The U.S. Securities and Exchange Commission has shown in many ways that it understands whistleblowers and the value they bring to exposing, stopping, and remediating securities law violations that harm investors.  The SEC has awarded more than $54 million to tipsters since the inception of its whistleblower program, which pays out from 10 percent to 30 percent of the money collected (where sanctions are more than $1 million). 

The commission also knows that whistleblowers face personal and professional risks when exposing wrongdoing and require strong protections.  By law, the SEC keeps information that might reveal the whistleblower’s identity under wraps and continues the anonymity even after the action has concluded and paid out.  The commission goes after companies that retaliate against those reporting malfeasance, and further has punished companies for attempting to prevent employees from reporting with stifling and restrictive confidentiality agreements — a practice its whistleblower office chief, Sean X. McKessey, terms “pretaliation.”

{mosads}Recently, however, the SEC took action that has many in the whistleblower community scratching their heads.  On November 4, 2015, the SEC rewarded a whistleblower for helping it to bring a successful enforcement action, recognizing that the tipster provided details and specifically identified responsible persons, but took pains to point out that the award could have been higher had the person “not hesitated” in coming forward.  The whistleblower apparently did not report the violations either internally or externally until after leaving the offending company, causing a “somewhat limited” delay the SEC deemed “unreasonable.”  In justifying the lower award, the commission cited the fact that the violations continued unabated and the company continued to rack up ill-gotten gains after the whistleblower knew of the facts.
Whistleblowers and their attorneys know that in reality, it often takes time for a person to piece together the fraud, understand the options to expose it, and make the sometimes life-changing decision to report.  A potential whistleblower cannot always articulate exactly why he or she did not come forward right away: all of the disparate facts might be known but the scheme not figured out or the extent and harmful results might not be immediately realized.  With the natural instinct to belong and develop in the workplace or to maintain otherwise decent employment, the whistleblower might at first go along with what appears to be a longstanding known practice or to accept the company’s explanation for the misbehavior.  Even once the suspicions of wrongdoing mature into certainty, it might take additional time to research and learn about internal and external reporting options and their possible repercussions.  As in the case of the November 4th award, many will consider whether and when they can secure new employment, or in some cases find a new line of business altogether, before putting themselves at risk.

In its explanation of the award reduction, the SEC rejected the whistleblower’s argument that forcing earlier reporting brings higher personal and professional risks and that tips made in haste can have insufficient specificity or quality.  The SEC insisted that the delay was too long given the incentives and protections the whistleblower program affords, and that in this case, all of the delay occurred after the creation of the program in 2011.  The director of the SEC’s Division of Enforcement, Andrew Ceresney, emphasized that the commission wants to encourage corporate insiders who discover violations to come forward “without delay in order to prevent misconduct from continuing unabated while investors suffer more harm.”

More than seeking to encourage prompt reporting and an immediate stop to ongoing harmful violations, the commission seems concerned that a whistleblower will deliberately delay in reporting while the violations and penalties add up, leading to potentially a higher award.  But whistleblower attorneys know that this opportunistic behavior in whistleblowers is extremely rare.  Overwhelmingly, whistleblowers are deeply troubled by the harmful behavior and that the company is getting by with it (often while spouting hypocritical counterstatements).  Whistleblowers feel compelled to try to stop it — without unnecessary harm to themselves if possible – and if asked most will say that the award is the last thing on their minds.

The SEC may come to understand, in time, that penalizing whistleblowers for delay in coming forward is unnecessary and sounds a jarring note in its otherwise exemplary whistleblower program.  Until then, a potential whistleblower, in confidential consultation with his or her attorney, will need to decide the best course of action for the situation at hand.  For example, a person might provide a tip to the SEC anonymously through counsel.  Or, if investor harm is ongoing but a person needs more time to gather information to provide the highest quality tip, the whistleblower may decide to submit immediate abbreviated information and supplement their submission as soon as possible thereafter. 

Every situation will vary, but unless and until the SEC softens its position on delay in reporting, if a person knows of company wrongdoing that is continuing to cause investor harm, if possible it is best not to put off reporting to the SEC.

Moore is an attorney in the San Francisco office of Constantine Cannon LLP.