SEC Whistleblower Program

In the wake of the 2008 financial crisis, which was caused in large part by the misdeeds of Wall Street banks that securitized and sold faulty mortgaged-backed securities, Congress created the SEC Whistleblower Program in section 922 of the Dodd-Frank Act.  The program allows whistleblowers to submit tips of suspected violations of securities laws confidentially to the SEC. If the SEC recovers more than $1 million based on original information of the whistleblower (i.e., information derived from the independent knowledge of the whistleblower and not already known to the SEC), the whistleblower is entitled to between 10 percent to 30 percent of the SEC’s recovery.

Because of the far-reaching scope of the securities laws, many types of misconduct can lead to potential whistleblower awards, including:

  • Misrepresentations or omissions in offering documents, marketing materials, or financial or other public reports;
  • Fraud in connection with a securities offering, such as Ponzi or pyramid schemes;
  • Illegal trading practices, including insider trading, after-hours trading, or algorithmic trading;
  • Registration violations, including offering unregistered securities;
  • Financial advisor misconduct, including churning/excessive trading, and abuse of discretion in discretionary trading; and
  • Paying bribes to foreign officials for the purpose of getting business.

There are some key differences between the SEC Whistleblower Program and the False Claims Act.  They are as follows:

  • SEC Whistleblower claims do not require proof of fraud against the government, only proof of a violation of securities laws.
  • Unlike the False Claims Act, there is no private right of action under the SEC Whistleblower Program.  If the SEC decides not to pursue a claim, the claim is terminated.
  • SEC whistleblower claims are not filed in court, they are only filed with the SEC.

All tips submitted to the SEC are confidential.  Tips can also be submitted anonymously, in which case the tip must be made through an attorney.  Importantly, the whistleblower must submit the tip in the precise manner mandated by the SEC, or the whistleblower may not be eligible for recovery.  Therefore, it is important that all tips submitted to the SEC be done through a qualified whistleblower attorney.  

Read the full text of section 922 of the Dodd-Frank Act (codified at 15 U.S.C. § 78u-6).