The SEC, Jordan Thomas, and Compensating Whistleblowers
The possibility of being blacklisted by employers and other overt forms of retaliation discouraged whistleblowers from reporting wrongdoings for many years. Turns out, $562 million dollars is a strong incentive for people to come forward. That’s how much the U.S. Securities and Exchange Commission (SEC) has awarded to 106 whistleblowers from 2012-2020 after settlements brought in over $2.7 billion in sanctions. $175 million was awarded in 2020 alone. 2021 numbers are not out yet, but early indicators show some decline in the amount awarded to employees who blow the whistle. Let’s explore why!
Establishing Whistleblower Programs
After the 2008 financial crisis, Congress passed the Dodd-Frank Act and established whistleblower programs at the SEC and the Commodity Futures Trading Commission, which oversees financial instruments known as derivatives. At the SEC, awards were set at between 10% and 30% of the final settlement, with specific factors that determine whether an award gets bigger or smaller (whistleblowers get more if they initially tried to report problems internally; delaying or taking part in the wrongdoing would knock it down).
The SEC’s whistleblower office didn’t open for business until 2012, and it had a slow start. But it gained momentum as tips started to result in successful investigations, proving that protecting and rewarding whistleblowers gets results.
Risk vs. Reward
In a very quiet, closed-door vote on September 23, 2020, the Republican-dominated SEC adopted amendments to lower payments to whistleblowers. The argument was that awards should only be as large as necessary to prompt people to come forward, and excessively high payouts might be better spent on other priorities. To me, this is counterintuitive and seems to simply discourage whistleblowing.
After agonizing about his decision to blow the whistle on his firm by reporting wrongdoing to the SEC along with proof, a whistleblower stood to net roughly $50 million under the agency’s whistleblower program. In fact, he said his decision to ultimately blow the whistle was based on what kind of settlement he thought the government could extract.
“I’m not giving up 10 years’ worth of income to be a good guy,” the adviser said (the SEC never releases the names of people who blow the whistle). “I’ve got to weigh the risk against the reward. And the risk is huge.”
The settlement would be enough to offset any lost earnings in the likely event that his former colleagues figured out he’d turned them in and blacklisted him, even at his pay scale after years of success in financial services.
Jordan Thomas Takes a Stand
There’s a two headed storm coming our way – first, the loosening of financial regulations under the Trump administration included weaker incentives to report fraud. As a result, regulators may have fewer allies as they monitor markets for the kind of bad behavior that can follow such loosening of rules.
With the probability of committing fraud and other violations made easier, and reporting them harder, one of America’s top whistleblower attorneys is moving to stop the SEC. Jordan Thomas, who as a former SEC attorney helped write the rules that set up the whistleblower office in 2011, has just filed a lawsuit alleging that the amendments are illegal.
“Courageous whistleblowers have put their careers and lives on the line to assist the Commission — including wearing FBI wires and smuggling key documents out of China,” the complaint reads. “Now, in the middle of the proverbial football game, the Commission has moved the goal posts on literally hundreds of SEC whistleblowers.”
Thomas acknowledges that his interest in blocking the amendments isn’t altruistic — lawyers who represent whistleblowers operate on a contingency basis, taking usually about a third of their clients’ award. But Thomas argues that the public has a stake as well. When payouts become unpredictable, he said, highly paid executives are more likely to stick with the firms that provide their paychecks and sweep cheating under the rug.
My challenge to you and your company is this: do you encourage or discourage anonymous reporting? Do you reward or retaliate against whistleblowers? Take a stand and reward them and protect them – their report may be the difference in saving you business or having a business study written on its demise.
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J Rollins is the co-founder and CEO of ETHIX360. J is a well known leader and innovator who has served on senior leadership teams ranging in responsibility from Chief Revenue Officer, Chief Marketing Officer, SVP of Product Strategy and Chief Operating Officer.
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