heldthat information about wrongdoing cannot be a trade secret warrant-ing confidentiality protection.122

A more difficult question arises when an employer accepts thewhistleblower’s right to report misconduct but argues that the whistle-

R. Kleinmann, Health Care Employers Take Note: New Weapons Are Available When De-fending False Claims Act Suits, FORBES (June 20, 2014), available at http://www.forbes.com/sites/theemploymentbeat/2014/06/20/health-care-employers-take-note-new-weapons-are-available-when-defending-false-claims-act-suits/.

118. See O’Day v. McDonnell Douglas Helicopter Co., 79 F.3d 756, 763 (9th Cir.1996) (employer had “strong interest” in preventing employees from improperly takingand disclosing to other co-workers confidential documents); Dworkin & Callahan,supra note 33, at 174.

119. See, e.g., McGrane v. Reader’s Digest Ass’n, Inc., 822 F. Supp. 1044, 1046(S.D.N.Y. 1993) (confidentiality agreements involving “matters of substantial concernto the public” are distinct from “trade secrets or other legitimately confidentialinformation”).

120. Similarly, the Commission has stated “we wish to clarify that confidentialityagreements or protective orders entered into in [Self-Regulatory Organization] arbitra-tion or adjudicatory proceedings may not be used to prevent a party from reporting a pos-sible securities law violation.” ADOPTING RELEASE, supra note 6, at 201 n.407.

121. See Chambers v. Capital Cities/ABC, 159 F.R.D. 441, 444 (S.D.N.Y. 1995) (“Ab-sent possible extraordinary circumstances . . . , it is against public policy for parties toagree not to reveal, at least in the limited contexts of depositions or pre-deposition inter-views concerning litigation arising under federal law, facts relating to alleged or poten-tial violations of . . . law.”); EEOC v. U.S. Steel Corp., 671 F. Supp. 351, 357 (E.D. Pa.1987) (agreements restricting former employees revealing violations of law to EEOCwill “hinder[]” implementation of the “Congressionally mandated duty to enforce the pro-visions” of federal statutes), overturned on other grounds, 921 F.2d 489 (3d Cir. 1990).

122. McGrane, 822 F. Supp. at 1051–52; id. at 1046 (“Courts are increasingly re-luctant to enforce secrecy arrangements where matters of substantial concern to thepublic—as distinct from trade secrets or other legitimately confidential information—may be involved.”); id. at 1052 (“Disclosures of wrongdoing do not constitute revela-tions of trade secrets which can be prohibited by agreements binding on formeremployees.”).



blower cannot take or use company documents that might support theclaim. In this situation, does the employee’s right to communicate withthe government justify the taking and sharing of these confidentialdocuments, or does the employer have a superior interest in maintain-ing the confidentiality of its proprietary information? Courts have longgrappled with these questions in the FCA context,123 and are now be-ginning to face them in the SEC whistleblower context.

Employers are likely to argue that the federal interest in SECwhistleblowing cannot outweigh traditionally recognized propertyand intellectual property rights, and are likely to characterize employ-ees’ taking of documents for whistleblowing purposes as theft or con-version.124 Employers may also note that, once the SEC is alerted towrongdoing, it can request or subpoena documents, reducing theneed for employees to take confidential documents.125 This argumentfinds at least some support in existing case law, as some courts havetaken an anti-whistleblower stance even when employees took docu-ments to support a disclosure of illegality to the government. A prom-inent example is JDS Uniphase Corp. v. Jennings,126 in which anemployee defended his former employer’s claim for a breach of a con-fidentiality agreement by claiming that the agreement was unenforce-able in violation of the public policy in favor of whistleblowing.127

123. See Zahodnick v. Int’l Bus. Mach. Corp., 135 F.3d 911, 914–15 (4th Cir. 1997);Siebert v. Gene Sec. Network, No. 11-cv-01987-JST, slip op. at 11–13 (N.D. Cal. Oct. 16,2013); United States ex rel. Wildhirt v. AARS Forever, Inc., No. 1:09-cv-01215, slip op. at9 (N.D. Ill. Sept. 19, 2013); United States ex rel. Ruhe v. Masimo Corp., 929 F. Supp. 2d1033, 1039 (C.D. Cal. 2012); Glynn v. Impact Sci. & Tech., Inc., 807 F. Supp. 2d 391, 423–24 (D. Md. 2011), aff ’d, 710 F.3d 209, 214–18 (4th Cir. 2013); United States ex rel. Head v.Kane Co., 668 F. Supp. 2d 146, 152 (D.D.C. 2009); United States ex rel. Grandeau v. Can-cer Treatment Ctrs. of Am., 350 F. Supp. 2d 765, 773 (N.D. Ill. 2004); X Corp. v. Doe, 805F. Supp. 1298 n.24 (E.D. Va. 1992). For a good discussion of FCA case law examining theenforceability of confidentiality agreements, see Joel D. Hesch, The False Claims ActCreates a “Zone of Protection” That Bars Suits Against Employees Who Report FraudAgainst the Government, 62 DRAKE L. REV. 361, 395–404 (2014).

124. See, e.g., Ruhe, 929 F. Supp. 2d at 1038 (company claimed that the relator cop-ied confidential documents and transmitted them to the government in violation of rela-tor’s nondisclosure agreement); Head, 668 F. Supp. 2d at 150 (D.D.C. 2009) (suit by for-mer employer against a False Claims Act relator for fraud, libel, tortious interferencewith contract, and other associated claims arising from relator’s disclosure of confiden-tial employer documents to the government, in violation of the relator’s nondisclosureagreement).

125. See, e.g., Securities and Exchange Act of 1934, § 17(b), 15 U.S.C. § 78q-1(b)(2012).

126. 473 F. Supp. 2d 697 (E.D. Va. 2007).127. See id. at 701–02. Pursuant to the agreement’s choice of law provision, the

court analyzed this claim under California law, which has a provision that asserts a “gen-eralized declaration of public policy in favor of whistle-blowing.” Id. at 701. However, thecourt also noted that “Sarbanes-Oxley is itself an embodiment of a federal policy encour-aging whistleblowers to come forward, and the effect of the California declaration, if any,is to encourage liberal construction of whistleblower statutes by California courts orother courts applying California law.” Id. at 701 n.5.



Specifically, the employee argued that he needed to take proprietarydocuments “to function as an effective Sarbanes-Oxley whistle-blower.”128 In rejecting this argument, the court concluded that apro-whistleblower public policy cannot “authorize disgruntled employ-ees to pilfer a wheelbarrow full of an employer’s proprietary docu-ments in violation of their contract merely because it might helpthem blow the whistle on an employer’s violations of law, real or imag-ined.”129 The court pointedly concluded that “Sarbanes-Oxley is not alicense to steal documents and break contracts.”130

Many other courts, however, take a more nuanced approach, fo-cusing on the nexus between the confidential documents in questionand the misconduct alleged by the whistleblower. These courts haveoften found that an employer can bring a breach-of-contract claimagainst the employee, or successfully repel a retaliation claim by theemployee, based on a confidentiality agreement if the purportedly con-fidential documents or materials taken by the employee bear little re-lationship to the reported violation. For example, in Cafasso, U.S. exrel. v. General Dynamics C4 Sys., Inc.,131 an FCA relator argued thatthe court should adopt a public policy exception to enforcement ofher confidentiality agreement.132 The court determined that, even ifit adopted such an exception, the exception would not protect the rela-tor because of her “vast and indiscriminate appropriation” of theemployer’s files.133 The relator had copied approximately “eleven giga-bytes of data—tens of thousands of pages,” with little understandingor limitation on her choice of documents to take:

She decided which [employer] documents to copy by browsingthrough folders related to technology and technology development,and, she testified, “if I saw something that I thought actually couldapply and should be investigated, I just grabbed the whole folder”(emphasis added). Further, she scanned only file names and “didnot look at any individual documents at all.” Swept up in this unse-lective taking of documents were attorney-client privileged commu-nications, trade secrets belonging to [her employer] and othercontractors, internal research and development information, sensi-tive government information, and at least one patent applicationthat the Patent Office had placed under a secrecy order.134

The Ninth Circuit concluded that any employee asserting a public pol-icy exception to a breach of confidentiality agreement claim must

128. Id. at 702.129. Id.130. Id. at 703.131. 637 F.3d 1047 (9th Cir. 2011).132. See id. at 1061–62.133. See id. at 1062.134. Id.



make a “particularized showing” that the “removal of the documentswas reasonably necessary to pursue an FCA claim.”135

When the relationship between the documents in dispute and thereported wrongdoing is close, courts typically will refuse to enforce theconfidentiality provisions on public policy grounds.136 For example,courts have repeatedly found that an FCA relator’s taking of docu-ments is not actionable if those documents could be used as evidenceat trial or are “relevant to the alleged fraud” because the FCA reflectsa “strong public policy in favor of protecting whistleblowers who reportfraud against the government.”137 Otherwise, “[e]nforcing a private

135. Id. The Ninth Circuit did not rule out such an exception, but clearly limitedits use:

The need to facilitate valid claims does not justify the wholesale stripping of acompany’s confidential documents. Although courts perhaps should considerin particular instances for particular documents whether confidentiality pol-icies must give way to the needs of FCA litigation for the public’s interest, Ca-fasso’s grabbing of tens of thousands of documents here is overbroad and un-reasonable, and cannot be sustained by reference to a public policy exception.

Id.; see also Walsh v. Amerisource Bergen Corp., Civ. No. 11-7548, slip op. at 13 (E.D. Pa.June 16, 2014) (refusing to dismiss a counterclaim for breach of confidentiality agree-ment because it was too early to tell whether “the entirety” of the documents taken bythe whistleblower were necessary for his FCA claim); Siebert v. Gene Sec. Network,Inc., 11-CV-01987-JST, slip op. at 13 (N.D. Cal. Oct. 16, 2013) (“The Court agrees thatany alleged obligation by Siebert not to retain or disclose the confidential documentsthat form the basis of this action is unenforceable as a matter of public policy becauseit would frustrate Congress’ purpose in enacting the False Claims Act. . . . But theCourt cannot now conclude that the counterclaim in its entirety should be dismissed, be-cause it is possible that Siebert also took confidential documents that bore no relation tohis False Claims Act claim.”); United States ex rel. Wildhirt v. AARS Forever, Inc., No.1:09-cv-01215, slip op. at 6 (N.D. Ill. Sept. 19, 2013) (refusing to dismiss a counterclaimbased on a confidentiality agreement when it was alleged that the relator took docu-ments “with no intention of using” them in the qui tam suit and when the relator’s dis-closure went beyond what was necessary for the suit).

136. See, e.g., Siebert, 2013 WL 5645309, slip op. at 13 (“[A]ny alleged obligation bySiebert not to retain or disclose the confidential documents that form the basis of thisaction is unenforceable as a matter of public policy because it would frustrate Congress’purpose in enacting the False Claims Act—namely, the public policy in favor of providingincentives for whistleblowers to come forward, file FCA suits, and aid the government inits investigation efforts,” but holding that a breach of contract claim may still be appro-priate if the relator took confidential documents that “bore no relation” to his FCAclaim); United States ex rel. Ruhe v. Masimo Corp., 929 F. Supp. 2d 1033, 1039 (C.D.Cal. 2012) (“Relators sought to expose a fraud against the government and limitedtheir taking to documents relevant to the alleged fraud. Thus, this taking and publica-tion was not wrongful, even in light of nondisclosure agreements, given ‘the strong publicpolicy in favor of protecting whistleblowers who report fraud against the government.’ ”)(quotingUnited States ex rel. Grandeau v. Cancer Treatment Ctrs. of Am., 350 F. Supp. 2d765, 773 (N.D. Ill. 2004) (relator exempt from liability for breach of confidentiality agree-ment for disclosure to government of documents showing employer engaged in fraudu-lent healthcare billing)); United States ex rel. Head v. Kane Co., 668 F. Supp. 2d 146,152 (D.D.C. 2009); X Corp. v. Doe, 805 F. Supp. 1298, 1310 n.24 (E.D. Va. 1992) (a confi-dentiality agreement would be void as against public policy if, when enforced, it wouldprevent “disclosure of evidence of a fraud on the government”).

137. Siebert, 11-CV-01987-JST, slip op. at 12; see also Ruhe, 929 F. Supp. 2d at1039; Grandeau, 350 F. Supp. 2d at 773.



agreement that requires a qui tam plaintiff to turn over his or her copyof a document, which is likely to be needed as evidence at trial, to thedefendant who is under investigation would unduly frustrate the pur-pose” of the FCA.138

A similar rule prevails in the Sarbanes-Oxley context, in whichcourts also recognize that the federal interest in whistleblowing cantrump employers’ otherwise legitimate desire to protect confidential doc-uments when there is a reasonable connection between the documentsand the alleged securities violation.139 For example, one court stated:“[T]he statute demonstrates the public policy in favor of allowing evencurrent employees to assist in securities fraud investigations. It certainlydoes not establish a public policy in favor of allowing employers to muz-zle their employees with overbroad confidentiality agreements.”140

Even more specifically, the DOL’s ARB, which hears appeals ofSarbanes-Oxley whistleblower retaliation claims, has indicated thatemployees should be able to take and share documents related to po-tential misconduct, despite the existence of a confidentiality agree-ment, if those documents represent “the kind of ‘original information’that Congress intended be protected under either the Internal Reve-nue Service [(IRS)] or SEC whistleblower programs.”141 In Vannoy v.Celanese Corp., an employee complained internally about his employ-er’s financial practices, and then reported the practices to the IRSunder the Agency’s whistleblower reward program.142 As part of theIRS complaint, the employee attached numerous proprietary and con-fidential company documents in violation of the company’s generalconfidentiality agreement.143 The employee filed a Sarbanes-Oxley re-taliation claim after the employer terminated his employment.144

Initially, a DOL administrative law judge (ALJ) rejected the em-ployee’s claim, finding that the company properly discharged theemployee for, among other things, copying confidential documents inviolation of his confidentiality agreement.145 The ALJ also rejectedthe employee’s argument that he had an “informer’s privilege” to usethe company’s confidential documents when reporting wrongdoing, as-serting that “SOX allows for the reporting of violations but not for ille-gally obtaining documents.”146 On appeal, however, the ARB concluded

138. Head, 668 F. Supp. 2d at 152.139. In re JDS Uniphase Corp. Secs. Litig., 238 F. Supp. 2d 1127, 1136 (N.D. Cal.

2002).140. Id.141. Vannoy v. Celanese Corp., ARB No. 09-118, slip op. at 17 (Sept. 28, 2011).142. See id. at 4, 6.143. Id. at 6.144. Id. at 2.145. Id. at 20–21.146. Id. at 22 (citing JDS Uniphase Corp. v. Jennings, 473 F. Supp. 2d 697 (D. Va.

2007)).



that the confidentiality agreement did not necessarily prohibit the em-ployee from providing documents to the government, even though theycontained sensitive data such as social security numbers.147

The ARB noted the difficulty of resolving the “clear tension be-tween a company’s legitimate business policies protecting confidentialinformation and the whistleblower bounty programs” and looked to thepublic policy supporting the bounty programs to resolve the tension.148

The ARB asserted that Congress created the IRS and Dodd-Frankprograms:

to encourage whistleblowers to disclose confidential company infor-mation in furtherance of enforcement of tax and securities laws. Pas-sage of these bounty provisions demonstrate that Congress intendedto encourage federal agencies to seek out and investigate indepen-dently procured, non-public information from whistleblowers suchas Vannoy to eliminate abuses in the tax realm under the IRSWhistleblower program and now in the securities realm with theSEC Whistleblower program . . . . [T]he Dodd-Frank Act establishedthe SEC Investor Protection Fund, which is to be used to pay whistle-blower claims and is funded with monetary sanctions that the SECcollects in a judicial or administrative action, or through certain dis-gorgements under the Sarbanes-Oxley Act of 2002. Similar to theIRS Whistleblower bounty program that Vannoy pursued, Section21F(b) of the Dodd-Frank Act provides that the SEC “shall pay” awhistleblower who voluntarily provides original information to theSEC that leads to the successful enforcement of a covered judicialor administrative action and results in certain monetary sanctions.

. . .

. . . Under the terms of the SEC whistleblower bounty program, Con-gress anticipated that the whistleblower would provide indepen-dently garnered, insider information that would be valuable to theSEC in its investigation.149

Ultimately, the ARB remanded the case to the ALJ, noting that, inlight of these public policy interests, “the crucial question for the ALJto resolve . . . is whether the information [the employee] procured fromthe company is the kind of ‘original information’ that Congress in-tended be protected under either the IRS or SEC whistleblower pro-grams, and whether . . . the transfer of information was protectedactivity.”150

Vannoy offers a guiding principle that documents may be lawfullytaken by an employee, notwithstanding a confidentiality agreement, ifthose documents reasonably support or relate to a whistleblower com-plaint that is required, protected, or encouraged by federal or state lawbecause the government has a compelling interest in receiving the doc-

147. See id. at 8.148. Id. at 16.149. Id.150. Id. at 17.



uments. Conversely, documents with no reasonably ascertainablerelevance to a possible securities violation would be subject to the ap-plicable confidentiality agreement.

As the ARB’s discussion of Dodd-Frank in Vannoy suggests, thereis good reason to extend this guiding principle to the SEC Whistle-blower Program because it comports fully with the public policyaims of the statute. Relevant documents taken from an employer notonly can provide potentially valuable evidence of a possible securitiesviolation, but also can help the SEC confirm the veracity of thewhistleblower’s information and better distinguish between tips thatwarrant significant attention and those that do not. This is a criticalfunction because the SEC received over 3,200 tips through the SECWhistleblower Program in fiscal year 2013 alone,151 and receivestens of thousands of other tips and referrals through other means,such as investor complaints.152 Similarly, background documentssuch as organizational charts, compliance policies, and descriptionsof relevant internal systems can save investigative time and resourcesby helping the SEC understand the facts of a case more quickly.153 In-deed, the SEC expects whistleblowers to provide documentary sup-port. The SEC’s “Tips, Complaints and Referrals” form (Form TCR)specifically asks the whistleblower to “[d]escribe all supporting mate-rials in the complainant’s possession . . .” and to “[i]dentify with partic-ularity any documents or other information in your submission thatyou believe could reasonably be expected to reveal your identity.”154

These questions would make little sense if the SEC did not expectwhistleblowers to include relevant documents in their submissions.

Finally, while employers would obviously like to avoid SEC scru-tiny, the disclosure of documents to the SEC poses relatively littlerisk of harm to employers who have not engaged in wrongdoing.SEC policy mandates that all investigations—and all documents pro-duced therein—must be kept confidential and nonpublic until the fil-ing of a complaint or administrative order, giving employers a highlevel of assurance that any confidential documents will not be leaked

151. U.S. SEC. & EXCH. COMM’N., 2013 ANNUAL REPORT, supra note 21.152. As the SEC’s Enforcement Manual indicates, the SEC cannot allocate the

same level of resources to each tip and investigation, and instead must rank investiga-tions based on a number of factors, including the scope of the misconduct and investorharm. U.S. SEC. & EXCH. COMM’N., ENFORCEMENT MANUAL § 2.1.1 (2013) (“Devoting appro-priate resources to investigations that are more significant will help ensure high qualityinvestigations and maximize desired program outcomes.”).

153. The ability to gain early access to documents is particularly significant be-cause the SEC cannot subpoena documents without a formal order of investigation,which itself typically requires investigating attorneys to have some evidence that a se-curities violation is occurring or has occurred. See id. § 2.3.4.

154. U.S. SEC. & EXCH. COMM’N, FORM TCR, available at http://www.sec.gov/about/forms/formtcr.pdf.



to the public or third parties.155 In this way, SEC investigations offergreater confidentiality protections to employers than an FCA suit, inwhich relators may choose to attach supporting documents to publicfilings.156

A rule that allows whistleblowers to provide the SEC with docu-ments relevant to understanding and investigating a possible securi-ties violation strikes an appropriate balance between employers’legitimate interests in confidentiality and data security, while ensuringthat the SEC retains access to potentially valuable sources of evidenceand supporting background information. While employers and employ-ees may disagree about whether certain documents are relevant to apossible securities violation, this rule also has the benefit of being rel-atively easy to understand and intuitive, reducing the risk thatwhistleblowers will inadvertently expose themselves to personal liabil-ity while making a good-faith effort to report possible misconduct.

IV. Practical Steps to Reduce the Risks Posed byAgreements Restricting Whistleblowing

This analysis of the three types of de facto gag clauses indicatesthat courts will, and should, refuse to enforce agreements that wouldsignificantly threaten the flow of potentially actionable informationand documents about possible securities violations from whistleblowersto the SEC. If our prediction is correct, and courts do strike down suchcontractual clauses, they will become less common over time. In themeantime, even if courts refuse to enforce de facto gag clauses, the in-clusion of such provisions in agreements continues to pose a danger tothe SEC Whistleblower Program. Many individuals, particularly thosewho are unrepresented, may not understand that such provisions couldbe challenged, and may decide to forgo reporting as a result. Other po-tential whistleblowers may recognize that such provisions are likelyunenforceable but decide that staying silent is preferable to acting asa “test case” and risking personal liability by blowing the whistle. Em-ployees may also reasonably fear that challenging such provisions willflag them as a potential whistleblower, leading to retaliation. The wide-spread use of such agreements poses risks for employers, too, who mayreflexively seek the broadest confidentiality and release provisions pos-sible without recognizing the law’s substantial limitations.

155. ADOPTING RELEASE, supra note 6, at 126. Additionally, employers producingdocuments to the SEC can request confidentiality for those documents under theSEC’s Freedom of Information Act procedures. See 17 C.F.R. § 200.83 (2014).

156. The FCA provides that relators must first file their complaints under seal togive the government an opportunity to investigate. See 31 U.S.C. § 3730(b)(2) (2012). Un-less the government seeks an extension, however, the complaint may be unsealed aftersixty days. Id.



Accordingly, our analysis suggests that the key stakeholders—employers, employees, and the SEC—should each take steps now to re-duce the risks associated with these agreements. First, employers andtheir counsel should be aware that agreements that impede employeesfrom reporting misconduct to the SEC or other government authoritiesmay backfire. Although such agreements may dissuade some employ-ees from reporting misconduct, other employees may challenge theseprovisions, resulting in uncertainty and added employer litigationcosts. In such cases, employers may find that bargained-for contrac-tual provisions are unenforceable, upsetting settled expectations.157

In addition to losing the benefit of their bargain, employers andtheir counsel may face substantial liability or sanctions for draftingagreements that purport to limit or condition communications withthe SEC. Such agreements may put employers and their counsel inthe SEC’s crosshairs for violating Rule 21F-17 or federal and statestatutes prohibiting compounding and obstruction of justice.158 Suchagreements also may subject employers’ counsel to professional sanc-tions under Rule 3.4(f ) of the Model Rules of Professional Conduct,which, with limited exceptions, states that attorneys shall not “requesta person other than a client to refrain from voluntarily giving relevantinformation to another party.”159

Even if the SEC does not act, employees may be able to bringSarbanes-Oxley or Dodd-Frank retaliation claims against employersbased upon an employment-related agreement that purports to limitor condition their ability to communicate with the SEC, on the theorythat they have suffered an adverse employment action as a result of try-ing to exercise or preserve statutory rights.160 Courts have previouslyallowed similar retaliation claims under other statutes where (1) theemployee engaged in protected whistleblowing conduct prior to receiv-ing the problematic agreement161 or (2) the employee did not engage inprior protected conduct, but the employer either “(i) attempt[ed] to

157. Employers should also be aware that anonymity provisions discussed abovemake it possible that employers may never learn when and if an employee has breachedan agreement by, for example, accepting a whistleblower award.

158. As Professor Bauer points out in an article exploring the ethical implicationsof evidence-suppressing settlements, it is unlikely that a settlement prohibiting volun-tary disclosures would be deemed criminal conduct, especially if it includes a carve-out for disclosures pursuant to subpoena or court order. See Jon Bauer, Buying WitnessSilence: Evidence-Suppressing Settlements and Lawyers’ Ethics, 87 OR. L. REV. 481, 506(2008). Nevertheless, there is a risk that the SEC or a federal prosecutor might draw in-ferences from an agreement that aims to deter whistleblowing to the SEC. See id.

159. MODEL RULES OF PROF’L CONDUCT R. 3.4(f ) (1983). For a detailed discussion ofModel Rule 3.4(f ), see Bauer, supra note 158, at 506.

160. See 18 U.S.C. § 1514A (2012) (Sarbanes-Oxley); 15 U.S.C. § 78u-6(h) (2012)(Dodd-Frank).

161. Conn. Light & Power Co. v. Sec’y of U.S. Dep’t of Labor, 85 F.3d 89 (2d Cir.1996).



enforce the agreement against an employee who signed the agreementbut nevertheless files or participates in an EEOC charge, or (ii) with[e]ldbenefits already promised or owed from an employee who refuses tosign the agreement.”162 An agreement that the employer intended touse as a shield from liability may become a sword in the hands of a so-phisticated employee-side attorney. Thus, employers and their counselshould take proactive steps to ensure that their agreements do not di-rectly or indirectly impede their employees’ ability to report misconductto the government.

For their part, employees and their counsel should educate them-selves about the legal ramifications of these provisions and take a firmstand against their enforceability and legality. In particular, employee-side counsel should understand both the relevant law, including SECrules, ethical rules, and case law, and the available legal tools attheir disposal, including public policy arguments to defend a breach-of-contract claim or bring a retaliation claim against the employer.Counsel can then argue against the inclusion of such provisions duringnegotiations or, if necessary, challenge their enforceability later. Like-wise, employees and their counsel should seriously consider advisingthe SEC if a company is using agreements to block individuals fromreporting possible securities violations, especially if the company isunder investigation by the SEC for other possible misconduct. TheSEC has expressed interest in receiving such information,163 andreports can be made anonymously. Employees’ attorneys also shouldinform clients about the potential risks of taking and disclosingdocuments—including the risk of a claim against the employee—to en-sure that employees do not expose themselves to personal liability byindiscriminately taking documents that bear no reasonable relation-ship to a possible securities violation.

Finally, and perhaps most importantly, we believe that govern-ment agencies should take meaningful action to counter the chillingeffect of de facto gag clauses on whistleblowing. First, the SEC shoulduse its enforcement authority to sanction companies that run afoul ofRule 21F-17, as Sean McKessy has already warned.164 In addition, the

162. EEOC v. Nucletron Corp., 563 F. Supp. 2d 592, 594 (D. Md. 2008).163. Mahoney, supra note 25 (quoting McKessy as stating that “we are actively

looking for examples of confidentiality agreements, separat[ion] agreements, employeeagreements that . . . in substance say ‘as a prerequisite to get this benefit you agreeyou’re not going to come to the Commission . . . .’ ”).

164. John A. Goldmark, SEC Warns In-House Counsel Against Using Incentives toDeter External Whistleblowing, DAVIS WRIGHT TREMAINE LLP (Apr. 14, 2014), available athttp://www.dwt.com/SEC-Warns-In-House-Counsel-Against-Using-Incentives-to-Deter-External-Whistleblowing-04-14-2014 (quoting McKessy as stating that companiesshould “[b]e aware that this is something we are very concerned about. If you’re spend-ing a lot of your time trying to come up with creative ways to get people out of our pro-grams, I think you’re spending a lot of wasted time and you run the risk of running afoulof our regulations.”).



SEC could bring administrative actions against attorneys who requireemployees to enter into impermissibly restrictive agreements andcould potentially suspend such attorneys from practicing before theSEC.165

Moreover, we believe the SEC should amend Rule 21F-17 to pro-vide additional guidance on the type of contractual provisions thatimpede an individual from communicating with the SEC. Such guid-ance should clarify that an attempt to condition payment of sever-ance or any other benefit on any limitation to an employee participat-ing in the SEC’s whistleblower reward program (such as losing theability to make an anonymous report or receive an award) violatesRule 21F-17.166 In addition, an amended Rule 21F-17 could provideexamples of prohibited provisions, while also clarifying that the ex-amples are not exclusive.167 Likewise, OSHA, which already reviewscertain settlement agreements in Sarbanes-Oxley cases to ensurethat they do not contain explicit gag clauses,168 should also modifyits existing settlement review policies to clarify that any provisionthat bars or impedes participation in the SEC Whistleblower Pro-gram is invalid.169

165. Under Rule 102(e)(1)(iii) of the SEC’s Rules of Practice, the SEC “may censurea person or deny, temporarily or permanently, the privilege of appearing or practicingbefore it in any way to any person who is found . . . to have willfully violated, or willfullyaided and abetted the violation of any provision of the Federal securities laws or therules and regulations thereunder.” SEC Rules of Practice, Rule 102(e)(1)(iii), 17 C.F.R.§ 201.102(e)(1)(iii) (2013).

166. While this Article is focused on contractual provisions that deter SEC whistle-blowing, such provisions also undermine the effectiveness of similar whistleblower re-ward programs. Accordingly, the CFTC and IRS should consider issuing guidance bar-ring these types of provisions. Furthermore, the General Services Administrationshould consider amending the Federal Acquisition Regulations to bar these types of pro-visions in any agreement between a government contractor and an employee of thecontractor.

167. For this reason, one of the authors of this Article, Jordan Thomas, along withthe nonprofit whistleblower advocacy organization Government Accountability Project,has submitted a rule-making petition to the SEC seeking such an amendment to Rule21F-17(a). See SEC File No. 4-676; SEC File No. 4-677 (July 18, 2014).

168. See OCCUPATIONAL SAFETY & HEALTH ADMIN., WHISTLEBLOWER INVESTIGATIONS

MANUAL 6–11 (2011) (“OSHA will not approve a ‘gag’ provision that restricts the com-plainant’s ability to participate in investigations or testify in proceedings relating tomatters that arose during his or her employment. When such a provision is encountered,the parties should be asked to remove it or to replace it with the following: ‘Nothing inthis Agreement is intended to or must prevent, impede or interfere with Complainant’sproviding truthful testimony and information in the course of an investigation or pro-ceeding authorized by law and conducted by a government agency.’ ”).

169. For this reason, one of the authors of this Article, Jason Zuckerman, alongwith the Government Accountability Project, has submitted a rule-making petition toOSHA seeking such an amendment.



Such guidance from the SEC and OSHA would provide additionalclarity for both employers and employees, and help protect the efficacyof the SEC Whistleblower Program. If the SEC Whistleblower Pro-gram is to fulfill its goal of better protecting investors, it must be al-lowed to function as Congress intended, without being constrainedby private agreements. The public policy behind Dodd-Frank is too sig-nificant to allow for any other result.



The Street, The Bull and The Crisis: A Survey of the US & UK Financial Services Industry Page 1

The Street, The Bull and The Crisis:A Survey of the US & UK Financial Services Industry

Presented by The University of Notre Dame and Labaton Sucharow LLP

May 2015

www.labaton.comPage 2

In the aftermath of the financial crisis, as we struggled to understand the key drivers of the fallout, our work—albeit in very

different trenches—brought us together. As sweeping financial reforms honed in on the wounded market, we turned our focus

from the industry to the individual, to better understand the character of, and on, Wall Street.

In this report, we present the findings of our collaborative study—the most detailed and expansive of its kind—to measure

workplace ethics in the financial services industry. We surveyed more than 1200 professionals working in the United States

and the United Kingdom. Respondents represented a broad spectrum of the industry, from young professionals to senior

executives, investment bankers and investment managers, from San Francisco to Scotland.

Our findings are particularly compelling when compared to data from Labaton Sucharow’s 2012 benchmark study, Wall Street,

Fleet Street and Main Street: Integrity at a Crossroads. In the three years since that report, regulations have taken hold in

both the US and UK, and authorities have successfully investigated and levied record fines against numerous global banking

giants. Various indicia of market health suggest that investors’ faith in the markets has somewhat returned. Against this

backdrop, we wonder if that faith is rightly placed. Has the industry truly reformed or has the public grown complacent? Has

enforcement deterred wrongdoing or are perpetrators finding new ways to evade the law? Are we just as, or perhaps even

more, vulnerable to another financial disaster? What does the future hold?

The answers are not pretty. Despite the headline-making consequences of corporate misconduct, our survey reveals that

attitudes toward corruption within the industry have not changed for the better. To be sure, there are some encouraging

statistics such as increased faith in law enforcement and in colleagues. Nevertheless, there is no way to overlook the marked

decline in ethics and the enormous dangers we face as a result, especially when considering the views of the most junior

professionals in the business. Most concerning, is the proliferation of secrecy policies and agreements that attempt to

silence reports of wrongdoing and obstruct an individual’s fundamental right to freely engage with her government.

We hope this report will serve as a useful tool for those who wish to understand and remedy the current state of ethics within

the industry. As an educator and an advocate, we each believe it is imperative to tackle the issue from all sides. Greed and

corruption are not endemic to financial services nor are they critical to its success. Allowing the status quo to persist is an open

invitation to the next, perhaps more devastating, financial crisis.

Ann Tenbrunsel Jordan Thomas

University of Notre Dame Labaton Sucharow LLP

From the Authors


Key Findings

State of Play: Unethical Behavior Continues to Persist Nearly seven years after the global financial crisis rocked investors’ confidence in the markets and financial services in general,

our survey clearly shows that a culture of integrity has failed to take hold. Numerous individuals continue to believe that engaging

in illegal or unethical activity is part and parcel of succeeding in this highly competitive field. With legal and regulatory sanctions

coming out on almost a daily basis, the industry has a long way to go to regain the confidence of the public.

47% of respondents find it likely that their competitors have

engaged in unethical or illegal activity in order to gain an

edge in the market. This represents a spike from the 39% who

reported as such when surveyed in 2012. This figure jumps to 51% for individuals earning $500,000 or more per year.

More than one-third (34%) of those earning $500,000 or

more annually have witnessed or have first hand knowledge

of wrongdoing in the workplace.

23% of respondents believe it is likely that fellow

employees have engaged in illegal or unethical activity

in order to gain an edge, nearly double the 12% that reported as such in 2012.

25% would likely use non-public information to make

a guaranteed $10 million if there was no chance of getting

arrested for insider trading. Employees with less than 10 years’

experience are more than two times as likely as those with

over 20 years’ experience, reporting 32% and 14% respectively.

In the UK, 32% of individuals said they would likely engage

in insider trading to earn $10 million if there was no chance of

getting arrested, compared to 24% of respondents from the US.

Nearly one in five respondents feel financial services

professionals must at least sometimes engage in illegal or

unethical activity to be successful.

27% of those surveyed disagree that the financial services

industry puts the best interests of clients first. This figure rises

to 38% for those earning $500,000 or more per year.

Nearly one-third of respondents (32%) believe

compensation structures or bonus plans in place at their

company could incentivize employees to compromise ethics

or violate the law.

33% of financial services professionals feel the industry

hasn’t changed for the better since the financial crisis.

Whistleblowing: Hope and Challenges There is hope. The marked increase in whistleblower activity along with the strengthening of internal compliance procedures

serve as a powerful deterrent to wrongdoers. Still, an alarming number of people report being subject to corporate policies and

confidentiality agreements that they believe prevent them from reporting wrongdoing to outside authorities. These troubling

policies and agreements can silence the reporting of all local, state, and federal violations. We applaud recent efforts by

Congress and the SEC to address these questionable secrecy policies and agreements.

While the majority of industry professionals (89%) would

report misconduct given the incentives and protections such

as those offered by the SEC whistleblower program, 37% of

respondents are still not aware of the SEC’s program.

28% of respondents earning $500,000 or more per year

(16% for all employees) say their company’s confidentiality

policies and procedures bar the reporting of potential illegal

or unethical activities directly to law enforcement or regulatory

authorities. In the UK, this rises to 21% for all employees.

25% of respondents earning $500,000 or more annually have

signed or been asked to sign a confidentiality agreement that

would prohibit reporting illegal or unethical activities to the

authorities.

19% of respondents find it likely that their employer would

retaliate if they were to report wrongdoing in the workplace.

This jumps to 24% for respondents from the UK.


We uncovered some of our most astounding results when we examined the ethos of the financial services professional, and the key influencers of bad behavior. Despite three years of significant reforms and high-profile prosecutions since Labaton Sucharow’s 2012 survey, this year, many figures are unchanged and many more have changed for the worse. Our evidence reveals a large number of individuals in the midst of—and losing—an ethical battle of the highest order.

What would you do if no one was

watching? This year, we again ask

individuals how likely they would be

to utilize nonpublic information to

make a quick $10 million if there was

no chance of being arrested for insider

trading. Consistent with prior years,

25% admit they would likely do so.

We are particularly dismayed by

the ethical standards of the most junior

employees in the industry. Looking at

the total sample, 32% of employees

with less than a decade in the financial

services industry said they would likely

engage in insider trading to make

$10 million if there was no chance of

being arrested. This compares to

14% of employees with more than

21 years in the industry.

Respondents from the UK are either

more willing to commit a crime they

could get away with, or are more frank

about it. A full 32% of individuals from

the UK say they would likely engage in

insider trading to make $10 million if

there was no chance of being arrested,

compared to 24% of respondents from

the US.

Testing the total sample, there is

a 5-point spread, with 27% of males

saying they would likely engage in

insider trading to make $10 million if

there was no chance of being arrested,

against 22% of females. In the UK,

the gender spread is even more

remarkable; 34% of male respondents

say they would engage in this insider

trading scenario, compared to 23%

of females.

The Professional in Crisis

When looking at their own companies,

23% of all respondents believe it is

likely that fellow employees have

engaged in illegal or unethical activity

in order to gain an advantage over

competitors or others at the company,

nearly double the 12% that reported as such in 2012.

This rises to 28% for respondents

in the UK, a full 6 points higher than

the US.

With no small amount of dismay,

we note that individuals with the

fewest years in the industry have the

least confidence in their colleagues’

ethical conduct. Nearly one out of

every four respondents with less than

10 years, compared to one out of five

respondents with more than 21 years,

indicate that they believe it is likely

that colleagues have made ethical

or illegal compromises in order to

get ahead.

Nearly one third of employees with less than two decades in the industry say they would likely engage in insider trading to make $10 million if there was no chance of being arrested. That’s more than two times the figure for employees with more than two decades in the financial services sector.


With the effects of the financial crisis

still in our midst, it is shocking that

nearly one-third of those surveyed

(32%) believe there are compensation

structures/bonus plans at their

company that could incentivize

employees to compromise ethical

standards or violate the law.

Not surprisingly, when we ask a

more pointed question—have you

ever felt pressure at your company

to compromise ethical standards

or violate the law—only 10% of all

respondents admit to feeling such

pressure.

There is a 6-point spread based on

geography, with 14% of respondents

from the UK affirming such pressure,

compared to 8% of their US

counterparts.

Most disconcerting is the evidence

that individuals at the top face

more ethical dilemmas. 23% of those

earning $500,000 or more

per year report experiencing pressure

to compromise, compared with 9% of

those earning less than $50,000 year.

The sliver of good news is a

modest decline in the witnessing of

misconduct: 22% of respondents have

personally observed or have first-hand

knowledge of wrongdoing in the

workplace, down from 26% in 2012.

Our data indicates a correlation

between income level and the

likelihood of witnessing misconduct.

More than one-third (34%) of those

earning $500,000 or more annually

have witnessed or have first-hand

knowledge of wrongdoing in the

workplace, compared to 21% of those

earning less than $50,000 per annum.

Years in the industry factors similarly

into the calculus. 29% of individuals

with more than 21 years in the industry

say they have witnessed or have

first-hand knowledge of wrongdoing,

compared to 18% of those with less

than a decade in the business.

While the number of individuals

who say they have observed or have

first-hand knowledge of wrongdoing

in the workplace did not change for

US respondents since our prior survey,

individuals in the UK reveal a decline—

dropping to 25% this year from 30%

in 2012.

A change coming? In April 2015, the SEC announced a landmark enforcement action against KBR, Inc., a Texas-based technology and engineering firm, for using restrictive language in confidentiality agreements that could stifle whistleblowers.


We recognize that respondents may sometimes be unwilling to reckon with and divulge personal truths—especially negative ones—and it is probable that respondents’ views about their own companies are understated. Therefore, we believe respondents’ views of their competitors may represent the most accurate snapshot of industry reality. So we are alarmed to report that nearly half (47%) of all respondents find it likely that their competitors have engaged in illegal or unethical activity in order to gain an edge in the market. This represents a spike from 39% in 2012. This figure jumps to 51% for individuals earning $500,000 or more per year.

Customer focused? With trillions

of dollars in customer assets under

management, 27% of those surveyed

disagree that the financial services

industry puts the best interests of

clients first.

This figure rises to 38% for those

earning $500,000 or more per year.

Remarkably, in the UK, professionals

with fewer than 10 years in the industry

are the least confident in a client-first

culture. Indeed, 42% disagree that

clients come first in the industry.

Despite numerous reform efforts and

severe fines levied against industry

Goliaths, one-third of those surveyed

do not believe the financial services

industry has changed for the better

since the financial crisis.

We detect a significant variation

based on gender. Across the total

sample, 35% of males, compared

to 28% of females, do not feel the

industry has changed for the better.

Across the sample, we find the

highest degree of skepticism among

high wage earners, with 38% of those

making $500,000 or more per year

feeling the industry has not changed

for the better.

An Industry on the Edge

To what extent, in the current

environment, do industry professionals

have to engage in illegal or unethical

activity in order to be successful?

Nearly one in five respondents—19%

—feel misconduct is part of the recipe

for success, nearly double the 11%

who remarked as such in 2012.

33% of financial services professionals do not feel the industry has changed for the better since the financial crisis and 27% disagree that the financial services industry puts the interests of clients first.


Given the tremendous responsibility shouldered by the financial services professional, employers should take every step to foster a culture of integrity. To the contrary, our findings reveal an alarming tendency on the part of industry employers to construct an ‘omerta culture,’ characterized by policies that demand silence and complicity. Even more egregious, is the growing preponderance of explicit, and often targeted, confidentiality agreements crafted in large part to deter specific employees from reporting wrongdoing to the appropriate authorities.

One in 10 respondents has signed or

been asked to sign a confidentiality

agreement that would prohibit

reporting illegal or unethical activities

to the authorities.

This figure surges to 25% for those

respondents earning $500,000 or more

annually.

Surprisingly, more junior employees

report being issued these gag orders

than the most senior statesmen, with

13% of those with fewer than 10 years

in the industry, compared to 7% of

those with more than 21 years.

Respondents from the UK note

a higher exposure to gag orders,

at 14%, a full five points higher than

US respondents.

As troubling as formal agreements

that silence employee reporting is the

cultivation of a culture where policies

and procedures enforce the same

code of silence.

16% of those surveyed report their

company’s confidentiality policies and

procedures prohibit the reporting of

potential illegal or unethical activities

directly to law enforcement or

regulatory authorities.

The Employers, The Enforcers: Are Safeguards Working?

Employers simply cannot stand in the way of an individual’s unwaivable right to report possible violations of law to the government.

In the UK, this figure surges

to 21%, a full six points higher

than US respondents.

28% of respondents earning

$500,000 or more per year say their

company’s confidentiality policies

and procedures bar the reporting

of potential illegal or unethical

activities directly to law enforcement

or regulatory authorities.

What is the ‘tone from the top’? We

ask if respondents believe company

leaders would ignore suspicions that a

top performer was earning large profits

from insider trading. A disheartening

15% feel it is likely that leaders would

look the other way.

This rises to 21% for respondents


Respondents from the UK have

slightly less faith in company leaders,

with 18% believing it is likely that

leaders would ignore a profitable

problem.

Taking the examination a step deeper,

we ask respondents a slightly different

question: If company leaders learned a

top performer had engaged in insider

trading, how likely or unlikely is it that

leadership would report the matter

to the law enforcement or regulatory

authorities?

An astonishing 17% of all

respondents find it unlikely that

company leaders would report

misconduct to law enforcement.

Respondents with more years in the

industry have more confidence in the

brass; 13% feel that leaders would be

unlikely to report the misconduct, as

compared to 19% of those with fewer

than 10 years in the industry.

This question stands as one of a few

with a notable gender disparity; 20%

of females find it unlikely that company

leaders would report the crime, against

16% of males.


Given the proportion of respondents

who feel that leaders are inclined

to ‘look the other way’ when a top

performer engages in wrongdoing,

how might leaders handle those who

report misconduct?

19% find it likely that their employer

would retaliate if they were to report

wrongdoing in the workplace.

This figure jumps to 24% of

respondents from the UK.

Tenure appears to factor into fear

of retaliation with 21% of respondents

working less than 10 years fearing

retaliation as opposed to only 13%

of respondents with over 20 years in

the industry.

Despite the role of corporate

malfeasance in bringing on the

financial crisis, our survey suggests that

more corporate reform is necessary.

Against the backdrop of a culture that

effectively ignores–and perhaps even

encourages–misconduct, enforcement

may be the only way to create

meaningful change and safeguard

against another crisis.

39% of respondents think law

enforcement and regulatory authorities

in their country are ineffective

in detecting, investigating and

prosecuting securities violations.

This rises to 46% for professionals


We note a 5-point spread when

looking at gender, with 41% of

males finding the authorities to

be ineffective, compared to 36%

of females.

With perception of authorities’

efficacy in the balance, we ask if

respondents would report misconduct

in their workplace if they could do

so anonymously, with protection

from retaliation, and if they had the

potential to receive a monetary award.

Affirming the core components of

the SEC whistleblower program—

anonymity, employment protections

and the potential for a monetary

award—89% of industry professionals

say they would report misconduct, a

figure that has remained consistent

since the 2012 survey of the industry.

Respondents in the US are more

inclined to report misconduct with

these protections and incentives at

90% versus 83% of those in the UK.

Some of the doubt regarding the

government’s ability to affect change

may be the result of limited knowledge

of the SEC whistleblower program

and its successes. Astonishingly,

while the lion’s share of industry

professionals would report misconduct

given the incentives and protections

such as those offered by the SEC

whistleblower program, 37% of

respondents are still unaware of the

agency’s program.

This is a significant improvement

over the 2012 survey, when 56% of

the sample was unfamiliar with the

program. However, more industry

and public worldwide education is

warranted. Any investment in this area

is likely to yield a substantial increase

in high-quality tips and assistance.

While there is greater awareness

among US respondents–63% are

aware of the SEC program, against

56% of UK professionals—due to the

significant law enforcement potential

of the program, the SEC should

attempt to raise awareness through

a more sophisticated and robust

education campaign.

One in five females in the financial services industry doubt that company leaders would report a top performer’s insider trading to the authorities.


In examining our results, we return to the same question: Are we destined for another financial crisis? Given the troubling attitudes toward corruption in the financial services industry, we fear that the industry has not learned its lesson. Our concerns are further exacerbated by new evidence of employers actively seeking to suppress employee truth-telling through the widespread use of restrictive, and often illegal, confidentiality agreements.

Without an aggressive plan to stamp

out misconduct, we are simply sitting

and waiting for another financial

disaster to strike. We needn’t be so

powerless. We can formulate and

initiate such a recovery plan, but it

must start with an implicit partnership

between employees and employers to

speak up about possible wrongdoing

in the workplace.

“SEC rules prohibit employers from taking measures through confidentiality, employment, severance, or other type of agreements that may silence potential whistleblowers before they can reach out to the SEC. We will vigorously enforce this provision.” – Andrew J. Ceresney, Director of the SEC’s Division of Enforcement

Conclusion

The SEC Whistleblower Program is

a powerful investor protection tool

that is quietly revolutionizing the way

securities laws are enforced. However,

this tool cannot be fully utilized

without empowered individuals.

Both the government and corporate

leadership must educate employees

of their right and their responsibility

to report misconduct, internally or

externally, whenever and wherever

it occurs.

We also must encourage an honest

dialogue among the industry’s

most junior employees who are

demonstrating a surprising and

disturbing cynicism regarding

corporate ethics. Educating a

generation of young professionals—

early and often—on the importance

of ethics, transparency and honesty

is crucial if we wish to affect real

change in the industry and avert

another, perhaps more destructive,

financial crisis.


Methodology This report presents the findings of 1223 participants who were surveyed using

an email-based online panel. Respondents were employed in the financial

services/banking industry in the US (925) and UK (298), worked more than 35

hours per week, were employed at firms with 10 employees or more and were

employed as account executives, financial/investment/wealth advisors, financial

analysts, investment bankers, branch/operations management, and portfolio

managers. This survey was conducted December 22, 2014 – January 23, 2015.

In this report, we occasionally make comparisons with figures in the 2012 survey.

In those cases, we have made the appropriate adjustments for differences in

question structure, including a varying number of answer options.

The majority of UK respondents were from England, but the survey included

professionals from Northern Ireland, Scotland and Wales. Within the US,

respondents were generally well distributed among the four census bureau

divisions of Northeast, Midwest, South, and West.

About UsThe University of Notre Dame provides a distinctive voice in higher education

that is at once rigorously intellectual, unapologetically moral in orientation,

and firmly embracing of a service ethos. Founded in 1842 by a priest of the

Congregation of Holy Cross, Notre Dame is an independent, national Catholic

research university located adjacent to the city of South Bend, Indiana. The

University is home to The Mendoza College of Business, which, as evident by

its motto “Ask More of Business,” fosters academic excellence, professional

effectiveness and personal accountability in a context that strives to be faithful to

the ideals of community, human development and individual integrity.

For more than 50 years, Labaton Sucharow has been one of the country’s

premier law firms comprehensively representing businesses, institutional

investors and consumers in complex securities and business litigation. It was

the first law firm in the country to establish a practice exclusively focused on

protecting and advocating for whistleblowers who report possible securities

violations to the SEC. The Whistleblower Representation Practice leverages

a world-class in-house team of investigators, financial analysts and forensic

accountants with federal and state law enforcement experience to provide

unparalleled representation for whistleblowers. Labaton Sucharow is consistently

among the top plaintiff litigation firms based upon its rankings in Chambers

& Partners, The Legal 500, The National Law Journal’s Plaintiffs’ Hot List and

Benchmark Litigation. More information about the firm and its Whistleblower

Representation Practice is available at www.labaton.com.

Greed and corruption are not endemic to the financial services industry, nor are they critical to its success.


140 BroadwayNew York, NY [email protected]: (212) 907-0836C: (202) 746-9314

ANNUAL REPORT ON THE WHISTLEBLOWER PROGRAM AND

CUSTOMER EDUCATION INITIATIVES

2017 Annual Report

October 2017

1

I. INTRODUCTION

Section 748 of the Dodd-Frank Wall Street Reform and Consumer Protection Act1

amended the Commodity Exchange Act (“CEA”) by adding Section 23, entitled “Commodity

Whistleblower Incentives and Protection.” 2 CEA Section 23 established a whistleblower

program under which the Commodity Futures Trading Commission (the “Commission” or

“CFTC”) will pay awards, based on collected monetary sanctions and under regulations

prescribed by the Commission, to eligible whistleblowers who voluntarily provide the

Commission with original information about violations of the CEA that lead either to a “covered

judicial or administrative action” or a “related action.”3 CEA Section 23 also established the

Commodity Futures Trading Commission Customer Protection Fund (“Fund”), which is used to

pay whistleblower awards and to fund “customer education initiatives designed to help

customers protect themselves against fraud or other violations of [the CEA], or the rules and

regulations thereunder.”4

CEA Section 23(g)(5) requires the Commission to transmit an annual report to the

Committee on Agriculture, Nutrition and Forestry of the Senate, and the Committee on

Agriculture of the House of Representatives, on the following:

the Commission’s whistleblower program, including a description of the number of awards granted and the types of cases in which awards were granted during the preceding fiscal year;

1 Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, § 748, 124 Stat. 1739 (2010). 2 7 U.S.C. § 26 (2012). 3 A “covered judicial or administrative action” is “any judicial or administrative action brought by the Commission under [the CEA] that results in monetary sanctions exceeding $1,000,000.” 7 U.S.C. § 26(a)(1). The term “related action,” when used with respect to any judicial or administrative action brought by the Commission under the CEA, means “any judicial or administrative action brought by an entity described in [7 U.S.C. § 26(h)(2)(C)(i)(I)-(VI)] that is based upon the original information provided by a whistleblower pursuant to [7 U.S.C. § 26(a)] that led to the successful enforcement of the Commission action.” Id. § 26(a)(5). 4 7 U.S.C. § 26(g)(2).

2

customer education initiatives that were funded by the Fund during the preceding fiscal year;

the balance of the Fund at the beginning of the preceding fiscal year;

the amounts deposited into or credited to the Fund during the preceding fiscal year;

the amount of earnings on investments of amounts in the Fund during the preceding fiscal year;

the amount paid from the Fund during the preceding fiscal year to whistleblowers;

the amount paid from the Fund during the preceding fiscal year for customer education initiatives;

the balance of the Fund at the end of the preceding fiscal year; and

a complete set of audited financial statements, including a balance sheet, income statement,5 and cash flow analysis.

This report covers the period from October 1, 2016 through September 30, 2017 (“Period”).

II. WHISTLEBLOWER PROGRAM AND WHISTLEBLOWER AWARDS

During the Period, the Commission issued two Final Orders denying two whistleblower

award applications submitted on Form WB-APP because the applicants did not meet the

requirements of 7 U.S.C. § 26 and 17 C.F.R. § 165. The Commission did not pay out any

whistleblower awards during the Period.

A. Amendments To The Whistleblower Rules

The notice-and-comment process for amending the Whistleblower Rules occupied much

of the Period.6 The Commission’s Whistleblower Office (“WBO”) worked with the Office of

General Counsel to review public comments on the proposed rules that were published in the

5 Federal Accounting Standards do not identify an “income statement” as a financial statement applicable to the Federal Government. Instead, the Statement of Federal Financial Accounting Concepts 2 identifies the “statement of net cost” as the equivalent financial statement. See Financial Accounting Standards Advisory Board, FASAB Handbook of Federal Accounting Standards and Other Pronouncements, as Amended, June 30, 2011. A “statement of net cost” is included in the attached audited financial statements. 6 The Whistleblower Rules are codified at 17 C.F.R. pt. 165 (2017).

3

Federal Register in August 2016.7 The final amended rules were published in May 2017 and

went into effect July 31, 2017.8

The amendments strengthen anti-retaliation protections for whistleblowers and add

transparency to the Commission’s process of deciding whistleblower award claims. Key

changes or clarifications made by the amendments include:

A person may not take any action to impede an individual from communicating directly with the Commission’s staff about a possible violation of the CEA, including by enforcing, or threatening to enforce, a confidentiality agreement or pre-dispute arbitration agreement with respect to such communications. See 17 C.F.R. § 165.19 (2017).

The Commission has authority to bring an action against an employer who retaliates against a whistleblower, irrespective of whether the whistleblower qualifies for an award. A whistleblower continues to have the right to pursue a private cause of action against such an employer. See 17 C.F.R. § 165.20 & app. A (2017).

The required Form WB-APP may be submitted electronically through the Commission’s website at https://www.cftc.gov or the Commission’s Whistleblower Program website at https://www.whistleblower.gov. A Form WB-APP must be received by the Commission within 90 days of the date of the Notice of Covered Action or 90 days following the date of a final judgment in a Related Action. See 17 C.F.R. § 165.7(b)(1) (2017).

The Claims Review Staff replaces the Whistleblower Award Determination Panel, and the claims review process includes additional steps, described in part below. See 17 C.F.R. §§ 165.15(a)(2), 165.7(f)–(l) (2017).

o The enhanced review process will be similar to that established under the whistleblower rules of the U.S. Securities and Exchange Commission (“SEC”) and includes issuance of a Preliminary Determination by the Claims Review Staff, setting forth a preliminary assessment as to whether an award claim should be granted or denied.

o A whistleblower will have an opportunity to review the record and contest the Preliminary Determination before the Commission issues a Final Determination.

While the rulemaking procedure on the amendments progressed, the processing of

whistleblower award applications was on hold. Once the amended rules took effect on July 31,

7 Whistleblower Awards Process, 81 Fed. Reg. 59,551 (August 30, 2016). 8 Whistleblower Awards Process, 82 Fed. Reg. 24,487 (May 30, 2017).

4

2017, the Claims Review Staff met to consider award applications and issued a number of

Preliminary Determinations, totaling more than $45 million.

The CFTC announced its most recent award on July 26, 2016—in an amount of

approximately $50,000 for a whistleblower who voluntarily provided key original information

that led to a successful CFTC enforcement action. The largest award announced by the CFTC to

date was in April 2016, in the amount of more than $10 million. Since the inception of the

Whistleblower Program, the CFTC has issued four awards totaling approximately $11 million.

B. Whistleblower Tips And Complaints

The WBO received 465 whistleblower tips and complaints on Form TCR during the

Period,9 by mail, facsimile, or through the Commission’s web portal.10 This total represents a 70

percent increase over the number of Form TCRs received during FY 2016. Figure 1 shows the

numbers of Form TCRs received each year since FY 2012. The sharp year-over-year increase

can be attributed at least in part to the WBO’s sustained outreach efforts, including the first full

year of operation for the CFTC’s Whistleblower Program website, at https://whistleblower.gov.

Those outreach efforts are discussed further below.

9 Under Rules 165.2(p) and 165.3 of the Commission’s Whistleblower Rules, a “whistleblower” is an individual who submits original information to the Commission on a Form TCR either by mail or facsimile, or through the Commission’s website. See 17 C.F.R. §§ 165.2(p), 165.3 (2017). 10 File a Tip or Complaint: https://whistleblower.gov/overview/submitatip/

Figure 1: Form TCRs received by WBO, by fiscal year

FY 2012 FY 2013 FY 2014 FY 2015 FY 2016 FY 2017

The WBO also received an additional 110 separate non-whistleblower tips and

complaints during the Period, 11 most often by email to [email protected]. When

appropriate, the WBO communicates with non-whistleblower con espondents and invites them to

become whistleblowers by submitting a Fo1m TCR. The WBO fo1wards all tips and complaints

to the Commission's Division of Enforcement for evaluation and disposition.

During the Period, the WBO received tips and complaints regarding activities such as

virtual cunency trading, spoofing and other fo1ms of disrnptive trading, market manipulation,

false repo1iing, misrepresentations to customers regarding the handling of their accounts, fraud

involving foreign cunency exchange, as well as Ponzi schemes and other off-exchange

investment scams involving futures.

11 This total consists of 61 emails and other non-whistleblower tips and complaints as well as 49 TCRs refen-ed to the Collllllission by the SEC.

5

C. Whistleblower Award Applications

The WBO posts on its website Notices of Covered Actions ("NCAs") for all judgments

and orders entered after July 21, 2010 which impose more than $1 million in moneta1y

sanctions.12 The WBO posted 30 NCAs during the Period, down slightly from 36 NCAs posted

in FY 2016. During the Period the WBO received 74 whistleblower award claims on Fo1m WB

APP. This represents a 25 percent increase over the number of Fo1m WB-APPs received during

FY 2016. Figure 2 below shows the numbers ofFonn WB-APPs received each year since

FY2012.

Figure 2: Form WB-APPs received by WBO, by fiscal year

80 ~-----------------------~

70 +---------------------~

60 +-------------------====-~

so +-----------------~

40 -1-----------=....;; __ _

30 +----------

20 +--.,.-,--------

10

0

74

FY 2012 FY 2013 FY 2014 FY 2015 FY 2016 FY 2017

D. Whistleblower Education and Outreach Efforts

During the Period the WBO also continued its effo1is to educate stakeholders about the

Whistleblower Progxam through speeches, web postings, panel and seminar appearances, by

answering questions about the program posed directly to the WBO, and by attending conferences

and other industry gatherings. The WBO's goal is to infonn various constituencies about the

12 17 C.F.R. § 165.7(a) (2017).

6

7

existence, benefits, and parameters of the program. Those constituencies include Commission

staff, whistleblowers and their attorneys, industry and professional groups, other government

agencies, self-regulatory organizations, academia, and potential whistleblowers—who may be

traders as well as hedgers, farmers, ranchers, producers, and commercial end users. To that end,

during the Period the WBO exhibited at more than a dozen industry conferences and trade shows

relating to the commodity futures and derivatives markets. These events included agricultural

trade shows; conferences focused on the global futures, options, and cleared swaps industry; as

well as gatherings of participants in the high-frequency and automated trading space.

The WBO launched its own website, http://www.whistleblower.gov, in January 2016.

The website continues to educate the public about the Whistleblower Program, serving as a one-

stop-shop for information about the Whistleblower Program to answer frequently asked

questions and offer helpful guidance on navigating the program.13 The website also affords a

convenient way for the public to submit both whistleblower tips about potential violations of the

CEA and award applications—on Form TCR and Form WB-APP, respectively. It also outlines

whistleblower rights and protections and guides users through the process of filing a

whistleblower tip and applying for an award. The website also provides users with easy access

to the rules and regulations governing the CFTC’s Whistleblower Program, final award

determinations, notices of covered actions, and press releases, while encouraging users to sign up

for emailed CFTC Whistleblower Program updates. As of September 30, 2017, more than

30,000 individuals had signed up to receive emails alerting them to updates on the

Whistleblower Program website, such as the posting of new NCAs. During the Period, the

website received over 111,000 page views.

13 Things To Know: https://www.whistleblower.gov/news/thingstoknow/

8

When the amended Whistleblower Rules went into effect, the WBO updated the website

to reflect the reinterpreted authority of the CFTC to protect against retaliation, the additional

procedures in the award claims process, the amended Form TCR, and the new submission

method for Form WB-APP. The WBO’s web portal began accepting Form WB-APP

applications for whistleblower awards during the Period, making it even easier for those who

have assisted the Commission to submit information to demonstrate their qualifications for

award.

E. Whistleblower Office Coordination On Confidentiality In Enforcement

The WBO also plays an important role in protecting whistleblower confidentiality while

allowing the Commission to litigate judicial and administrative actions, and to coordinate its

enforcement efforts with other federal agencies and regulators. During the Period, the WBO

considered 267 requests to produce documents from the investigation and litigation files of the

Commission’s Division of Enforcement. Among those, 117 requests involved whistleblowers,

and the WBO found 16 requests to implicate whistleblower-identifying information. The WBO

assisted the Commission’s Division of Enforcement in preparing the documents to remove

whistleblower-identifying information or otherwise take steps to preserve whistleblower

confidentiality. During the Period, the WBO also considered 56 requests from other federal

agencies and regulators to access documents from the Division of Enforcement’s files. Among

those, 20 requests involved whistleblowers, and the WBO found seven requests to implicate

whistleblower-identifying information. Again, the WBO assisted the Commission’s Division of

Enforcement in making the documents available outside the Commission without divulging

confidential whistleblower information.

9

III. CUSTOMER EDUCATION INITIATIVES

The Office of Customer Education and Outreach (OCEO) administers the CFTC’s

customer and public education initiatives. Among its duties, the OCEO supports the

Commission by creating and distributing financial education messages and materials designed to

help customers spot, avoid, and report fraud and other violations of the CEA.

OCEO conducts a majority of its outreach through the SmartCheck initiative, which aims

to encourage investors commonly targeted by fraud to check the registrations of the people and

companies making sales pitches as a means of avoiding fraud. The CEA requires that certain

individuals and firms selling to the public be registered with the CFTC. These registrations are

recorded by the National Futures Association (NFA) and are searchable on the NFA’s

Background Affiliation Status Information Center (BASIC) database. Many frauds involving

precious metals, binary options, forex trading and other markets or products regulated by the

CFTC are conducted by unregistered actors, and the majority of commonly targeted victims fail

to check registrations and backgrounds of financial professionals before investing.14

Investment fraud research indicates that common victims of investment fraud tend to be

men and women over age 50 with higher household incomes, higher levels of financial literacy,

and a willingness to accept investment risks.15 The CFTC SmartCheck initiative attempts to

reach potential victims where they are, before they fall victim to fraud, to educate them on the

importance of checking registrations and encourage them to change their behavior by conducting

registration checks as part of their investment research. SmartCheck.gov is designed to facilitate

14 The 2007 FINRA Foundation Senior Fraud Risk Survey indicated that 79 percent of all respondents ages 50-64 didn’t check their brokers for previous law violations, and 65 percent didn’t check their brokers’ registrations. 15 Investor Fraud Study, NASD Investor Education Foundation, 2006, The Consumer Fraud Research Group. AARP Foundation National Fraud Victim Study, 2011, Doug Shadel and Karla Pak. A more recent AARP Investment Fraud Vulnerability Study, 2017, Shadel and Pak, is also consistent with the 2006 and 2011 studies. However, it did indicate that victims are aging, with more victims over age 70 than the rest of the investing population, and that more victims preferred unregulated investments than the general investing population.

10

this behavior change by providing educational information and by funneling potential fraud

targets to BASIC or BrokerCheck, a database maintained by the Financial Industry Regulatory

Authority (FINRA) that includes registration information about broker-dealers and investment

advisers.

IV. CUSTOMER PROTECTION FUND

As of September 30, 2017, the Fund had an ending balance of $196,336,209:

Description FY 2017 Balance of the Fund at the beginning of the Period: $247,550,496

Amounts deposited into, or credited to, the Fund during the Period: $0

Amount of earnings on investments of amounts in the Fund during the Period:

$1,538,309

Amount paid from the Fund to whistleblowers during the Period: $0

Amount paid from the Fund for customer education initiatives during the Period:

($3,023,984)

Amount of unpaid customer education initiatives expenses incurred during the Period:

($1,672,316)

Amount paid from the Fund for administrative expenses during the Period: ($1,530,523)16

Amount of unpaid administrative expenses incurred during the Period: ($1,025,773)17

Amount of contingent claims to Fund resources accrued during the Period: ($45,500,000)

Balance of the Fund as of September 30, 2017: $196,336,209

Attached as an Appendix to this report are the audited financial statements for the Fund,

including a balance sheet, a statement of net cost, a statement of changes in net position, a

statement of budgetary resources, and a supplementary cash flow analysis schedule.

16 The administrative expenses of the WBO and OCEO are charged to the Fund pursuant to GAO Decision B-321788, 2011 WL 3510145 (Comp. Gen. Aug. 8, 2011). 17 Unpaid administrative expenses include amortization of software which is not a future disbursement.

U.S. COMMODITY FUTURES TRADING COMMISSION

OFFICE OF INSPECTOR GENERAL Three Lafayette Centre

1155 21st Street, NW, Washington, DC 20581 Telephone: (202) 418-5110

FROM: Miguel A. Castillo, CPA, and CRMA

Assistant Inspector General for Auditing

DATE: October 27, 2017

SUBJECT: Audit of the CFTC Customer Protection Fund Financial Statements for Fiscal Year 2017

Annually the Office of the Inspector General (OIG) conducts an audit of the CFTC Customer Protection Fund (Fund) financial statements. The Balance of the Fund as of September 30, 2017, was $196,336,209. We contracted with the independent certified public accounting firm Allmond & Company, LLC (Allmond & Co.) to audit the financial statements of the Fund as of September 30, 2017, and for the year then ended, to provide negative assurance on internal control and compliance with laws and regulations for financial reporting. We required that the audit be done in accordance with U.S. Generally Accepted Government Auditing Standards (GAGAS).

In its audit of the Fund, Allmond & Co. found:

• The financial statements were fairly presented, in all material respects, in conformity with U.S. Generally Accepted Accounting Principles.

• No material weaknesses in internal control or non-compliance with laws and regulations.

In connection with the contract, we reviewed Allmond & Co.’s report and related documentation and inquired of its representatives. Our review, as differentiated from an audit in accordance with GAGAS, was not intended to enable us to express, and we do not express, opinions on financial statements or internal control or on whether the Fund complied with laws and regulations. Allmond & Co. is responsible for the attached auditor’s report dated October 27, 2017 and the conclusions expressed in the report. However, our review disclosed no instances where Allmond & Co. did not comply, in all material respects, with GAGAS.

Attached is a copy of Allmond & Co.’s unmodified (clean) opinion letter. Please call me if any questions at (202) 418-5084.

TO: J. Christopher Giancarlo, Chairman

Brian D. Quintenz, Commissioner Rostin Behnam, Commissioner

cc: Michael Gill, Chief of Staff Kevin S. Webb, Chief of Staff John Dunfee, Acting Special Counsel Christopher Ehrman, Director. Whistleblower Office Anthony C. Thompson, Executive Director Mary Jean Buhler, Chief Financial Officer Keith A. Ingram, Accounting Officer Melissa Jurgens, Acting Chief Privacy Officer

A. Roy Lavik, Inspector General Judith A. Ringle, Deputy Inspector General and Chief Counsel

Independent Auditors’ Report

Chairman and Inspector General of U.S. Commodity Futures Trading Commission:

Report on the Financial Statements

We have audited the accompanying financial statements of the U.S. Commodity Futures Trading Commission (CFTC) Customer Protection Fund (CPF), which comprise the balance sheet as of September 30, 2017 and 2016 the related statement of net cost, statement of changes in net position, and combined statement of budgetary resources for the year ended, and the related notes to the financial statements (hereinafter referred to as the financial statements).

Management’s Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these financial statements in accordance with U.S. generally accepted accounting principles; this includes the design, implementation, and maintenance of internal control relevant to the preparation of financial statements that are free from material misstatement, whether due to fraud or error.

Auditors’ Responsibility

Our responsibility is to express an opinion on the fiscal year 2017 and 2016 financial statements of CPF based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America; the standards applicable to financial audits contained in Government Auditing Standards issued by the Comptroller General of the United States; and OMB Bulletin No. 17-03, Audit Requirements for Federal Financial Statements. Those standards and OMB Bulletin No. 17-03 require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors' judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity' s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity' s internal control. Accordingly, we express no such opinion.


An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for audit opinion.

Opinion

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the U.S. Commodity Futures Trading Commission Customer Protection Fund as of September 30, 2017 and 2016, and its net costs, changes in net position, and budgetary resources for the year then ended in conformity with general accepted accounting principles in the United States of America.

Other Information

The information in CPF’s Annual Report to Congress and the Cash Flow Analysis are not a required part of the basic financial statements, but are supplementary information required by the Dodd-Frank Wall Street Reform and Consumer Protection Act. We have applied certain limited procedures, which consisted principally of inquiries of management regarding the methods of measurement and presentation of this information. However, we did not audit this information and, accordingly, we express no opinion on it.

Other Reporting Required by Government Auditing Standards

Internal Control over Financial Reporting

In planning and performing our audit of the financial statements as of and for the year ended September 30, 2017, we considered CPF’s internal control over financial reporting by obtaining an understanding of CPF’s internal control, determining whether internal control had been placed in operation, assessing control risk, and performing tests of control to determine auditing procedures for the purpose of expressing our opinion on the financial statements, but not to provide an opinion on the effectiveness of CPF’s internal control over financial reporting. Accordingly, we do not express an opinion on CPF’s internal controls over financial reporting. We limited internal control testing to those necessary to achieve the objectives described in OMB Bulletin No. 17-03. We did not test all internal controls relevant to operating objectives as broadly defined by the Federal Managers’ Financial Integrity Act of 1982.

Our consideration of internal control over financial reporting was for the limited purpose as described in the paragraph above and was not designed to identify all deficiencies in internal control over financial reporting that might be a control deficiency, significant deficiency, or material weakness.


A control deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct misstatement on a timely basis. A significant deficiency is a control deficiency or a combination of control deficiencies, that adversely affects CPFs’ ability to initiate, authorize, record, process, or report financial data reliably in accordance with generally accepted accounting principles such that there is more than a remote likelihood that a misstatement of the CPF’s financial statements that is more than inconsequential will not be prevented or detected. A material weakness is a significant deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the financial statements will not be prevented or detected.

In our fiscal year 2017 audit, we did not identify any deficiencies in internal control over financial reporting that we considered to be a material weakness or significant deficiency, as defined above.

Compliance and Other Matters

As part of obtaining reasonable assurance about whether CPFs’ fiscal year 2017 financial statements are free of material misstatements, we performed tests of CPFs’ compliance with certain provisions of laws and regulations, which noncompliance with could have a direct and material effect on the determination of the consolidated financial statement amounts, and certain provisions of other laws specified in OMB Bulletin No. 17-03. However, providing an opinion on compliance with those provisions was not an objective of our audit, and accordingly, we do not express such an opinion.

The results of our tests of compliance as described in the preceding paragraph, disclosed no instances of noncompliance or other matters that are required to be reported herein under Government Auditing Standards or OMB Bulletin No. 17-03.

Purpose of the Other Reporting Required by Government Auditing Standards

The purpose of the communication described in the Other Reporting Required by Government Auditing Standards section is solely to describe the scope of our testing of internal control and compliance and the result of that testing, and not to provide an opinion on the effectiveness of CPF's internal control or on compliance. This communication is an integral part of an audit performed in accordance with U.S. generally accepted government auditing standards in considering in internal controls and compliance with laws and regulations which could have a material effect on CPF’s financial statements. Accordingly, this communication is not suitable for any other purpose.

October 27, 2017 Landover, MD

FINANCIAL STATEMENTS FOR THE CUSTOMER PROTECTION FUND

REPORT TO CONGRESS

September 30, 2017

2

U.S. Commodity Futures Trading Commission Customer Protection Fund Report to Congress: Financial Statements

Table of Contents Financial Statements ....................................................................................................................... 3

Notes to the Financial Statements ................................................................................................... 7

Supplementary Schedule:

Cash Flow Analysis……………………………………………… …………………...12

3

Commodity Futures Trading Commission

Customer Protection Fund Balance Sheets

As of September 30, 2017 and 2016

Assets

Intragov ernmental:

Fund Balance With Treasury (N ote 2) $ 7,560,992 $ 5,485,412

Inv estments (N ote 3) 234,006,240 244,000,000

Prepay ments 2,541,984 -

T otal Intragovernmental 244,109,216 249,485,412

General Property , Plant and Equipment, N et (N ote 4) 136,055 179,020

Prepay ments 15,190 4,369

T otal Assets $ 244,260,461 $ 249,668,801

Liabilities

Intragov ernmental:

Employ er Contributions and Pay roll Tax es Pay able 21,726 16,108

T otal Intragovernmental 21,726 16,108

Accounts Pay able 2,169,637 1,932,814

Accrued Pay roll 108,530 83,589

Accrued Annual Leav e 124,359 85,794

C ontingent Liabilities (N ote 5) 45,500,000 -

T otal Liabilities 47,924,252 2,118,305

Net Position

C umulativ e Results of Operations - Funds from Dedicated C ollections 196,336,209 247,550,496

T otal Net Position 196,336,209 247,550,496

T otal Liabilities and Net Position $ 244,260,461 $ 249,668,801

The accompanying notes are an integral part of these financial statements.

2017 2016

4

Commodity Futures Trading Commission Customer Protection Fund

Statements of Net Cost For the Years Ended September 30, 2017 and 2016

2017 2016

Net Costs of Operations (Note 6)

Gross C osts 52,752,596$ 20,551,582$

T otal Net Cost of Operations 52,752,596$ 20,551,582$


5


Statements of Changes in Net Position For the Years Ended September 30, 2017 and 2016

2017 2016

Cumulative Results of Operations

Beginning Balances, October 1 247,550,496$ 267,612,410$

Budgetary Financing Sources:

N onex change Interest Rev enue 1,538,309 489,668

T otal Financing Sources 1,538,309 489,668

Net Cost of Operations (52,752,596) (20,551,582)

Net Change (51,214,287) (20,061,914)

T otal Cumulative Results of Operations, September 30 196,336,209$ 247,550,496$


6


Statements of Budgetary Resources For the Years Ended September 30, 2017 and 2016

BUDGET ARY RESOURCES

U nobligated Balance Brought Forw ard, October 1 $ 245,160,899 $ 264,251,379 Recov eries of Prior Year U npaid Obligations 279,083 235,289 Other C hanges in U nobligated Balance 85,914 117,351 U nobligated Balance from Prior Year Budget Authority , N et 245,525,896 264,604,019

Spending Authority from Offsetting C ollections 1,426,356 456,371

T otal Budgetary Resources $ 246,952,252 $ 265,060,390

ST AT US OF BUDGET ARY RESOURCES N ew Obligations and U pw ard Adjustments $ 12,177,314 $ 19,899,491

U nobligated Balance, End of Year

Apportioned, U nex pired Accounts 234,455,541 245,160,899

U napportioned, U nex pired Accounts 319,397 -

U nobligated Balance, End of Year (Total) 234,774,938 245,160,899

T otal Budgetary Resources $ 246,952,252 $ 265,060,390

CHANGE IN OBLIGAT ED BALANCE U npaid Obligations:

U npaid Obligations, Brought Forw ard, October 1 $ 4,240,141 $ 4,291,207

N ew Obligations and U pw ard Adjustments 12,177,314 19,899,491 Outlay s (Gross) (9,542,403) (19,715,268)

Recov eries of Prior-Year U npaid Obligations (279,083) (235,289) U npaid Obligations, End of Year 6,595,969 4,240,141

M emorandum Entries:Obligated Balance, Start of Year $ 4,240,141 $ 4,291,207

Obligated Balance, End of Year $ 6,595,969 $ 4,240,141

BUDGET AUT HORIT Y AND OUT LAYS, NET

Budget Authority , Gross $ 1,426,356 $ 456,371

Actual Offsetting C ollections (1,617,983) (607,019) Recov eries of prior y ear paid obligations (discretionary and mandatory ) 85,914 117,351

Budget Authority , N et $ (105,713) $ (33,297)

Outlay s, Gross $ 9,542,403 $ 19,715,268

Actual Offsetting C ollections (1,617,983) (607,019)

Agency Outlay s, N et $ 7,924,420 $ 19,108,249


20162017

7

Notes to the Financial Statements For the Years Ended September 30, 2017 and 2016

Note 1. Summary of Significant Accounting Policies

A. Reporting Fund The Commodity Futures Trading Commission (CFTC or the Commission) is an independent agency of the executive branch of the Federal Government. Its mission is to “protect market users and the public from fraud, manipulation, and abusive practices related to the sale of commodity futures and options, and to foster open, competitive, and financially sound commodity futures and options markets.” On July 21, 2010, the “Dodd-Frank Wall Street Reform and Consumer Protection Act” (the Dodd-Frank Act, or the Act) was signed into law, significantly expanding the powers and responsibilities of the CFTC. According to Section 748 of the Act, there is established in the Treasury of the United States a revolving fund known as the “Commodity Futures Trading Commission Customer Protection Fund” (the Fund). The Fund shall be available to the Commission, without further appropriation or fiscal year limitation, for a) the payment of awards to whistleblowers; and b) the funding of customer education initiatives designed to help customers protect themselves against fraud or other violations of this Act or the rules and regulations thereunder. The Act requires CFTC to transmit to the Committee on Agriculture, Nutrition and Forestry of the Senate, and the Committee on Agriculture of the House of Representatives a report which includes a complete set of audited financial statements and supplementary information, including balance sheet, income statement, and cash flow analysis, no later than October 30, of each year. B. Basis of Presentation The financial statements have been prepared to report the financial position and results of operations for the Fund, as required by the Dodd-Frank Act. These statements have been prepared from the Fund’s books and records, which are a component of the Commission’s books and records, in conformity with U.S. generally accepted accounting principles (GAAP), as prescribed for the Federal government by the Federal Accounting Standards Advisory Board (FASAB) and in accordance with the form and content requirements contained in Office of Management and Budget (OMB) Circular A-136, Financial Reporting Requirements, as amended. The Fund was established in July 2010 and funded by transfers from CFTC’s Civil Monetary Penalties, Fines and Administrative Fees receipt account. These transfers do not meet the criteria of reportable revenue as defined by the Statement of Federal Financial Accounting Standards (SFFAS) 7, Accounting for Revenue and Other Financing Sources and Concepts for Reconciling Budgetary and Financial Accounting. The financial statements report on the Fund’s financial position, changes in net position, net cost and budgetary resources. The books and records of the Fund served as the source of information for preparing the financial statements in the prescribed formats. All Fund financial statements and reports used to monitor and control financial resources are prepared from the same books and records. The statements should be read with the understanding that they relate to a fund controlled by CFTC, a component of the U.S. Government, a sovereign entity. The Balance Sheet presents the financial position of the Fund. The Statement of Net Cost presents the Fund’s operating results. The Statement of Changes in Net Position displays the changes in the Fund’s net position, and the Statement of Budgetary Resources shows the spending authority of the Fund derived from the deposits eligible from civil monetary collections.

8

C. Fund Balance with Treasury

Fund Balance with Treasury is the aggregate amount of the Fund’s balance with the U.S. Treasury. The balance in the Fund is available to pay current liabilities and finance authorized operations. The Fund does not maintain bank accounts of its own, has no disbursing authority, and does not maintain cash held outside of Treasury. Treasury makes disbursements for the Fund.

D. Investments in U.S. Government Securities

The CFTC has authority to invest amounts in the Customer Protection Fund in market-based U.S. Treasury securities. Market-based Treasury securities are debt securities that the U.S. Treasury issues to Federal entities without statutorily determined interest rates. Although the securities are not marketable, the terms (prices and interest rates) mirror the terms of marketable Treasury securities. Investments are carried at their historical cost basis which approximates fair value due to their short-term nature. The interest earned on the investments is a component of the Fund and is available to be used for expenses of the Fund. Additional details regarding investments are provided in Note 3. Investments.

E. General Property, Plant and Equipment, Net

The Commission capitalizes assets annually if they have useful lives of at least two years and an individual value of $25,000 or more. Bulk or aggregate purchases are capitalized when the individual useful lives are at least two years and the purchase is a value of $25,000 or more. Property, plant and equipment that do not meet the capitalization criteria are expensed when acquired. Depreciation for equipment and amortization for software is computed on a straight-line basis using a 5-year life. The Commission’s assets are valued net of accumulated depreciation or amortization.

As of September 30, 2017, the Commission has capitalized as software the costs for development of a website for the CFTC Whistleblower Office. Additional details regarding general property, plant, and equipment are provided in Note 4. General Property, Plant and Equipment, Net.

F. Liabilities

The Fund’s liabilities consist of actual and estimated amounts that are likely to be paid as a result of transactions covered by the Whistleblower Incentives and Protection regulation, and will be paid from available balances remaining in the Fund. In addition, the salaries and operating expenses of the Whistleblower’s Office and Office of Customer Education and Outreach were funded through the Fund. Total accrued payroll is composed of amounts to be paid to Fund employees as well as the related intragovernmental payable for employer contributions and payroll taxes. The accrued annual leave liability is the amount owed to employees for unused annual leave as of the end of the reporting period. At the end of each quarter, the balance in the accrued annual leave account is adjusted to reflect current balances and pay rates. Sick leave and other types of non-vested leave are expensed as taken. Liabilities totaled $47,924,252 and $2,118,305 as of September 30, 2017, and 2016, respectively. The Fund’s liabilities are considered current liabilities.

G. Funds from Dedicated Collections

The Fund contains dedicated collections that can only be used to operate a whistleblower program and support customer education initiatives. See Note 1.A. for a description of the purpose of the Fund and its authority to use the revenues and other financing sources. Deposits into the Fund are credited from monetary sanctions collected by the Commission in covered judicial or administrative actions not otherwise distributed to victims of a violation of the Dodd-Frank Act or the rules and regulations underlying such action, unless the balance of the Fund at the time the monetary judgment is collected exceeded $100 million. No new legislation was enacted as of September 30, 2017, that significantly changed the purpose of the dedicated collections or redirected a material portion of the accumulated balance.

9

H. Revenues and Other Financing Sources

The CFTC Customer Protection Fund is funded through monetary sanctions resulting from judicial or administrative action brought by the Commission under the Commodity Exchange Act. All collections are deposited into a receipt account. Eligible collections are transferred into the Fund from the CFTC’s Civil Monetary Penalties, Fines and Administrative Fees receipt account.

Congress enacted the Dodd-Frank Act that provides the CFTC with the authority to establish the Fund. The Fund is available to the Commission, without further appropriation or fiscal year limitation. These funds are considered financing sources under U.S. Treasury Department guidelines. Per the Act, no sanction collected by the Commission can be deposited into the Fund if the Fund’s balance exceeds $100 million. The CFTC may request the Secretary of the Treasury to invest Fund amounts in Treasury obligations. No eligible collections were transferred during FY 2017 or FY 2016 because the Fund reached its legislative maximum during FY 2014. I. Intra- and Inter-Agency Relationships

The CFTC is an independent Federal agency. The Commodity Futures Trading Commission Customer Protection Fund is a fund within the CFTC, and these financial statements present a segment of the CFTC financial activity. The financial events of the Fund are consolidated into the CFTC annual financial statements. J. Use of Management Estimates

In addition to accruals for goods and services, management estimates were used to calculate overhead expenses in the amount of $918,000 and $736,530 that were allocated to the Fund for the years ended September 30, 2017, and 2016. These amounts were derived by multiplying management’s estimated overhead cost per full-time equivalent (FTE) by the number of FTE charged to the Fund.

K. Limitations of the Financial Statements

The principal financial statements included in this report have been prepared to report the financial position and results of operations of the Fund, pursuant to the requirements of Section 748 of the Dodd-Frank Consumer Protection Act. While the statements have been prepared from the books and records of the CFTC in accordance with GAAP for Federal entities, these statements are in addition to the reports used to monitor and control the financial activity of the CFTC, which are prepared from the same books and records. The statements should be read with the understanding that they are for the Customer Protection Fund, a single fund within the CFTC.

10

Note 2. Fund Balance with Treasury

The Fund Balance with Treasury by type of fund and Status of Fund Balance with Treasury as of September 30, 2017, and 2016, consists of the following:

2017 2016

Revolving Funds $ 7,560,992 $ 5,485,412

T OT AL FUND BALANCE WIT H T REASURY $ 7,560,992 $ 5,485,412

Revolving Funds

Unobligated Fund Balance

Av ailable $ 965,023 $ 1,245,271

Obligated Balance Not Yet Disbursed 6,595,969 4,240,141

T otal Revolving Funds 7,560,992 5,485,412

T OT AL FUND BALANCE WIT H T REASURY $ 7,560,992 $ 5,485,412

A. Reconciliation to Treasury

There are no differences between the fund balance reflected in the Fund’s Balance Sheet and the balance in the Treasury account.

B. Fund Balance with Treasury

Fund Balance with Treasury consists of collections of fines and penalties not owed to harmed investors. Obligation of these funds is controlled by apportionments made by OMB. Until such funds are apportioned by OMB for use in the current period, they are unavailable to be obligated.

Note 3. Investments

The CFTC invests amounts deposited in the Fund in overnight short-term Treasury securities. Treasury overnight certificates of indebtedness are issued with a stated rate of interest to be applied to their par amount, mature on the business day immediately following their issue date, are redeemed at their par amount at maturity, and have interest payable at maturity.

The overnight certificates are Treasury securities whose interest rates or prices are determined based on the interest rates or prices of Treasury-related financial instruments issued or trading in the market, rather than on the interest rates or prices of outstanding marketable Treasury securities. The Commission may invest in other short-term or long-term Treasury securities at management’s discretion

The Commission’s investments as of September 30, 2017, and 2016, were $234 million and $244 million, respectively. Related nonexchange interest revenue for the years ended September 30, 2017, and 2016, was $1,538,309 and $489,668, respectively.

Intragovernmental Investments in Treasury Securities The Federal Government does not set aside assets to pay future claims or other expenditures associated with funds from dedicated collections deposited into the Customer Protection Fund. The dedicated cash receipts collected by the Commission as a result of monetary sanctions are deposited in the U.S. Treasury, which uses the cash for general Government purposes. As discussed above and in Note 1.D., the Commission invests the majority of these funds in Treasury securities. These Treasury securities are an asset of the Commission and a liability of the U.S. Treasury. Because the Commission and the U.S. Treasury are both components of the Government, these assets and liabilities offset each other from the standpoint of the Government as a whole. For this reason, the investments presented by the Commission do not represent an asset or a liability in the U.S. Government-wide financial statements.

11

Treasury securities provide the Commission with authority to draw upon the U.S. Treasury to pay future claims or other expenditures. When the Commission requires redemption of these securities to make expenditures, the Government finances those expenditures out of accumulated cash balances, by raising taxes or other receipts, by borrowing from the public or repaying less debt, or by curtailing other expenditures. This is the same manner in which the Government finances all expenditures.

Note 4. General Property, Plant and Equipment, Net Property, Plant and Equipment as of September 30, 2017, and 2016, consisted of the following:

Major Class Service Life and Method Cost

Accumulated

Amortization/

Depreciation Net Book Value

IT Softw are 5 Years/Straight Line 214,824 (78,769) 136,055

$ 214,824 $ (78,769) $ 136,055

Major Class Service Life and Method Cost

Accumulated

Amortization/

Depreciation Net Book Value

IT Softw are 5 Years/Straight Line 214,824 (35,804) 179,020

$ 214,824 $ (35,804) $ 179,020

2017

2016

Note 5. Contingencies Unasserted claims are actions or potential actions the Commission is aware of in which future events may result in claims against the Fund.

As mentioned in Note 1.A. Reporting Fund, the Fund will be used to pay awards to whistleblowers if they voluntarily provide original information to the CFTC that leads to the successful enforcement by the CFTC of a covered judicial or administrative action in which monetary sanctions exceeding $1 million are imposed. Whistleblowers are entitled to appeal any decisions by the Commission in regards to claims made against the Fund.

In accordance with Federal accounting standards, CFTC records contingent liabilities for any unasserted claim in which payment has been deemed probable and for which the amount of potential liability can be estimated. The Commission also discloses all claims for which payment is reasonably possible. As of September 30, 2017, the Commission has determined that it is probable that it will make whistleblower awards of approximately $45.5 million as a result of valid whistleblower claims on Commission-imposed sanctions that have already been collected. There were no unasserted claims deemed reasonably probable and measurable, or reasonably possible, as of September 30, 2017.

Note 6. Intragovernmental Costs

The Statement of Net Cost presents the Customer Protection Fund’s results of operations for the activities to run the Whistleblower’s Office and Office of Customer Education and Outreach. Intragovernmental costs arise from the purchases of goods and services from other components of the Federal Government (including other CFTC funds). In contrast, public costs are those which arise from the purchase of goods and services from non-Federal entities. The Fund incurred $553,534 and $695,091 in net intragovernmental costs and $52,199,062 and $19,856,491 in net costs with the public for the years ended September 30, 2017, and 2016, respectively. The significant increase in costs with the public is primarily due to $45.5 million in whistleblower awards in FY 2017 compared to $11.5 million in FY 2016.

12

Supplementary Schedule

Cash as of October 1, 2016 $ 5,485,412

Cash flows from operating activities

Paid Ex penses for WhistleBlow er and C onsumer Outreach Offices $ (9,542,403) Interest earned from inv esting in U S Treasury Securities 1,532,069

Refunds collected 85,914

Net cash flows from operating activities $ (7,924,420)

Cash flows from investing activities

Redemptions of U S Treasury Securities $ 10,000,000

Net cash flows from investing activities $ 10,000,000

Net increase/(decrease) in cash and cash equivalents $ 2,075,580

Cash as of September 30, 2017 $ 7,560,992

Commodity Futures T rading Commission

Cash Flow Analysis

For the Period from October 1, 2016 to September 30, 2017

Customer Protection Fund

D I S C L A I M E R

This is a report of the Staff of the U.S. Securities and Exchange Commission. The Commission has expressed no view regarding the analysis, findings, or conclusions contained herein.

D I S C L A I M E R


D I S C L A I M E R


D I S C L A I M E R


C O N T E N T S

Message from the Chief of the Office of the Whistleblower . . . . . . . . . . . . . . .1

History and Purpose . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4

Activities of the Office of the Whistleblower . . . . . . . . . . . . . . . . . . . . . . . . . . .6

Claims for Awards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10Whistleblower Awards Made in Fiscal Year 2017 . . . . . . . . . . . . . . . 10Overview of Award Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

Profiles of Award Recipients . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16

Preserving Individuals’ Rights to Report to the Commission and

Shielding Employees from Retaliation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19Enforcement of Whistleblower Protections . . . . . . . . . . . . . . . . . . . . 19Protection for Internal Reporting . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

Whistleblower Tips Received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .23Increase in Whistleblower Tips . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23Whistleblower Allegation Type . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24Geographic Origin of Whistleblower Tips . . . . . . . . . . . . . . . . . . . . . 25

Processing of Whistleblower Tips . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .27TCR Evaluation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27Assistance by OWB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

Securities and Exchange Commission Investor Protection Fund . . . . . . . . . . .29

Appendix A. Whistleblower Tips by Allegation Type

Comparison of Fiscal Years 2014–2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .31

Appendix B. Whistleblower Tips Received by

Geographic Location, United States and its Territories, Fiscal Year 2017 . . . .32

Appendix C. Whistleblower Tips Received by

Geographic Location, International, Fiscal Year 2017 . . . . . . . . . . . . . . . . . . .33

Report available on the Web at: www .sec .gov/whistleblower

https://www.sec.gov/whistleblower

WHISTLEBLOWER PROGRAM | 1

“. . . the value of

the whistleblower

program is exhibited

most directly and

importantly by the

hundreds of millions

of dollars returned to

investors as a result

of actionable

information that

whistleblowers brought

to the agency.”

M E S S AG E F R O M T H E C H I E F O F T H E

O F F I C E O F T H E W H I S T L E B LOW E R

As we enter into the seventh year of the U .S . Securities and Exchange Commission’s (SEC, Commission, or agency) whistleblower program, the demonstrable benefits of the program continue to materialize . Whistleblowers have provided tremendous value to the SEC’s enforcement efforts and significant help to investors . Whistleblower information has aided the SEC’s efforts to uncover and stop fraudulent investment schemes . But the value of the whistleblower program is exhibited most directly and importantly by the hundreds of millions of dollars returned to investors as a result of actionable information that whistleblowers brought to the agency . Since the program’s inception, the SEC has ordered wrongdoers in enforcement matters involving whistleblower information to pay over $975 million in total monetary sanctions, including more than $671 million in disgorgement of ill-gotten gains and interest, the majority of which has been, or is scheduled to be, returned to harmed investors .

Investor Protection Actions Based on Whistleblower TipsThe Commission brought several enforcement actions in Fiscal Year (FY) 2017 that illustrate the critical role whistleblowers play in investor protection . Earlier this fiscal year, the SEC awarded a whistleblower who promptly came forward with valuable information that enabled the SEC to quickly initiate an enforcement action against wrongdoers before they could squander their ill-gotten funds, leading to a near total recovery and return of investor funds . Recently, in July 2017, the SEC awarded a whistleblower whose critical information helped the agency stop a hard-to-detect fraud and return millions of dollars to harmed investors in the process .

In the past year, we have also seen whistleblower information aid SEC staff in detecting and stopping active, ongoing investment schemes that directly targeted and victimized unsophisticated investors . In January, the Commission awarded a whistleblower who provided information that helped end an ongoing fraud that predominately targeted a more vulnerable investor community . Also in January of this year, the Commission awarded three whistleblowers whose information halted a scheme to which hundreds of investors, many of whom were unsophisticated, had fallen victim .

The success of the SEC’s whistleblower program is further illustrated by the number and amount of awards over this past year, as well as since the program’s inception . This fiscal year, the SEC ordered whistleblower awards totaling nearly $50 million to 12 individuals . Since the agency issued its first award in 2012 through the end of September 2017, the program has awarded approximately $160 million in whistleblower awards to 46 individuals whose information and cooperation assisted the agency in bringing successful Commission enforcement actions and related actions brought by non-SEC enforcement authorities .

Awareness of the Whistleblower ProgramAwareness of the whistleblower program has grown significantly over the years . This year, we have continued to experience a consistent increase in the number of whistleblower tips received . In FY 2017, we received over 4,400 tips, an increase of nearly 50 percent since FY 2012, the first year for which we have full-year data .

2 | U.S. SECURITIES AND EXCHANGE COMMISSION

Whistleblower Protections During FY 2017, the Commission brought a number of important actions to address instances in which companies unlawfully retaliated against their employees or impeded employees’ ability to report freely to the Commission .

In one such action brought in January 2017, the Commission found that HomeStreet, Inc ., a Seattle-based financial services company, attempted to uncover the identity of a presumed whistleblower after being contacted by SEC staff regarding potential accounting violations . In its efforts to root out the whistleblower, the company suggested that it could deny indemnification for legal costs to the individual whom the company believed to be the whistleblower . The company also required former employees to sign severance agreements waiving potential whistleblower awards or otherwise risk losing their severance payments and other post-employment benefits . Without admitting or denying the findings, the company agreed to, among other things, cease and desist from violating Rule 21F-17 of the Securities Exchange Act of 1934 (Exchange Act) and pay a $500,000 civil penalty .

The SEC also continued its enforcement of Rule 21F-17 by bringing two actions against companies for using restrictive language in separation and severance agreements that specifically targeted the Commission’s whistleblower rules and incentives . In December 2016, the Commission found that Virginia-based technology company NeuStar, Inc . used broad non-disparagement clauses in its severance agreements that specifically named the SEC as a regulator to whom employees were forbidden from communicating any disparaging information or else forfeit all but $100 of their severance . In a subsequent Rule 21F-17 enforcement action brought in January 2017, the Commission found that BlackRock, Inc . used separation agreements that required departing employees to waive their right to receive any incentives for reporting misconduct under the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act or Dodd-Frank) .

The SEC also brought a settled action against Oklahoma-based oil and gas company, SandRidge Energy, Inc ., for terminating an employee in retaliation for raising concerns to company management about how the company calculated its reserves . Along with findings that the company had violated the whistleblower anti-retaliation provisions of Dodd-Frank, the Commission also found that the company had violated Rule 21F-17 by entering into separation agreements with hundreds of employees that prohibited voluntary, direct communication with the Commission .

Reviewing fact patterns of retaliation against whistleblowers and potential actions to impede communications with the Commission will continue to be a focus for the Office of the Whistleblower (OWB or Office) in the upcoming fiscal year to ensure that whistleblowers can freely report information to the Commission and feel comfortable reporting wrongdoing without fear of reprisal .

“Reviewing fact

patterns of

retaliation against

whistleblowers

and potential

actions to impede

communications with

the Commission will

continue to be a focus

for the Office of the

Whistleblower . . .”


Whistleblower ProcessesWe encourage those who believe they have information concerning a potential securities law violation to submit a tip via the online portal on OWB’s webpage (www .sec .gov/whistleblower) or by submitting a Form TCR, which is also available on OWB’s webpage, by mail or fax .

Moreover, to help promote the agency’s whistleblower program and establish a line of communication with the public, OWB operates a hotline where whistleblowers, their attorneys, or other members of the public with questions about the program may call to speak to OWB staff . During FY 2017, we returned nearly 3,200 calls from members of the public, exceeding the number of calls returned the prior fiscal year . Since May 2011 when the hotline was established, OWB has returned over 18,600 calls from the public .

If individuals or their counsel have any questions about the program, including questions about how to submit a tip to the Commission, we encourage them to call OWB’s whistleblower hotline at (202) 551-4790 .

ConclusionWe attribute the public’s active interest in the whistleblower program to its three key features that Congress created as part of Dodd-Frank: the promise of monetary awards to whistleblowers whose information leads to successful enforcement actions, provisions to safeguard whistleblower confidentiality, and enhanced anti-retaliation protections . We believe that these features will continue to incentivize company insiders, market participants, and others with knowledge of potential securities law violations to step forward and report their information to the agency . And we expect that the Commission will continue to receive high-quality tips that can be leveraged to detect and halt fraud earlier and more effectively .

We are proud that the whistleblower program continues to positively impact the SEC’s enforcement of the federal securities laws . We are confident that it will continue to bolster the agency’s mission of protection of investors and the markets in the years ahead .

JANE NORBERG Chief, Office of the WhistleblowerNovember 15, 2017

“. . . we expect that

the Commission will

continue to receive

high-quality tips that

can be leveraged to

detect and halt fraud

earlier and more

effectively.”


H I S T O R Y A N D P U R P O S E

The Dodd-Frank Act1 amended the Exchange Act2 by, among other things, adopting Section 21F,3 entitled “Securities Whistleblower Incentives and Protection .” Section 21F directs the Commission to make monetary awards to eligible individuals who voluntarily provide original information that leads to successful Commission enforcement actions resulting in monetary sanctions over $1 million and successful related actions .4

Awards must be made in an amount equal to 10 to 30 percent of the monetary sanctions collected .5 To ensure that whistleblower payments would not diminish the amount of recovery for victims of securities law violations, Congress established a separate fund, called the Investor Protection Fund (Fund), from which eligible whistleblowers are paid .

The Commission established OWB, an office within the SEC’s Division of Enforcement (Enforcement), to administer and effectuate the whistleblower program . It is OWB’s mission to administer a vigorous whistleblower program that will help the Commission identify and halt securities frauds early and quickly to minimize investor losses .

In addition to establishing an awards program to encourage the submission of high-quality information, Dodd-Frank and the Commission’s implementing regulations (Whistleblower Rules)6 prohibit retaliation by employers against employees who report possible wrongdoing based on a reasonable belief that a possible securities violation has occurred, is in progress, or is about to occur .7

In adopting the Whistleblower Rules, the Commission recognized that whistleblower reporting through internal compliance procedures can enhance the Commission’s enforcement efforts in appropriate circumstances .8 Consequently, the Commission adopted strong incentives and protections for employees who choose to work within their company’s own compliance structure because they believe that the employer’s internal compliance function is an effective mechanism to address any potential wrongdoing .9

1 Pub . L . No . 111-203, § 922(a), 124 Stat . 1841 (2010) .2 15 U .S .C . § 78a, et seq.3 Id. § 78u-6 .4 “Related actions” is defined at 15 U .S .C . § 78u-6(a)(5) and 17 C .F .R . § 240 .21F-3(b) .5 15 U .S .C . § 78u-6(b)(1) .6 17 C .F .R . § 240 .21F-1 through 21F-17 .7 15 U .S .C . § 78u-6(h)(1); 17 C .F .R . § 240 .21F-2(b) .8 Securities Whistleblower Incentives and Protections, 76 Fed . Reg . 34,300, 34,359 n .450 (June 13, 2011) .9 See 17 C .F .R . §§ 240 .21F-4(b)(7), 240 .21F-6(a)(4), (b)(3) .


Dodd-Frank’s Section 924(d) requires OWB to report annually to Congress on OWB’s activities, whistleblower complaints received, and the response of the Commission to such complaints .10 In addition, Section 21F(g)(5) of the Exchange Act requires the Commission to submit an annual report to Congress that addresses the following subjects:

• The whistleblower award program, including a description of the number of awards granted and the types of cases in which awards were granted during the preceding fiscal year;

• The balance of the Fund at the beginning of the preceding fiscal year;

• The amounts deposited into or credited to the Fund during the preceding fiscal year;

• The amount of earnings on investments made under Section 21F(g)(4) during the preceding fiscal year;

• The amount paid from the Fund during the preceding fiscal year to whistleblowers pursuant to Section 21F(b);

• The balance of the Fund at the end of the preceding fiscal year; and

• A complete set of audited financial statements, including a balance sheet, income statement, and cash flow analysis .11

OWB, in consultation with other offices within the Commission, has prepared this report to satisfy the reporting requirements of Section 924(d) of the Dodd-Frank Act and Section 21F(g)(5) of the Exchange Act . The sections in this report addressing the activities of OWB, the whistleblower tips received during FY 2017, and the processing of whistleblower tips primarily address the requirements of Dodd-Frank’s Section 924(d) . The sections addressing the Fund and whistleblower incentive awards made during FY 2017 primarily address the requirements of Section 21F(g)(5) of the Exchange Act .

10 15 U .S .C . § 78u-7(d) .11 15 U .S .C . § 78u-6(g)(5) .


AC T I V I T I E S O F T H E O F F I C E O F T H E

W H I S T L E B LOW E R

Section 924(d) of the Dodd-Frank Act directed the Commission to establish a separate office within the Commission to administer and enforce the provisions of Section 21F of the Exchange Act . Jane Norberg heads the Office as Chief of OWB . In May 2017, Emily Pasquinelli was promoted to Deputy Chief to fill the role vacated by Ms . Norberg when she was promoted to Chief . Additionally, OWB is staffed by eleven attorneys, four paralegals, and an administrative assistant . Below is an overview of OWB’s primary responsibilities and activities over the past fiscal year .

Assessment of Award Applications The whistleblower program was designed, in part, to provide a monetary incentive to corporate insiders and others with relevant information concerning potential securities violations to report their information to the Commission . As such, much of OWB’s work relates to the assessment of claims for whistleblower awards .

OWB posts a Notice of Covered Action (NoCA) on its webpage (www .sec .gov/whistleblower/claim-award) for every Commission enforcement action that results in monetary sanctions of over $1 million . Anyone who believes that (s)he is entitled to a whistleblower award may submit an application in response to a posted NoCA . Before submitting an application, however, a whistleblower should ensure that there is a nexus between a whistleblower tip that (s)he provided to the Commission and what was ultimately charged in the enforcement matter .

OWB staff tracks investigations where a whistleblower has provided information or assistance to Enforcement staff . This case-tracking initiative provides early information to OWB about which matters may ultimately result in an award payout and allows OWB staff to provide subject matter expertise to Enforcement staff on whistleblower investigations, as needed . Although it is ultimately a whistleblower’s responsibility to make a timely application for an award, OWB may contact whistleblowers who have been actively working with Enforcement staff—or who have previously contacted the office about the posting of a particular covered action—to confirm they are aware of the posting and applicable deadline for submitting claims for award .

After receiving an application for an award, OWB attorneys assess the application and the eligibility of the claimant and confer with relevant Enforcement or other Commission staff to understand the contribution of the claimant, if any, to the covered action . OWB then makes recommendations to the Claims Review Staff, currently comprised of five senior officers in Enforcement, as to award eligibility . Pages 10-15 of this report provide a fuller explanation of how applications for awards are processed at the Commission, as well as what awards were made during FY 2017 .

Reviewing Restrictive Agreements During FY 2017, OWB focused on employers’ usage of confidentiality, severance, and other kinds of agreements, or engagement in other practices, to interfere with individuals’ ability to report potential wrongdoing to the SEC . Exchange Act Rule 21F-17(a) provides that “[n]o person may take any action to impede an individual

“. . . OWB focused

on employers’ usage

of confidentiality,

severance, and other

kinds of agreements,

or engagement in

other practices, to

interfere with

individuals’ ability

to report potential

wrongdoing to

the SEC.”


from communicating directly with the Commission staff about a possible securities law violation, including enforcing, or threatening to enforce, a confidentiality agreement . . . with respect to such communications .”12 In FY 2017, the Commission instituted administrative proceedings against four companies for violating Rule 21F-17(a) . OWB continues to work closely with investigative staff to identify and investigate practices in the use of confidentiality and other kinds of agreements, or other actions, that may violate Rule 21F-17(a) . For more information about these activities, please see pages 19-21 of this report .

Advancing Anti-Retaliation ProtectionsOWB identifies and monitors whistleblower complaints alleging retaliation by employers or former employers in response to an employee’s reporting of possible securities law violations internally or to the Commission . The Commission may bring an enforcement action against companies or individuals who violate the anti-retaliation provisions of the Dodd-Frank Act . In FY 2017, the Commission brought a retaliation case against a company for retaliating against an employee who reported concerns of possible securities laws violations internally to his company, but did not also separately report to the Commission . Bringing retaliation cases illustrates the high priority placed on ensuring an environment where whistleblowers can report internally or to the Commission without fear of reprisal . OWB continues to work with Enforcement staff to identify cases where companies and individuals take reprisals against employees for whistleblowing efforts that may be appropriate for enforcement action .

OWB also monitors federal court cases involving the anti-retaliation provisions of the Dodd-Frank Act and the Sarbanes-Oxley Act of 2002 .13 OWB works with the SEC’s Office of General Counsel, which has filed amicus curiae briefs on behalf of the Commission and appeared in federal courts around the country advocating the Commission’s position that anti-retaliation protections under Dodd-Frank apply to employees who report potential violations of the securities laws internally or to other federal law enforcement agencies without also having informed the Commission of the same .14 On June 26, 2017, the United States Supreme Court granted certiorari in Digital Realty Trust, Inc. v. Somers to address a lower court split on the scope of the Dodd-Frank Act anti-retaliation protections .15 On October 17, 2017, the United States Solicitor General, acting on behalf of the Department of Justice and joined by the Commission, filed an amicus curiae brief in the Supreme Court in support of the whistleblower-respondent . The United States’ amicus curiae brief in Digital Realty continues the Commission’s advocacy efforts and urges the Supreme Court to recognize that Dodd-Frank’s statutory language, its legislative history, and the Commission’s rules require that individuals who internally report potential securities violations at a publicly-traded company are entitled to employment retaliation protection, regardless of whether they have separately reported that information to the Commission . For more information about these activities, please see pages 21-22 of this report .

12 17 C .F .R . § 240 .21F-17(a) .13 18 U .S .C . § 1514A . 14 The SEC’s interpretive guidance may be found on OWB’s webpage, www .sec .gov/whistleblower/retaliation, and

also has been published in the Federal Register at 80 Fed . Reg . 47,829 (Aug . 10, 2015) .15 850 F .3d 1045 (9th Cir . 2017), cert. granted, No . 16-1276 (U .S . June 26, 2017) .


Intake of Whistleblower Tips The Commission has an internal database called the Tips, Complaints, and Referrals Intake and Resolution System (TCR System) that serves as a central repository for all tips and complaints received by the Commission, as well as referrals from self-regulatory organizations and other government agencies . Exchange Act Rule 21F-9 provides whistleblowers the option to submit tips either electronically through an online portal that feeds directly into the TCR System or by mailing or faxing a hard-copy Form TCR directed to OWB . This flexibility supports whistleblowers who may not have ready access to a computer or who, for other reasons, may prefer to submit their information in hard copy . In cases where whistleblowers elect to submit a hard-copy Form TCR, OWB and other SEC staff manually enter the tips into the TCR System so they can be appropriately reviewed, assigned, and tracked in the same manner as tips received through the online portal . For more information on the number and types of tips received, please refer to pages 23-26 of this report .

Communications with WhistleblowersOWB serves as the primary liaison between the Commission and individuals who have submitted information or are considering whether to submit information to the agency concerning a possible securities violation . OWB created a whistleblower hotline, in operation since May 2011, to respond to questions from the public about the whistleblower program . Individuals may leave messages on the hotline by calling (202) 551-4790 . All calls to the hotline are returned by OWB attorneys within 24 business hours (3 business days) .

During FY 2017, the Office returned nearly 3,200 phone calls from members of the public . Many of the calls OWB receives relate to how the caller should submit a tip to be eligible for an award, how the Commission will maintain the confidentiality of a whistleblower’s identity, requests for information on the investigative process or tracking an individual’s complaint status, and whether the SEC is the appropriate agency to handle the caller’s tip . OWB recently updated the hotline voicemail to provide a menu of options with answers to frequently asked questions .

In addition to communicating with whistleblowers through the hotline, the Office sends letters to whistleblowers who have submitted tips, additional information, claims for awards, and other correspondence to OWB .

“During FY 2017,

the Office

returned nearly

3,200 phone calls

from members

of the public.”


Public Outreach and Education One of the Office’s primary goals is to promote public awareness of the Commission’s whistleblower program . As part of that outreach effort, the Office aims to promote the whistleblower program, and educate the public about the whistleblower program, through OWB’s webpage (www .sec .gov/whistleblower) . The webpage contains information about the program, copies of the forms required to submit a tip or claim an award, a listing of enforcement actions for which a claim for award may be made, links to helpful resources, and answers to frequently asked questions . In FY 2017, the Office updated its webpage to provide the public with additional information about the whistleblower program, including adding a new section dedicated to retaliation-related issues .

OWB also actively participates in numerous webinars, media interviews, presentations, press releases, and other public communications . In FY 2017, OWB participated in many public engagements aimed at promoting and educating the public about the Commission’s whistleblower program . The Office’s target audience generally includes potential whistleblowers, whistleblower counsel, and corporate compliance counsel and professionals . OWB’s Chief has also participated in legal panels and other forums with other federal agencies with similar whistleblower programs .


C L A I M S F O R AWA R D S

Whistleblower Awards Made in Fiscal Year 2017In FY 2017, the Commission ordered whistleblower awards of nearly $50 million to 12 individuals, each of whom provided new information, of which the agency was previously unaware, that either led to the opening of an investigation or significantly contributed to a successful enforcement action .

Below are the top ten highest awards made under the SEC’s whistleblower program through FY 2017 .

$5.5 million

$5–6 million

$4 million

$3.5 million

$30 million

$22 million

$20 million

$17 million

$14 million

$7 million

TOP 10 SEC WHISTLEBLOWER AWARDSFrom program inception to end of Fiscal Year 2017, the SEC awarded

approximately $160 million to 46 whistleblowers.

September 2014

August 2016

November 2016

June 2016

September 2013

January 2017

January 2017

May 2016

September 2016

May 2016

As reflected in the graphic, three of the ten largest whistleblower awards were made by the Commission during FY 2017 . The more than $30 million award issued by the Commission in September 2014 remains the highest award made to date under the program .16

Below is an overview of the whistleblower awards made by the SEC during the past fiscal year .

Third-Highest Award of Over $20 Million On November 14, 2016, the Commission announced an award of more than $20 million to a whistleblower who promptly came forward with valuable information that enabled the SEC to quickly initiate an enforcement action against wrongdoers before they could squander the money, leading to a near total recovery of investor funds .17 This was the third-highest award made since the program issued its first award in 2012 .

16 See Order Determining Award Claim, Exchange Act Rel . No . 73174, File No . 2014-10 (Sept . 22, 2014); SEC Press Rel . No . 2014-206, “SEC Announces Largest-Ever Whistleblower Award .”

17 See Order Determining Award Claim, Exchange Act Rel . No . 79294, File No . 2017-1 (Nov . 14, 2016); SEC Press Rel . No . 2016-237, “SEC Issues $20 Million Whistleblower Award .”


$7 Million Awarded to Three WhistleblowersOn January 23, 2017, the Commission announced an award of more than $7 million to three whistleblowers who helped the SEC stop an investment scheme that defrauded hundreds of investors, many of whom were unsophisticated .18 One whistleblower provided information that was the primary impetus for the beginning of the Commission’s investigation . This individual received an award of more than $4 million . The other two whistleblowers split more than $3 million for voluntarily providing new information during the SEC’s investigation that significantly contributed to the success of the Commission’s action .

Company Insider Receives $5.5 Million AwardOn January 6, 2017, the Commission announced an award of more than $5 .5 million to a company insider who provided information that led to a successful Commission enforcement action .19 Not only did the information help open the investigation, but the whistleblower also continued to provide information and assistance throughout the course of the investigation, which ultimately helped end an ongoing fraud that chiefly targeted a vulnerable investor community .

$4 Million Award to Whistleblower for Providing Industry-Specific ExpertiseOn April 25, 2017, the Commission announced an award of almost $4 million to a whistleblower whose information was the primary cause for an investigation’s opening .20 The whistleblower provided industry-specific knowledge and expertise that allowed the Commission to effectively bring the underlying action with fewer resources .

$3.5 Million AwardOn December 5, 2016, the Commission announced an award of nearly $3 .5 million to a whistleblower who came forward with information that led to a successful SEC enforcement action .21

Information Launched Investigation and Earned Whistleblower a $2.5 Million AwardOn July 25, 2017, the Commission announced an award of nearly $2 .5 million to an employee of a domestic government agency whose whistleblower tip helped launch an SEC investigation and whose continued assistance enabled the SEC to address a company’s misconduct .22 This individual provided timely ongoing assistance along with critical documents that accelerated the pace of the Commission’s enforcement investigation .

18 See Order Determining Award Claim, Exchange Act Rel . No . 79853, File No . 2017-6 (Jan . 23, 2017); SEC Press Rel . No . 2017-27, “SEC Announces $7 Million Whistleblower Award .”

19 See Order Determining Award Claim, Exchange Act Rel . No . 79747, File No . 2017-5 (Jan . 6, 2017); SEC Press Rel . No . 2017-1, “SEC Awards $5 .5 Million to Whistleblower,”

20 See Order Determining Award Claim, Exchange Act Rel . No . 80521, File No . 2017-8 (Apr . 25, 2017); SEC Press Rel . No . 2017-84, “SEC Awards Nearly $4 Million to Whistleblower .”

21 See Order Determining Award Claim, Exchange Act Rel . No . 79464, File No . 2017-2 (Dec . 5, 2016); SEC Press Rel . No . 2016-255, “SEC Awards $3 .5 Million to Whistleblower .”

22 See Order Determining Award Claim, Exchange Act Rel . No . 81200, File No . 2017-12 (July 25, 2017); SEC Press Rel . No . 2017-130, “SEC Announces $2 .5 Million Whistleblower Award .”


Company Insider Awarded More than $1.7 Million for Help with Difficult to Detect FraudOn July 27, 2017, the Commission announced a whistleblower award of more than $1 .7 million to a company insider who provided the agency with critical information to help stop a fraud that would have otherwise been difficult to detect .23 Millions of dollars were returned to harmed investors as a result of the SEC’s ensuing investigation and enforcement action .

Award of More Than $900,000 for Assistance with Multiple ActionsOn December 9, 2016, the Commission announced an award of more than $900,000 to a whistleblower whose tip enabled the SEC to bring multiple enforcement actions against wrongdoers .24

Award of More Than $500,000On May 2, 2017, the Commission ordered an award of more than $500,000 to a company insider whose information prompted the Commission’s investigation of a well-hidden and hard-to-detect securities violation .25 This award highlights how company insiders are in a unique position to provide specific information that allows the Commission to better protect investors and the marketplace .

20 Percent AwardOn February 28, 2017, the Commission announced a whistleblower award of 20 percent of amounts collected or to be collected to a whistleblower who voluntarily provided original information to the agency that led to a successful enforcement action .26

“Millions of dollars

were returned to

harmed investors

as a result of

the SEC’s ensuing

investigation and

enforcement

action.”

23 See Order Determining Award Claim, Exchange Act Rel . No . 81227, File No . 2017-13 (July 27, 2017); SEC Press Rel . No . 2017-134, “SEC Announces Whistleblower Award of More Than $1 .7 Million .”

24 See Order Determining Award Claim, Exchange Act Rel . No . 79517, File No . 2017-3 (Dec . 9, 2016); SEC Press Rel . No . 2016-260, “SEC Awards Nearly $1 Million to Whistleblower .”

25 See Order Determining Award Claim, Exchange Act Rel . No . 80571, File No . 2017-9 (May 2, 2017); SEC Press Rel . No . 2017-90, “Whistleblower Award of More Than Half-Million Dollars for Company Insider .”

26 See Order Determining Award Claim, Exchange Act Rel . No . 80115, File No . 2017-7 (Feb . 28, 2017) .


Overview of Award Process For a whistleblower to receive an award, there are a number of preconditions that must be met . The diagram below provides a snapshot of the overall process, from the filing of the whistleblower tip to payment of the whistleblower award . As reflected, the time between the submission of a whistleblower tip and when an individual may receive an award payment can be several years, particularly where the underlying investigation is especially complex, where there are multiple, competing award claims, or where there are claims for related actions .

The discussion below focuses on the award claims process, from the posting of the NoCA to the issuance of a Final Order by the Commission .

NoCA Posted The Office posts on its webpage a NoCA for each Commission enforcement action where a final judgment or order, by itself or together with other judgments or orders in the same action issued after July 21, 2010, results in monetary sanctions exceeding $1 million .27 During FY 2017, OWB posted 193 NoCAs .

OWB announces on Twitter each time a new group of NoCAs is posted to its webpage, and sends email alerts to GovDelivery when the NoCA listing is updated .28 Whistleblowers and other members of the public may sign up to receive an update via email every time the list of NoCAs on OWB’s webpage is updated . OWB posts new NoCAs on its webpage on the last business day of each month .

27 OWB posts a NoCA for every enforcement action that results in monetary sanctions exceeding $1 million . By posting a NoCA for a particular case, the Commission is not making a determination either that a whistleblower tip, complaint or referral led to the Commission opening an investigation or filing an action with respect to the case or that an award to a whistleblower will be paid in connection with the case .

28 GovDelivery is a vendor that provides communications for public-sector clients .


Award Claim SubmittedOnce a NoCA is posted, individuals have 90 calendar days to apply for an award by submitting a completed award application on Form WB-APP to OWB .29 It is the responsibility of the claimant to make a timely application for award . The Commission has denied late-filed award claims . The Court of Appeals for the Second Circuit recently upheld the Commission’s denial of two claimants whose award applications were submitted approximately two years after the required deadline .30 As such, we encourage whistleblowers and their counsel to regularly review the monthly NoCA postings or to sign up to receive emails to alert them as to when new NoCAs are posted .

Award Claim ReviewedOWB attorneys evaluate each application for a whistleblower award . OWB works closely with investigative staff responsible for the relevant action, as well as other Commission staff who may have interacted with the claimant, to understand the contribution or involvement the applicant may have had in the matter .

Utilizing the information and materials provided by the claimant in support of the application, as well as other relevant materials, OWB prepares a written recommendation to the Claims Review Staff as to whether the applicant meets the criteria for receiving an award, and if so, the percentage of the award .

Preliminary Determination IssuedThe Claims Review Staff, designated by the co-Directors of Enforcement, considers OWB’s recommendation on the award application in accordance with the criteria set forth in the Dodd-Frank Act and the Whistleblower Rules . The Claims Review Staff currently is composed of five senior officers in Enforcement, including one of the co-Directors of Enforcement . The Claims Review Staff then issues a Preliminary Determination setting forth its assessment of whether the claim should be allowed or denied and, if allowed, setting forth the proposed award percentage amount .31

The Whistleblower Rules outline a number of positive and negative factors that the Commission and Claims Review Staff may consider in assessing an individual’s award percentage . Award percentages are based on the particular facts and circumstances of each case, and are not based on any hard-set mathematical formula .

Factors that may increase an award percentage include the significance of the information provided by the whistleblower, the level of assistance provided by the whistleblower, the law enforcement interests at stake, and whether the whistleblower reported the violation internally through his or her firm’s internal reporting channels or mechanisms .

Factors that may decrease an award percentage include whether the whistleblower was culpable or involved in the underlying misconduct, interfered with internal compliance systems, or unreasonably delayed in reporting the violation to the Commission .

“Once a NoCA is

posted, individuals

have 90 calendar

days to apply for an

award by submitting

a completed award

application on Form

WB-APP to OWB.”

29 17 C .F .R . §§ 240 . 21F-10(a), (b) .30 Cerny v. SEC, No . 16-934, 2017 WL 3911581 (2d Cir . Sept . 7, 2017) (affirming Order Determining

Whistleblower Award Claim, Exchange Act Rel . No . 77368 (Mar . 14, 2016)) .31 17 C .F .R . § 240 .21F-10(d) .


Record and Reconsideration RequestedAn applicant may submit a written request within 30 calendar days of the date of the Preliminary Determination asking for a copy of the record that formed the basis of the Claims Review Staff’s decision as to the applicant’s claim for award . As a precondition to receiving a copy of the record, OWB requires claimants and their counsel, if the claimant is represented, to execute a confidentiality agreement limiting the use of such materials to the claims review process .32 A claimant also has 30 calendar days to request a meeting with OWB, which OWB may grant at its discretion .

Claimants may seek reconsideration of the Preliminary Determination by submitting a written response to OWB within 60 calendar days of the later of (i) the date of the Preliminary Determination, or (ii) if the record was requested, the date when OWB made the record available for a claimant’s review .33 If a claim is denied and the applicant does not object within the time period prescribed under the Whistleblower Rules, then the Preliminary Determination of the Claims Review Staff becomes the Final Order of the Commission .

Final Order IssuedAfter considering any requests for reconsideration, the Claims Review Staff issues a Proposed Final Determination, and the matter is submitted to the Commission for its decision .34

All Preliminary Determinations of the Claims Review Staff that involve granting an award are submitted to the Commission for consideration as Proposed Final Determinations irrespective of whether the applicant objected to the Preliminary Determination .35

Within 30 days of receiving the Proposed Final Determination, any Commissioner may request that the Proposed Final Determination be reviewed by the Commission . If no Commissioner requests such a review within the 30-day period, then the Proposed Final Determination becomes the Final Order of the Commission . Claimants who are issued a denial have a right to appeal the Commission’s Final Order within 30 days of issuance to the United States Court of Appeals for the District of Columbia Circuit, or to the circuit where the claimant resides or has his or her principal place of business .36

Final Orders of the Commission are publicly available on the Commission’s website and OWB’s webpage . The public Final Orders are redacted to protect award applicants’ confidentiality .

32 Id. § 240 .21F-12(b) . Rule 21F-12(b) states, “The Office of the Whistleblower may also require you to sign a confidentiality agreement, as set forth in § 240 .21F-(8)(b)(4) of this chapter, before providing [Preliminary Determination] materials .”

33 17 C .F .R . § 240 .21F-10(e) .34 Id. §§ 240 .21F-10(g), (h) .35 Id. §§ 240 .21F-10(f), (h) .36 Id. § 240 .21F-10(h) . A whistleblower’s rights of appeal from a Commission Final Order are set forth in

Section 21F(f) of the Exchange Act, 15 U .S .C . § 78u-6(f), and Exchange Act Rule 21F-13(a), 17 C .F .R . § 240 .21F-13(a) .


P R O F I L E S O F AWA R D R E C I P I E N T S

Protecting whistleblower confidentiality is an integral component of the whistleblower program . The Dodd-Frank Act prohibits the Commission and its staff from disclosing any information that reasonably could be expected to reveal the identity of a whistleblower, subject to certain exceptions . Consequently, information that may tend to reveal a whistleblower’s identity is redacted from Commission orders granting or denying awards before they are issued publicly . This may include redacting the name of the enforcement action upon which the award is based .

Consistent with our statutory obligation to maintain whistleblower confidentiality but in an effort to provide more transparency, this section provides information about the profiles of past award recipients—from the whistleblower program’s inception to the end of FY 2017—while still protecting the identity of any particular individual .

Since program inception, the Commission has issued awards of approximately $160 million to 46 individuals in connection with 37 covered actions, as well as in connection with several related actions . Many of the tips or complaints that were submitted by these successful whistleblowers share similar characteristics . The information provided by each award recipient was specific . For example, the whistleblower identified particular individuals involved in the misconduct, or provided specific documents that substantiated their allegations or explained where such documents could be located . In some instances, the whistleblower identified specific financial transactions that evidenced fraud, or provided detailed assessment of the wrongdoing . The misconduct reported by award recipients was often relatively current or ongoing at the time it was reported to the Commission . Additionally, the vast majority of award recipients provided Commission staff with additional assistance and/or information (e .g ., answered staff questions or provided testimony) after they submitted their initial tips .

An individual may be eligible to receive an award where her or his information leads to a successful enforcement action—meaning generally that the original information either caused an examination or investigation to open, or the original information significantly contributed to a successful enforcement action where the matter was already under examination or investigation . The majority of the whistleblowers who have received awards under the program provided original information that caused Enforcement staff to open an investigation, and a significant percentage received awards because their original information assisted with an already-existing investigation . In assessing whether information assisted with an already-existing enforcement action, the

96%

4%

Additional Assistance After Initial Tip

Did not provideadditionalassistance

Provided additionalassistance

34%

66%

Led to Successful Enforcement Action

By opening investigation or exam

By assisting with already-existing investigation

“Protecting

whistleblower

confidentiality is

an integral

component of the

whistleblower

program.”


Commission will consider factors such as whether the information allowed the agency to bring the action in significantly less time or with fewer resources, and whether it supported additional successful charges, or successful claims against additional individuals or entities .37 When the Commission has found claimants to be ineligible for awards on non-procedural grounds, it is often because the claimants’ information did not open an investigation or exam, open a new line of inquiry in an existing investigation, or significantly contribute to an existing investigation .

There is no requirement under the Whistleblower Rules that an individual be an employee or company insider to be eligible for an award . However, about 62 percent of the award recipients to date were current or former insiders of the entity about which they reported information of wrongdoing to the SEC . Of the award recipients who were current or former employees of a subject entity, almost 83 percent raised their concerns internally to their supervisors, compliance personnel, or through internal reporting mechanisms, or understood that their supervisor or relevant compliance personnel knew of the violations, before reporting their information of wrongdoing to the Commission .

25%

15%

19%

4% 7%

30%

Whistleblower Award Recipients

Current employees

Former employees

Other types of insiders (including consultants or close affiliates of subject company)

Industry professionals

Harmed or prospective investors

Other types of outsiders

83%

17%

Internal Reporting by Current and Former Employees or Supervisor/Compliance Already Aware of Violations

Reported internally or supervisor/ compliance aware

Did not report

As reflected in the left chart above, whistleblowers may obtain information of possible wrongdoing by a subject company or individual that is not their employer . Although the majority were employees or former employees of the company involved in the wrongdoing, the remaining award recipients obtained their information because they were either investors who had been victims of the fraud, professionals working in the same or a related industry, or other types of outsiders, such as individuals who had a personal relationship with the wrongdoer .

Whistleblowers seeking an award are not required to be represented by counsel unless they choose to file their tips with the Commission anonymously . About 46 percent of the award recipients did not have counsel when they initially submitted their tips to the agency . The other 54 percent were represented by counsel, 19 percent of which filed anonymously . Some of the individuals who were not represented by counsel at the time they submitted their tips subsequently retained counsel during the course of the investigation or during the whistleblower award application process (although retaining counsel is not required to file for a whistleblower award) .

37 Securities Whistleblower Incentives and Protections, 76 Fed . Reg . 34,300, 34,325 (June 13, 2011) .


Whistleblowers help the Commission bring cases against a variety of defendants, many of which are involved in the financial services industry . Twenty-eight percent of the cases in which a whistleblower received an award concerned corporate defendants registered with the Commission, including broker-dealers, investment advisers, or other registered market participants . Whistleblowers also have contributed to enforcement actions against individuals and unregistered entities responsible for securities law violations . Individuals comprised 47 percent of the defendants, and unregistered entities and companies 25 percent of the defendants, in cases resulting in whistleblower awards .

25%

47%

28%

Defendants for Covered Actions

Registered entities

Private entities or companies (unregistered)

Individuals (registered and unregistered)

Additionally, whistleblowers have assisted the Commission in bringing enforcement cases involving an array of securities violations . A number of the award recipients reported information to the Commission concerning offering frauds, such as Ponzi or Ponzi-like schemes . Other award recipients provided tips to the Commission relating to false or misleading statements in a company’s offering memoranda or marketing materials, false pricing information, accounting, and internal controls violations, among other types of misconduct . The chart above reflects the diversity of securities violations in which award recipients have been involved in reporting .

8%

9%

22%

11%

28%

22%

Primary Securities Violations for Covered Actions

Misrepresentation/omission violations

Corporate/issuer disclosure violations (including FCPA, accounting, and offering document violations)

Offering fraud (including Ponzi and pyramid schemes)

Trading violations (including insider trading)

Sales and advisory practices violations

Other (including operational, registration, and fees/markups/commissions violations)

Under the Whistleblower Rules, individuals are permitted to jointly submit a tip to the Commission . Six of the matters for which whistleblower awards were ordered involved two or more whistleblowers jointly submitting information and materials to the Commission .

Individuals who provide information that leads to successful SEC actions resulting in monetary sanctions over $1 million also may be eligible to receive an award if the same information led to a related action, such as a parallel criminal prosecution . Six of the award recipients have received payments based, in part, on collections made in related criminal or other qualifying related actions .

Past whistleblower award recipients hail from several different parts of the United States, and nine recipients were foreign nationals or residents of foreign countries at the time they submitted their tips to the Commission .


P R E S E R V I N G I N D I V I D U A L S ’ R I G H T S T O

R E P O R T T O T H E C O M M I S S I O N A N D S H I E L D I N G

E M P LOY E E S F R O M R E TA L I AT I O N

Section 21F(h)(1) of the Dodd-Frank Act expanded protections for whistleblowers and broadened prohibitions against retaliation .38 Following the passage of Dodd-Frank, the SEC implemented rules that enabled the SEC to take legal action against employers who have retaliated against whistleblowers . This generally means that employers may not discharge, demote, suspend, harass, or in any way discriminate against an employee in the terms and conditions of employment because the employee reported conduct that the employee reasonably believed violated the federal securities laws . Dodd-Frank also created a private right of action that gives whistleblowers the right to file a retaliation complaint in federal court . To date, the Commission has brought three anti-retaliation enforcement actions, including one in FY 2017 .

Exchange Act Rule 21F-17(a) prohibits any person from taking any action to prevent an individual from contacting the SEC directly to report a possible securities law violation . The Rule states that “[n]o person may take any action to impede an individual from communicating directly with the Commission staff about a possible securities law violation, including enforcing, or threatening to enforce, a confidentiality agreement . . . with respect to such communications .”39 To date, the Commission has brought nine enforcement actions involving violations of Rule 21F-17, including four in FY 2017 .

OWB supported the enforcement of whistleblower protections in FY 2017 by reviewing fact patterns of retaliation and attempts to impede free communications with the SEC, and served as subject matter experts to staff as needed on investigations .

Enforcement of Whistleblower Protections During FY 2017, the Commission found that a company violated Rule 21F-17 through its efforts to determine the existence and identity of a presumed whistleblower . On January 19, 2017, the Commission announced that Seattle-based financial services company HomeStreet, Inc . had agreed, without admitting or denying the Commission’s findings, to settle charges that it conducted improper hedge accounting and later took steps to impede potential whistleblowers .40 The SEC’s order found that after the SEC contacted the company in April 2015 seeking documents related to hedge accounting, HomeStreet presumed it was in response to a whistleblower complaint and began taking actions to determine the identity of the whistleblower, including asking certain individuals to affirm that they were not the whistleblower . The company went so far to suggest to a presumed whistleblower that the terms of an indemnification agreement could allow HomeStreet to deny payment for any legal costs incurred as a witness during the SEC’s investigation if this person was an SEC whistleblower . HomeStreet also required former employees to sign severance agreements requiring them to waive potential whistleblower awards or risk losing their severance payments and other post-employment benefits . Without admitting or denying the Commission’s Rule

“OWB supported

the enforcement

of whistleblower

protections in FY 2017

by reviewing fact

patterns of retaliation

and attempts to

impede free

communications with

the SEC . . .”38 15 U .S .C . § 78u-6(h)(1) .39 17 C .F .R . § 240 .21F-17(a) .40 In the Matter of HomeStreet, Inc. and Darrell Van Amen, Exchange Act Rel . No . 79844, File No . 3-17801

(Jan . 19, 2017) .


21F-17 finding, HomeStreet agreed to make reasonable efforts to contact former company employees who signed the Rule 21F-17-violative severance agreements, and provide them with a link to the Commission’s order and a statement that HomeStreet does not prohibit former employees from reporting information to the Commission or from seeking and obtaining a whistleblower award from the Commission . HomeStreet additionally agreed to pay a civil money penalty of $500,000 to the Commission .

The Commission also brought two actions against companies for using language in separation and severance agreements that specifically targeted the Commission’s whistleblower rules and incentives . In the first action, brought on December 19, 2016, the Commission announced that Virginia-based technology company NeuStar, Inc . had agreed to settle charges involving severance agreements that impeded at least one former employee from communicating information to the SEC .41 The Commission’s order found that NeuStar, Inc . had violated Exchange Act Rule 21F-17 by routinely entering into severance agreements that forbade former employees from engaging in communications that disparaged the company with the SEC, among other regulators . Former employees could be compelled to forfeit all but $100 of their severance pay for breaching the clause . NeuStar used these severance agreements with at least 246 departing employees from August 12, 2011 to May 21, 2015 . NeuStar voluntarily revised its severance agreements promptly after the SEC began investigating . The company agreed to make reasonable efforts to inform those who signed the severance agreements that NeuStar does not prohibit former employees from communicating any concerns about potential violations of law or regulation to the SEC . Without admitting or denying the SEC’s Rule 21F-17 findings, NeuStar also agreed to pay a civil money penalty of $180,000 to the Commission .

The second action was brought against BlackRock, Inc . for using impermissible language in its separation agreements . The Commission’s order found that BlackRock violated Rule 21F-17 because over 1,000 departing BlackRock employees had signed separation agreements containing violative language stating that they “waive any right to recovery of incentives for reporting of misconduct, including, without limitation, under the Dodd-Frank Wall Street Reform and Consumer Protection Act” in exchange for receiving monetary separation payments from the firm . BlackRock added the waiver provision in October 2011 after the SEC adopted Rule 21F-17, and the firm continued using it in its separation agreements until March 2016 . Without admitting or denying the Commission’s Rule 21F-17 finding, BlackRock agreed to pay a $340,000 penalty to settle the charges .42

Finally, in FY 2017, the SEC brought an action against a company for violation of both Rule 21F-17 and the whistleblower anti-retaliation provisions of Section 21F(h) . On December 20, 2016, the Commission announced an action against SandRidge Energy, Inc . This Oklahoma-based oil and gas company agreed to settle charges that it violated Section 21F(h) of the Exchange Act when it terminated a whistleblower in retaliation for expressing concerns internally about how the company calculated its oil and gas reserves .43 The SEC’s order also found that from August 2011 through April 2015, SandRidge had entered into separation agreements that did not permit employees to

41 In the Matter of NeuStar, Inc., Exchange Act Rel . No . 79593, File No . 3-17736 (Dec . 19, 2016) .42 In the Matter of BlackRock, Inc., Exchange Act Rel . No . 79804, File No . 3-17786 (Jan . 17, 2017) .43 In the Matter of SandRidge Energy, Inc., Exchange Act Rel . No . 79607, File No . 3-17739 (Dec . 20, 2016) .


voluntarily cooperate with any governmental agency in connection with any complaint or investigation of the company . The order found that SandRidge had conducted multiple reviews of its separation agreements after Rule 21F-17 became effective in August 2011, yet continued to regularly use restrictive language prohibiting outgoing employees from participating in any government investigation or disclosing information potentially harmful or embarrassing to the company . More than 500 former employees signed agreements with the restrictive language . Without admitting or denying the SEC’s Rule 21F-17 and retaliation findings, SandRidge agreed to pay a penalty of $1 .4 million .

Protection for Internal ReportingWhen the Commission issued the Whistleblower Rules in 2011, it stated that the Dodd-Frank employment retaliation protections apply not only when individuals report potential securities law violations directly to the SEC but also when they, among other things, report internally to their employer, like the whistleblower in the SandRidge Energy matter .44 In August 2015, the Commission released interpretive guidance clarifying the interaction of the anti-retaliation provisions and the award provisions of the Whistleblower Rules with respect to the protection of internal reporting under the Dodd-Frank Act . As explained in the interpretive guidance, individuals can report possible securities law violations internally, through their companies’ respective reporting structures, and still be protected if they then suffer adverse employment consequences—even if they have not reported such information to the SEC in the manner required to qualify for an award under the Whistleblower Rules .45

The Commission has filed several amicus curiae briefs in support of whistleblowers in private retaliation lawsuits in district and appellate courts urging the courts to defer to the Commission’s rule that individuals are entitled to employment retaliation protection if they report information of a possible securities violation internally at a publicly-traded company, regardless of whether they have separately reported the information to the SEC .46 As the SEC has explained in these amicus filings, ensuring that employees are protected from employment retaliation whenever they report possible securities law violations, whether internally or to the SEC, is critical to the SEC’s enforcement efforts . Put simply, if individuals are not assured they will be protected from retaliation if they report internally, they will be less likely to report internally, which could undermine the important role that internal compliance programs play in helping the Commission prevent, detect, and stop securities law violations .

44 17 C .F .R . § 240 .21F-2(b)(1) . The anti-retaliation protections apply whether or not the individual satisfies the requirements to qualify for an award . Id. § 240 .21F-2(b)(1)(ii) .

45 The SEC’s interpretive guidance may be found on OWB’s webpage, www .sec .gov/whistleblower/retaliation, and also has been published in the Federal Register at 80 Fed . Reg . 47,829 (Aug . 10, 2015) .

46 See Danon v. Vanguard Grp., Inc., 686 F . App’x 101 (3d Cir . 2017) (amicus filed Oct . 26, 2016); Duke v. Prestige Cruises Int’l, Inc., No . 16-15426 (11th Cir ., amicus filed Jan . 31, 2017); Deykes v. Cooper-Standard Auto., Inc., No . 16-2740 (6th Cir . July 17, 2017) (amicus filed Feb . 22, 2017); Verfuerth v. Orion Energy Sys., Inc., No . 16-3502 (7th Cir ., amicus filed May 5, 2017); see also, e.g., Somers v. Digital Realty Trust, Inc., 850 F .3d 1045 (9th Cir . 2017) (amicus filed May 25, 2016); Verble v. Morgan Stanley Smith Barney LLC, 676 F . App’x 421 (6th Cir . 2017) (amicus filed Feb . 1, 2016); Beacom v. Oracle Am., Inc., 825 F .3d 376 (8th Cir . 2016) (amicus filed Aug . 19, 2015); Berman v. Neo@Ogilvy LLC, 801 F .3d 145 (2d Cir . 2015) (amicus filed Feb . 6, 2015); Safarian v. Am. DG Energy, Inc., 622 F . App’x 149 (3d Cir . 2015) (amicus filed Dec . 11, 2014); Liu Meng-Lin v. Siemens AG, 763 F .3d 175 (2d Cir . 2014) (amicus filed Feb . 20, 2014); Sandford Wadler v. Bio-rad Labs., Inc., 141 F . Supp . 3d 1005 (N .D . Cal . 2015) (amicus filed Dec . 13, 2016); Stroh v. Saturna Capital Corp., 16-cv-00283-TSZ (W .D . Wash . Aug . 4, 2016) (amicus filed May 20, 2016); Davies v. Broadcom Corp., 130 F . Supp . 3d 1343 (C .D . Cal . 2015) (amicus filed Sept . 8, 2015); Wiggins v. ING U.S., Inc., 2015 WL 3771646 (D . Conn . June 17, 2015) (amicus filed June 16, 2015) .


The federal courts of appeals are divided over whether the Dodd-Frank anti-retaliation protections apply to employees who report potential violations of the securities laws internally without also reporting directly to the Commission . Most recently, in Somers v. Digital Realty Trust, Inc., the United States Court of Appeals for the Ninth Circuit agreed with the United States Court of Appeals for the Second Circuit’s decision in Berman v. Neo@Ogilvy LLC by finding that Congress did not intend to limit protections to those who disclose information to the SEC .47 Rather, the anti-retaliation provision also protects those who were fired or otherwise retaliated against after making internal disclosures of alleged unlawful activity under the Sarbanes-Oxley Act and other laws, rules, and regulations . The Ninth Circuit agreed with the Second Circuit that even if the statute were ambiguous, the SEC’s regulation resolved any ambiguity, and was entitled to deference . The United States Court of Appeals for the Fifth Circuit in Asadi v. G.E. Energy (USA), L.L.C.,48 however, found to the contrary .

On June 26, 2017, on the basis of the circuit split, the United States Supreme Court granted certiorari in Digital Realty Trust, Inc. v. Somers to address the scope of Dodd-Frank’s anti-retaliation protections .49 On October 17, 2017, the United States Solicitor General, acting on behalf of the Department of Justice and joined by the Commission, filed an amicus curiae brief in the Supreme Court in support of the whistleblower-respondent . The United States’ amicus curiae brief in support of the whistleblower in Digital Realty continues the Commission’s advocacy efforts and urges the Supreme Court to recognize that Dodd-Frank’s statutory language, its legislative history, and the Commission’s rules require that individuals who internally report potential securities violations at a publicly-traded company are entitled to employment retaliation protection, regardless of whether they have separately reported that information to the Commission .

47 850 F .3d 1045 (9th Cir . 2017) (agreeing with Berman, 801 F .3d 145, 155 (2d Cir . 2015)) .48 720 F .3d 620, 621 (5th Cir . 2013) .49 137 S . Ct . 2300 (U .S . June 26, 2016) (No . 16-1276) .


W H I S T L E B LOW E R T I P S R E C E I V E D

The Whistleblower Rules specify that individuals who would like to be part of the whistleblower program must submit their tips via the Commission’s online portal or by mailing or faxing their tips on Form TCR to OWB .50 Whistleblowers who use the online portal to submit a complaint receive a computer-generated confirmation of receipt with a TCR submission number . For those who submit a hard-copy Form TCR by mail or fax, OWB sends an acknowledgement letter, which includes a TCR submission number, or a deficiency letter explaining that the information was not properly submitted under the Whistleblower Rules . All whistleblower tips related to potential securities law violations received by the Commission are entered into the TCR System and are evaluated by the Commission’s Office of Market Intelligence within the Division of Enforcement .

Increase in Whistleblower TipsAcross the history of the whistleblower program, the Commission’s receipt of whistleblower tips has reflected an upward trajectory . Since August 2011, the Commission has received over 22,000 whistleblower tips, and in FY 2017 alone, received more than 4,400 tips . The table below shows the number of whistleblower tips received by the Commission on a yearly basis since the inception of the whistleblower program51:

FY2011 FY2012 FY2013 FY2014 FY2015 FY2016 FY2017

334 3,001 3,238 3,620 3,923 4,218 4,484

As reflected in this table, from FY 2012, the first year for which we have full-year data, to FY 2017, the number of whistleblower tips received by the Commission has grown by almost 50 percent .

“Across the history

of the whistleblower

program, the

Commission’s receipt

of whistleblower

tips has reflected an

upward trajectory. ”

50 17 C .F .R . § 240 .21F-9(a) .51 The Commission also receives tips from individuals who do not wish, or are not eligible, to be considered

for an award under the whistleblower program . The data in this report is limited to those TCRs that include the required whistleblower declaration and does not reflect all tips or complaints received by the Commission during the fiscal year .

Because the Whistleblower Rules became effective on August 12, 2011, only seven weeks of whistleblower data was available for FY 2011 .

For FY 2016 and 2017, the Commission received an unusually high number of whistleblower tips from two individuals . The data for FY 2016 and 2017 excludes tips received from these two individuals—both in this section of the report and in the appendices to this report .


Whistleblower Allegation TypeWhether submitting their tips on Form TCR or through the online portal, whistleblowers are asked to identify the nature of their complaint allegations . For FY 2017, the most common complaint categories reported by whistleblowers were 19 percent Corporate Disclosures and Financials, 18 percent Offering Fraud, and 12 percent Manipulation .52

The following graph reflects the number of whistleblower tips received in FY 2017 by allegation type53:

Trading andPricing

OfferingFraud

NotReported

MunicipalSecurities and Public Pension

FCPA0

200

400

600

800

1000

1200

Corporate Disclosures

and Financials

Manipulation InsiderTrading

UnregisteredOfferings

Other*MarketEvent

954

210

231

468

125

67

94

758

1,162

271

144

52 This breakdown reflects the categories selected by whistleblowers and, thus, the data represents the whistleblower’s own characterization of the violation type .

53 The category of “Other” indicates that the submitter identified the whistleblower TCR as not fitting into any allegation category that is listed on the questionnaire .


The type of securities violations reported by whistleblowers has remained generally consistent over the last six years . Since the beginning of the program, Corporate Disclosures and Financials, Offering Fraud, and Manipulation have consistently ranked as the three highest allegation types reported by whistleblowers . Appendix A to this report provides a comparison among the number of whistleblower tips by allegation type that the Commission received during FY 2014 through 2017 .

Geographic Origin of Whistleblower TipsThrough OWB’s extensive outreach efforts to publicize and promote the Commission’s whistleblower program, the Commission continues to receive whistleblower submissions from individuals throughout the United States, as well as internationally .

During FY 2017, California, New York, Texas, Florida, and New Jersey yielded the highest number of whistleblower tips .

FREQUENCY0–20

21–4041–6061–100>101


Since the beginning of the whistleblower program, the Commission has received whistleblower tips from individuals in 114 countries outside the United States . In FY 2017 alone, the Commission received whistleblower submissions from individuals in 72 foreign countries . After the United States, OWB received the highest number of whistleblower tips in FY 2017 from individuals in the United Kingdom, Canada, and Australia . The map below reflects all countries in which whistleblower tips originated during FY 2017 .

Appendices B and C to this report provide detailed information concerning the sources of domestic and foreign whistleblower tips that the Commission received during FY 2017 .


P R O C E S S I N G O F W H I S T L E B LOW E R T I P S

The Office of Market Intelligence (OMI), within the Commission’s Division of Enforcement, evaluates incoming whistleblower TCRs and assigns specific, credible, and timely TCRs to members of the Commission staff for further investigation or analysis .

TCR Evaluation OMI reviews every TCR submitted by a whistleblower to the Commission that alleges a possible securities law violation . During the evaluation process, OMI staff examines each tip to identify those with high-quality information that warrant the additional allocation of Commission resources . Generally, when the evaluation of a tip could benefit from the specific expertise of another Division or Office within the SEC, the tip is forwarded to staff in that Division or Office for further analysis . When OMI determines that a tip warrants further review, OMI staff assigns the complaint to one of the Commission’s eleven regional offices, a specialty unit, or to an Enforcement group in the Home Office . Complaints that relate to an existing investigation are forwarded to the staff working on the matter .

The Commission may use information from whistleblower tips and complaints in several different ways . For example, the Commission may initiate an enforcement investigation based on the whistleblower’s tip . Even if the tip does not cause an investigation to be opened, it may still help lead to a successful enforcement action if the whistleblower provides additional information that significantly contributes to an ongoing or active investigation . Tips may also prompt the Commission to commence an examination of a regulated entity, which may lead to an enforcement action or to the entity correcting the problem or clarifying an issue .

As noted previously, OWB actively tracks whistleblower tips that are referred to Enforcement staff for investigation . OWB currently is tracking over 700 matters in which a whistleblower’s tip has caused a Matter Under Inquiry or investigation to be opened or which have been forwarded to Enforcement staff for review and consideration in connection with an ongoing investigation . However, not all of these matters will result in an enforcement action, or an enforcement action where the required threshold of over $1 million in monetary sanctions will be ordered .

In general, the more specific, credible, and timely a whistleblower tip, the more likely it is that the tip will be forwarded to investigative staff for further follow-up or investigation . For instance, if the tip identifies individuals involved in the scheme, provides examples of particular fraudulent transactions, or points to non-public materials evidencing the fraud, the tip is more likely to be assigned to Enforcement staff for investigation . Tips that make blanket assertions or general inferences based on market events, or which do not relate to the federal securities laws, are less likely to be forwarded to or investigated by Enforcement staff .

In certain instances, OMI may determine it is more appropriate that a whistleblower’s tip be investigated by another regulatory or law enforcement agency . When this occurs, OMI refers the tip to the other agency in accordance with the Exchange Act’s whistleblower confidentiality requirements .

“ In general,

the more specific,

credible, and timely

a whistleblower tip,

the more likely it

is that the tip will

be forwarded to

investigative staff

for further follow-up

or investigation.”


Tips that relate to the financial affairs of an individual investor or a discrete investor group usually are forwarded to the Commission’s Office of Investor Education and Advocacy (OIEA) for resolution . Comments or questions about agency practice or the federal securities laws also are forwarded to OIEA .

Assistance by OWBOWB supports the tip allocation and investigative processes in several ways . When whistleblowers submit tips on a Form TCR in hard-copy by mail or fax, OWB enters the information into the TCR System so it can be evaluated by OMI . Tips submitted by whistleblowers through the Commission’s online portal are automatically forwarded to OMI for evaluation . During the evaluation process, OWB may assist by contacting the whistleblower to obtain additional information to help in the triage process .

After submitting an initial tip, a whistleblower is free to, and often does, submit additional information or materials to buttress his or her earlier allegations . Ideally, additional information is sent to OWB in hard-copy by mail or fax and includes the original TCR submission number . OWB then uploads the additional information into the TCR System and sends an acknowledgement letter to the whistleblower confirming receipt of the information or materials . Additional information can also be submitted via the portal, but reference should be made to the original TCR submission number .


S E C U R I T I E S A N D E XC H A N G E C O M M I S S I O N

I N V E S T O R P R O T E C T I O N F U N D

Section 922 of the Dodd-Frank Act established the Investor Protection Fund to provide funding for the Commission’s whistleblower award program, including the payment of awards in related actions .54 As required by statute, all payments are made out of this Fund, which is financed entirely through monetary sanctions paid to the SEC by securities law violators . No money has been taken or withheld from harmed investors to pay whistleblower awards . The Fund also is used to finance the operations of the suggestion program of the SEC’s Office of Inspector General .55 The suggestion program is intended for the receipt of suggestions from Commission employees for improvements in work efficiency, effectiveness, productivity, and the use of resources at the Commission, as well as allegations by Commission employees of waste, abuse, misconduct, or mismanagement within the Commission, and is operated outside of OWB .56

Section 21F(g)(5) of the Exchange Act requires certain Fund information to be reported to Congress on an annual basis . Below is a chart containing Fund-related information for FY 2017 .

FY 2017

Balance of Fund at beginning of fiscal year $ 368,116,007.44

Amounts deposited into or credited to Fund during fiscal year $ 0.0057

Amount of earnings on investments during fiscal year $ 2,734,295.64

Amount paid from Fund during fiscal year to whistleblowers $ (49,041,304.95)

Amount disbursed to Office of the Inspector General during fiscal year

$ (129,324.76)

Balance of Fund at end of the fiscal year $ 321,679,673.37

In addition, Section 21F(g)(5) of the Exchange Act requires a complete set of audited financial statements for the Fund, including a balance sheet, income sheet, income statement, and cash-flow analysis . That information will be included in the Commission’s Agency Financial Report, which will be separately submitted to Congress .

54 Section 21F(g)(2)(A) of the Exchange Act, 15 U .S .C . § 78u-6(g)(2)(A) .55 Section 21F(g)(2)(B) of the Exchange Act, 15 U .S .C . § 78u-6(g)(2)(B), provides that the Fund shall be

available to the Commission for “funding the activities of the Inspector General of the Commission under section 4(i) .” The Commission’s Office of General Counsel has interpreted this section to refer to Exchange Act Section 4D, which established the Inspector General’s suggestion program . That section provides that the “activities of the Inspector General under this subsection shall be funded by the Securities and Exchange Commission Investor Protection Fund established under Section 21F .” Id . § 78d-4(e) .

56 Section 4D(a) of the Exchange Act, id . § 78d-4(a) .57 Pursuant to Section 21F(g)(3) of the Exchange Act, no monetary sanctions are deposited into or credited

to the Fund if the balance of the Fund exceeds certain thresholds at the time the monetary sanctions are collected . Id. § 78u-6(g)(3) .


A P P E N D I X A

W H I S T L E B LOW E R T I P S B Y A L L E G AT I O N T Y P E

C O M PA R I S O N O F F I S C A L Y E A R S 2 0 1 4 – 2 0 1 7

0

300

600

900

1200

2014

2015

2016

2017

Corporate Disclosures

and Financials

OfferingFraud

Manipulation InsiderTrading

Trading andPricing

FCPA UnregisteredOfferings

MarketEvent

MunicipalSecurities and Public Pension

Other* Not Reported

97 97 94

114

911

956

58 57

139

192

102

150159

186

210

144

213

256273

563

482

581

613610

687

938954

472 468

262

231

257271

238

143 144

102

125

67 67

996

1,162

646

758

*The category of “Other” indicates that the submitter identified the whistleblower TCR as not fitting into any allegation category that is listed on the questionnaire.


A P P E N D I X B

W H I ST L E B LOW E R T I P S R E C E I V E D BY G E O G R A P H I C LO C AT I O N

U N I T E D STAT E S A N D I TS T E R R I TO R I E S , F I S C A L Y E A R 2 0 1 7 *

AK

AL

AR

AZ

CA

CO

CT

DC

DE

FL

GA

HI

IA

ID

IL

IN

KS

KY

LA

MA

MD

ME

MI

MN

MO

MS

MT

NC

ND

NE

NH

NJ

NM

NV

NY

OH

OK

OR

PA

RI

SC

SD

TN

TX

UT

VA

VT

WA

WI

WV

WY

100 200 300 400 500 6000

54

229

151

71

71

87

7355

32

80

175

438

37114

4

25030

133

76

61

28

11

14

3

15

9

28

10

615

14

15

13

1128

6

9

71

6

3

2

18

36

21

7

33

34

33

27

500

*Multiple individuals may jointly submit a TCR under the Commission’s whistleblower program. Appendix B reflects the number of individuals submitting WB TCRs to the Commission within the United States, or one of its territories, and not the total number of domestic WB TCRs received by the Commission during FY 2017. For example, a WB TCR that is jointly submitted by two individuals—one in New York and one in New Jersey—would be reflected in Appendix B as a submission from both New York and New Jersey. The total number of individuals submitting WB TCRs in the United States or a U.S. territory during FY 2017 exceeded 3,100 and constituted about 68 percent of the individuals participating in the Commission’s whistleblower program for this period. Additionally, over 900 individuals, constituting approximately 20 percent of the total number of persons participating in the Commission’s whistleblower program in FY 2017, submitted WB TCRs without any foreign or domestic geographical categorization or submitted them anonymously through counsel.


A P P E N D I X C

W H I ST L E B LOW E R T I P S R E C E I V E D BY G E O G R A P H I C LO C AT I O N

I N T E R N AT I O N A L , F I S C A L Y E A R 2 0 1 7 *

ANDORRA, PRINCIPALITY OF

ARGENTINA

AUSTRALIA

AUSTRIA

AZERBAIJAN

BELGIUM

BRAZIL

BULGARIA

CANADA

CHILE

CHINA, PEOPLE'S REPUBLIC OF

COLOMBIA

COSTA RICA

CZECH REPUBLIC

DEMOCRATIC REPUBLIC OF CONGO

DENMARK

EGYPT

ESTONIA

FINLAND

FRANCE

FRENCH POLYNESIA

GERMANY

GHANA

GREECE

GUATEMALA

HONG KONG

INDIA

INDONESIA

IRAN

IRELAND

ISRAEL

ITALY

JAPAN

KAZAKHSTAN

LUXEMBOURG

MACAU

MADAGASCAR

MALAYSIA

MALTA

MEXICO

MONTENEGRO

MOROCCO

NETHERLANDS

NEW ZEALAND

NIGERIA

NORWAY

OMAN

PAKISTAN

PANAMA

PAPUA NEW GUINEA

PHILIPPINES

POLAND

PORTUGAL

QATAR

RUSSIA

SAINT LUCIA

SAUDI ARABIA

SENEGAL

SINGAPORE

SOUTH AFRICA

SOUTH KOREA

SPAIN

SWEDEN

SWITZERLAND

TAIWAN

THAILAND

TUNISIA

TURKEY

UKRAINE

UNITED ARAB EMIRATES

UNITED KINGDOM

VENEZUELA

1

5

48

1

1

10

6

73

1

2

7

19

1

14

2

2

1

1

1

26

26

1

1

4

3

1

1

1

11

1

1

1

84

1

2

21

39

3

1

3

1

1

2

2

1

1

23

12

5

7

3

1

2

2

6

2

1

5

3

3

1

1

1

2

6

12

1

10

10

3

3

7

0 20 40 60 80 100

*As with domestic WB TCRs, multiple individuals from abroad may jointly submit a TCR under the Commission’s whistleblower program. Appendix C reflects the number of individuals submitting WB TCRs to the Commission from abroad, and not the total number of foreign WB TCRs received during FY 2017. The number of individuals submitting WB TCRs from abroad during FY 2017 exceeded 550, and constituted approximately 12 percent of the individuals participating in the Commission’s whistleblower program.

O F F I C E O F T H E W H I S T L E B L O W E R

Washington, DC

reporting without regrets - energy bar association · reporting without regrets: the sec...

Documents