21 November 2021

Last week the Acting Chief of the US Securities and Exchange Commission’s Whistleblower Program published the agency’s Annual Report. It makes for interesting reading.  It indicates an exponential increase in the number of informants making contact with the agency in 2021 and that much larger payments for information have been made during the year than previously.

Set up under the Dodd-Frank Wall Street Reform Act as a measure to avoid a recurrence of the market manipulation that precipitated the 2008 Financial Crisis, the Whistleblower Program is funded to make substantial awards to employees and others with inside information who contact the SEC with information about businesses acting unlawfully.

The Annual Report advised Congress that since its establishment in 2010, more than $1.1 billion has been awarded to 214 whistleblowers.

The last Financial Year was significant for the extent of whistleblower operations. 2021 saw the largest number of whistleblower tips received, and saw the highest number of awards made, both in terms of dollars and recipients. More awards were made than in the previous ten years combined. These included

  • the two largest awards to date — a $114 million award to one whistleblower made in October 2020;
  • a combined $114 million award to two whistleblowers made in September 2021; and
  • an award for more than $50 million to joint whistleblowers in April 2021.

The Report observes that “These large awards underscore the Commission’s commitment to rewarding whistleblowers who provide specific and detailed information that plays a significant role in the success of the agency’s enforcement actions,” 

The SEC credits the Whistleblower program with a sharp rise in enforcement orders that have resulted in the return to shareholders of losses suffered as a result of companies’ financial manoeuvres. 

To date, the program has generated nearly $5 billion in monetary sanctions, including more than $3.1 billion in disgorgement, of which more than $1.3 billion has been, or is scheduled to be, returned to harmed investors.

The SEC obviously finds that rewarding whistleblowers is a “good thing”. But what are the ethics of such payments? When invitations to provide information and the awards payable are advertised, is the responding whistleblower acting through a sense of public duty or primarily for the payment? Because of the detail required for an SEC payment, does that motivate an employee to defer action they may otherwise have taken? Instead, do they purport continuing loyalty to the employer and compliance with the employer’s business information obligations, while covertly extracting and distributing, without authority, whatever will enhance the reward for whistleblowing? Is a Police informer reputable if they appear as prosecution witness; was a privateer not just a pirate licensed by the State?

Whistleblowing makes deception and misappropriation acceptable because of a higher cause, not devalued by the motivation of the whistleblower.

Most agree that countering illegal and unethical activity is necessary for a just and moral society. Whistleblowing is justified for that purpose. It is sort of ethical! But whistleblowing often involves balancing the importance of one law against another. This means asking questions like, “Who is helped by the whistleblowing? Who is harmed?” Experience suggests that whistleblowing in a capitalist economy facilitates a more just society than may otherwise be the case. And the practicality is that in business, few “in the know” will blow the whistle without a lot of deliberation. Whistleblowing always involves risks. Offering incentives seems to be the best way to ensure that people take the risk. And bigger fish are attracted by a bigger bait.

Large awards reflect the SEC commitment to rewarding whistleblowers who provide specific and detailed information that plays a significant role in the success of the agency’s enforcement actions. 

2021 Annual Whistleblower Program Report to Congress (sec.gov)