Blowing the Whistle: The SEC Whistle-blower Policy

by Shashikant Mudaliar | January 8, 2019

 

You know something’s not right at work when numbers don’t add up or the documentation doesn’t reflect what you know to be true. The world of high-stakes finance is cutthroat; dotted with the occasional fraud. It is neither fiction nor a movie but a harsh reality for those investors who have been defrauded. 
 
It is a well-known fact that the SEC tries to keep a strict vigil on companies that file with it-especially the complicit. We’re talking of regulatory compliance, of course. No one likes these words, but you will like them even less when you have a pen wielding auditor dragging you into her world for nine hours a day.
 
Perhaps the most frightening part of concealing fraud is when a whistle-blower ‘blows the whistle’. When Sam Antar, CFO of Crazy Eddie, who was part of the largest security frauds during the 1980s was asked “What was your biggest threat while you were committing your crimes?” he answered: “The biggest threat was that a whistle-blower from within the company would inform the government of our crimes. Lying to auditors, Wall Street analysts, and journalists was easy.”
 
Who is a Whistle-blower?
Whistle-blowers are champions of truth who alert authorities about wrong doings of a company and provide original information about a possible violation or fraud. This may include information about illicit activities, theft, abuse of power or similar events that pose a danger or risk to the investors of the company.
 
The SEC awards whistle-blowers for taking the courage to report such information which otherwise it would have never known.  Their names and relevant information are concealed to protect their identity and encourage more whistle-blowers.
 
What is the SEC really looking for?
While violations can be identified if there are adequate internal controls in place, there is a big chance that companies do not follow the required law, practices and therefore violate and sometimes even end up in activities resulting in fraud. While none of this can a business regulator can directly know about the internal working in the Company, SEC has come up with a Whistle blower Program wherein it encourages people to provide information to the SEC where they sense that there is a possible violation or fraud and therefore get huge get rewarded.
 
Below are some activities for which SEC always looks out for information:
  • Ponzi scheme, Pyramid Scheme, or a High-Yield Investment Program
  • Theft or misappropriation of funds or securities
  • Manipulation of a security's price or volume
  • Insider trading
  • Fraudulent or unregistered securities offering
  • False or misleading statements about a company (including false or misleading SEC reports or financial statements)
  • Abusive naked short selling
  • Bribery of, or improper payments to, foreign officials
  • Fraudulent conduct associated with municipal securities transactions or public pension plans
  • Other fraudulent conduct involving securities
 
The SEC Whistle-blower Policy
“Company employees are in unique positions behind-the-scenes to unravel complex or deeply buried wrongdoing. Without the whistle-blower’s courage, information, and assistance, it would have been extremely difficult for law enforcement to discover this securities fraud on its own,” said Jane Norberg, Acting Chief of the SEC’s Office.
 
The SEC whistle-blower program offers awards to  eligible whistle-blowers who provide original information that leads to successful SEC enforcement actions with total civil penalties exceeding $1 million. A whistle-blower may receive an award of between 10% and 30% of the monetary sanctions collected in actions brought by the SEC and in related actions brought by other regulatory or law-enforcement authorities.
 
Since the start of the program, the SEC's Whistle-blower Office has received more than 14,000 whistle-blower tips from individuals in all 50 states. This has resulted in $326 million being awarded to 59 whistle-blowers. The SEC said that the number of tips increased by about 30% from 2012 till today. Due to their assistance, the SEC was able to bring successful enforcement actions where more than $1.7 billion was ordered in sanctions.
 
Redefining Corporate Culture
Apart from adhering to compliance, it is crucial that your organisation- large or small, hone employees to raise a flag in the case of fraud or wrong doings; all this, in the best interest of the company. A transparent corporate culture that uses internal controls to detect fraud as well as encourages champions of truth to speak up is the most sought after environment to work in.