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The SEC’s Whistleblower Program After Digital Realty Trust is Still Going Gangbusters

Litigation & Dispute Resolution Alert Mark Kornfeld, Jordan Maglich

Out of the ashes of the 2008 financial wildfires (including the world-wide revelation of the collapse of Lehman Brothers, the sub-prime market and the Madoff Ponzi scheme), arose the Dodd-Frank Wall Street Reform and Consumer Protection Act ("the "Act"). As part of the Act, the Securities and Exchange Commission ("SEC") established its Whistleblower Program, allowing individuals to confidentially report fraud or other securities and/or compliance violations to the SEC, and for those individuals to be compensated with monetary awards when the information provided leads to a successful SEC enforcement action.

Digital Realty - Be Careful For What You Wish

Last year, the U.S. Supreme Court, in a unanimous decision, held that the anti-retaliation provisions of the Act do not apply to one who solely reports potential violations, internally, pursuant to a company's internal compliance procedures. Digital Realty Trust v. Somers, 138 S. Ct. 767 (2019). The Court made clear that to achieve whistleblower status, receive both the anti-retaliatory protections and monetary awards provided by the Act, an employee must report the information to the SEC directly.

In the spirit of "be careful for what you wish," the decision raised the prospect of employees running directly to the SEC instead of first reporting suspected malfeasance directly to their employers. Corporate America by and large had advocated for the result reached in Digital Realty, but now faces the real possibility of a spate of whistleblowing activity where employees feel compelled to go directly to the Commission in order to get full levels of protection under the Act. While it is still too early to assess Digital Realty's full impact, the decision inevitably reinforces the need for companies to create a strong culture of transparency, compliance, incentives and protections for employees to feel comfortable in abiding by the credo, "if you see something, say something."

Another $50 Million Award = Over $375 Million Since Inception

Last month the SEC announced whistleblower awards totaling $50 million. SEC Press Release, SEC Awards $50 million to Two Whistleblowers, No. 2019-42 (Mar. 26, 2019). One of the whistleblowers received $37 million, which reflected the third biggest total ever awarded to a single individual under the program. The other whistleblower was awarded the remaining $13 million. The SEC rejected the claims of five other individual claimants. With these most recent awards, the SEC has now paid out to over sixty (60) different individuals, in excess of $375 million.

Whistleblowers are eligible for compensation by providing timely, original/and believable information that leads to a successful enforcement/action. Awards may range from between ten and thirty percent of the amounts collected by the SEC. In connection with the March 2019 awards, the Chief of the SEC's Office of Whistleblower, reinforced the Commission's view as to the importance of whistleblowers as a key took in investor protection: "Whistleblowers . . . may be the source of the smoking gun evidence and indispensable assistance that strengthens the agency's ability to protect investors and the capital markets."

The most recent award highlights the fact that whereas SEC enforcement may, in the aggregate, be on the decline under the current administration, the SEC shall continue to rely on company informants in ferreting out fraud. While policy debates grapple with the question of whether more restrictive "caps" on SEC awards need be imposed (as opposed to the counter view of "leave well enough alone"), there remains very strong support for the program. Large awards and Digital Realty standing alone or when considered in tandem, serve to remind all as to the importance of platinum standard, internal compliance policies and procedures.

For more information on the Whistleblower Program, please contact your Quarles & Brady attorney or: