Whistleblower Developments is a periodic report covering significant cases, decisions, proposals and legislation relating to whistleblower laws and their impact on your business. Recent developments include:

• Court says SEC whistleblower rule prohibits inclusion of standard privacy language in settlement agreements with investors
• SEC Whistleblower Program Continues Major Awards Series, With More Than $72 Million Awarded in Q4 2021
• SEC Whistleblower Program 2021 Annual Report Boasts Record Year

Court says SEC whistleblower rule prohibits inclusion of standard privacy language in settlement agreements with investors

As stated in our last newsletter, in SEC v Collector’s Coffee Inc., 19-Civ-4355 (SDNY July 21, 2021), the United States District Court for the Southern District of New York in July 2021 dismissed defendants’ assertion that SEC Rule 21F-17, which prohibited from preventing persons from communicating with the SEC regarding potential violations of securities laws by relying on confidentiality agreements, violated the regulatory authority of the SEC. On November 17, 2021, the court granted the SEC’s motion for summary judgment on count 21F-17. The defendants had entered into settlement agreements with investors which provided that the investors would not initiate any communication with any regulatory agency, including the SEC. Defendants enforced those agreements, suing an investor for breach of the confidentiality clause after the investor contacted the SEC. In its Notice of Summary Judgment, the court first upheld its earlier finding that Rule 21F-17 was a proper exercise of the SEC’s regulatory power and did not violate the First Amendment. Second, the court found that the defendants’ conduct violated Rule 21F-17 and granted SEC summary judgment on this claim. (See previous newsletters discussing the risk of privacy provisions violating Rule 21F-17: click here, here and here.)

SEC Whistleblower Program Continues Major Awards Series, With More Than $72 Million Awarded in Q4 2021

Although falling short of the $160 million+ granted in the third quarter of 2021, the SEC’s whistleblower program kicked off the SEC’s fiscal year 2022 with more than $72 million granted in the fourth quarter of 2021 . Here are some examples :

• On December 7, 2021, the SEC announced the award of $5 million to a whistleblower who provided the SEC with critical information and assistance that led to the SEC’s successful execution of an action covered. In determining the award, the SEC considered the whistleblower’s prompt reporting of the defendants’ alleged misuse of proceeds from a securities offering, as well as the whistleblower’s participation in interviews and provision of documents during the investigation.
• On November 23, 2021, the SEC awarded $400,000 to a whistleblower who alerted the SEC to a Ponzi scheme, despite also acknowledging that the whistleblower was guilty in the scheme. The whistleblower’s help eventually helped the SEC shut down the scheme and get emergency relief. Without disclosing the extent of the whistleblower’s culpability, the SEC noted that the whistleblower had not been charged and was unaware of at least some fraudulent aspects of the scheme. To determine the price, the SEC balanced the whistleblower’s contributions to the investigation and efforts to repair the harm with the whistleblower’s level of culpability.
• On November 22, 2021, the SEC announced a total award of $10.4 million to seven whistleblowers in varying amounts in three separate actions.
  • In the first action, the SEC awarded $6.2 million to the first whistleblower and $1.3 million to the second whistleblower, both of which provided new and material information during an ongoing investigation. Specifically, whistleblowers alerted the SEC to misconduct in different geographies. The SEC acknowledged that the information from the first whistleblower was more important than that provided by the second whistleblower and noted that the second waited more than a year before reporting. Additionally, the first whistleblower reported internally before reporting to the SEC and also provided information to another agency in a related action.
  • In the second action, the SEC awarded $2.4 million to two whistleblowers. The first whistleblower provided information that prompted the SEC to open the investigation and provided key interviews and evidence during the investigation. The second whistleblower provided new information which greatly contributed to the success of the action.
  • In the third action, the SEC awarded $435,000 to three whistleblowers – approximately $240,000 to the first two (jointly) and $195,000 to the third – for contributing to the success of a covered action and a related action. The first two whistleblowers jointly alerted the SEC to fraudulent behavior that prompted the SEC to initiate an investigation and provided assistance throughout the investigation. The third whistleblower provided new, detailed and very valuable information early on that was critical in helping the SEC develop its case. For the covered stock, the SEC split the price equally between the first two whistleblowers (jointly) and the third. But as for the related action, the SEC awarded a higher percentage to the first two whistleblowers.
• On November 10, 2021, the SEC announced a total award of $15 million to two whistleblowers whose information and assistance led to successful enforcement action by the SEC. The first whistleblower, who received $12.5 million, alerted the SEC to the fraudulent scheme and prompted the SEC to open the investigation. The second whistleblower’s information, while helpful, was more limited and had less impact than the first whistleblower’s, warranting a lower award of $2.5 million.
• On October 29, 2021, the SEC announced a $2 million reward to a whistleblower who, having previously been rewarded for contributing to SEC enforcement action, received this award for providing the same information that led to successful related action by the DOJ. The whistleblower was eligible for this new award following the December 2020 whistleblower rule changes (our summary of which can be found here), which clarified that “related action” includes non-prosecution and sue agreements. deferred concluded by the DOJ.
• On October 15, 2021, the SEC announced the award of $40 million to two whistleblowers whose information and assistance contributed to the success of an enforcement action by the SEC. The first whistleblower received a $32 million reward, after providing information that led the SEC to open the investigation and revealed hard-to-detect misconduct. The second whistleblower received a lower reward of $8 million. Although the second whistleblower provided important information during the investigation and was a valuable first-hand witness, the whistleblower unreasonably delayed reporting the wrongdoing for several years after becoming aware of it.

SEC Whistleblower Program 2021 Annual Report Boasts Record Year

On November 15, 2021, the SEC released its Fiscal Year 2021 Annual Report on the SEC Whistleblower Program (covering October 1, 2020 through September 30, 2021). It was a monumental year for the program, in which several records were broken. In fiscal year 2021, the SEC awarded approximately $564 million to 108 individuals, establishing both the highest dollar amount and the most individuals awarded in a single year. To put that into perspective, since the program’s inception in fiscal year 2011 through fiscal year 2020, a span of about 10 years, the SEC has awarded about $562 million to 106 individuals, in total . Notably, just two awards in fiscal year 2021 accounted for nearly 40% of the total amount awarded for the year – $114 million to a whistleblower on October 22, 2020 and $110 million to a whistleblower on September 15, 2021. These were the two largest awards to date. , the latter bringing the program’s total dollars awarded since its inception to more than $1.1 billion. Additionally, in fiscal year 2021, the SEC received more than 12,200 whistleblowers, an increase of 76% from the prior fiscal year and an increase of more than 300% since the program began.

The annual report also noted changes to the whistleblower rules that came into effect on December 7, 2020. The changes, among other things, increased the efficiency of reviewing and processing reward claims and clarified the actions that are considered “related actions”. “Our summary of these changes can be found here.

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