On September 22, 2014, the U.S. Securities and Exchange Commission announced the largest-ever whistleblower award, more than double last year’s record-breaking award.1 According to the Order, the award, which will likely exceed $30 million, could have been even larger if the whistleblower had not waited an “unreasonably” long time to report the violations.2
SEC whistleblower awards may range from 10 percent to 30 percent of the total monetary sanctions collected as the result of a successful SEC enforcement action,3 as prescribed by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank”).4 The Commission considered the factors enumerated in the statute to arrive at the percentage used to calculate the award here, and noted that the lengthy reporting delay caused a downward adjustment of the award amount. The SEC’s Order reasoned that the delay, the length of which was undisclosed, caused investors to “continue to suffer significant monetary injury” that could have been avoided. Some of the violations appear to have occurred prior to the enactment of the whistleblower protection measures, making them more than four years old. A more severe downward adjustment could have been taken, the Commission noted, if the violations had all occurred after the enactment of the Dodd-Frank protections.5
This award is the fourth made by the SEC to a whistleblower living in a foreign country.6 The Commission, in awarding this $30 million bounty, was again undeterred by the foreign residency of the whistleblower. The extraterritorial reach of Dodd-Frank was recently examined by the United States Court of Appeals for the Second Circuit in Liu v. Siemens,7 which found that the application of Dodd-Frank did not apply extraterritorially in a retaliation action where the whistleblowing employee lived outside the U.S., the violating company was a foreign company, and the activity complained of also occurred outside the U.S.8
In this most recent Order, the Commission, applying the analytical framework of Morrison v. Nat’l Austl. Bank, Ltd.,9 stated that there was a sufficient territorial nexus “whenever a claimant’s information leads to the successful enforcement of a covered action brought in the United States, concerning violations of U.S. securities law, by the Commission, a U.S. regulatory agency with enforcement authority for such violations.”10 According to the Commission, it is immaterial that the whistleblower resides overseas or even that the alleged misconduct occurred overseas. Rather, Congress’ intent behind Dodd-Frank was to further the effective enforcement of U.S. securities law violations, regardless of where the violations geographically took place.11
The Commission further explained the extraterritorial application of Dodd-Frank by specifically distinguishing the Second Circuit’s decision, finding that Liu involved the anti-retaliation provision of Dodd-Frank, which is aimed at protecting the employment relationship of the employer and the whistleblower, whereas the current matter involves the whistleblower award provisions aimed at uncovering violations of U.S. securities law. Therefore, where the focus of the enforcement action is uncovering otherwise difficult-to-detect violations of U.S. securities law, rather than protecting a whistleblower’s employment status, the SEC appears to consider the extraterritorial application of Dodd-Frank appropriate.
The Commission’s position in this matter may be part of a continued trend toward an expansive interpretation of the bounty eligibility requirements. The whistleblower protections afforded in Dodd-Frank authorize monetary awards to those who voluntarily provide original information related to securities laws violations if the information leads to an enforcement action resulting in monetary sanctions of more than $1 million.12 The Commission found that the extraterritorial nature of this enforcement action was appropriate, as was the downward adjustment of the award for an “unreasonable” delay. The confidentiality provisions of Dodd-Frank, however, prevent a company from knowing how long an “unreasonable” delay lasts, and under what circumstances the SEC may feel comfortable reaching outside the U.S. border to enforce the law.
1 For details of the prior SEC award, please see the following Sutherland Legal Alert: SEC Awards Whistleblower More Than $14 Million – Largest Award to Date (Oct. 4, 2013), available at http://www.sutherland.com/NewsCommentary/Legal-Alerts/158324/Legal-Alert-SEC-Awards-Whistleblower-More-Than-14-Million-Largest-Award-to-Date.
2 Order Determining Whistleblower Award Claim, Securities Exchange Act of 1934 Proceeding File No. 2014-10 (Sept. 22, 2014) [hereinafter SEC Order], available at http://www.sec.gov/rules/other/2014/34-73174.pdf.
3 15 U.S.C. § 78u-6(b)(1).
4 Pub. L. No. 111-203, 124 Stat. 1376 (2010).
6 SEC Press Release No. 2014-206, SEC Announces Largest-Ever Whistleblower Award (Sept. 22, 2014), available at http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370543011290#.VCLnj_ldXlc.
7 Case No. 13-4385, 2014 WL 3953672 (2d Cir. Aug. 14, 2014).
8 Id. at *7. For additional details regarding the Liu decision, please see the following Sutherland Legal Alert: Second Circuit Rejects Extraterritorial Application of Dodd-Frank’s Whistleblower Anti-Retaliation Provision (Aug. 18, 2014), available at http://www.sutherland.com/NewsCommentary/Legal-Alerts/166087/Legal-Alert-Second-Circuit-Rejects-Extraterritorial-Application-of-Dodd-Franks-Whistleblower-Anti-Retaliation-Provision.
9 561 U.S. 247, 266 (2010).
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