Surge in Whistleblower Complaints Should Prompt Compliance Checkups

By Brad Mroski, Ted Stafford, and Lindsay Redman


Compliance Securities and Exchange Commission Whistleblower Online Article

This is an abbreviated version of a more thorough article exclusively for NACD members. If you are an officer or director of a public, private, or nonprofit organization, you can become an NACD member to view the complete article and related resources.

A potent set of circumstances has created a perfect storm in the world of whistleblower complaints. The COVID-19 pandemic caused significant disruption for most companies, and some internal control environments were upended by the sudden and dramatic shifts in operations. At the same time, with large numbers of professionals working remotely, employers lost early visibility into workplace issues, quick access to concerns, and the ability in many cases to conduct prompt and thorough internal investigations.

Meanwhile, the US Securities and Exchange Commission (SEC) recently clarified and amended certain provisions of its successful whistleblower program, further highlighting the need for executives and boards to take a fresh look at their companies’ compliance efforts.

With the risk of whistleblowers approaching regulators increasing, organizations that develop a comprehensive approach to respond to complaints arising internally will find themselves better positioned if they are ultimately faced with a crisis. What’s more, if a complaint does draw regulatory scrutiny, the SEC and other law enforcement agencies have shown a willingness to recognize swift and credible action taken by companies, such as by standing down while allowing internal investigations to run their course, reducing data and document requests, and in some cases offering significantly reduced sanctions when violations are detected.

The SEC’s fiscal year ending Sept. 30, 2020, was one for the record books. The agency received 6,911 whistleblower tips. This was a 33 percent increase over 2019 and a 31 percent increase over 2018, making it the second highest single fiscal year for whistleblower tips (since surpassed by still-to-be completed 2021 results).

The vast majority of those 6,911 tips in 2020 were related to corporate disclosures and financials. These allegations often are among the largest categories of whistleblower tips. To wit: the 1,710 corporate disclosures and financials tips received by the SEC last year represented a whopping 54 percent increase over 2019.

Moreover, two of the 10 largest individual awards in the program’s history came in 2020, and the total awards amounted to $175 million. The number of awarded individuals also hit a record last year, with nearly five times the number of awards in 2019.

This trajectory of SEC whistleblower awards has continued into the current fiscal year that began Oct. 1. Just past the halfway point, whistleblower awards to 46 individuals total almost $250 million, inclusive of the two largest awards ever issued ($114 million and $50 million). With almost six months to go, 2021 is already the largest year in the program’s history in terms of amounts and individuals awarded. This means that nearly $425 million—more than 50 percent of the cumulative amounts ordered since the inception of the whistleblower program—has been awarded in the past 18 months.

Changes to the SEC’s Program

Amendments adopted by the SEC in September were designed to add both transparency and efficiency to the whistleblower program. Among other changes, the SEC announced a new mechanism for whistleblowers with potential awards of under $5 million—which has historically amounted to nearly 75 percent of all whistleblower awards—to qualify for a presumption that they will receive the maximum statutory award amount. Higher awards would be subject to the discretion of the SEC, without a hard or soft cap on the amount.

A second change was to ensure that whistleblowers would not be disadvantaged because of the particular form of action that the SEC or the US Department of Justice chooses to pursue. Under the amendment, whistleblowers would be able to receive awards even based on money collected as a result of deferred and non-prosecution agreements, as well as under settlement agreements entered into outside of a judicial or administrative proceeding to address violations of the securities laws.

To read the full story, and to learn how organizations can prepare for this increased emphasis on reporting, see the May/June 2021 issue of Directorship magazine.

Brad Mroski, a former assistant chief accountant in the SEC’s Division of Enforcement.

Ted Stafford is a director in AlixPartners’ Investigations, Disputes, and Risk practice.

Lindsay Redman is a senior vice president in AlixPartners’ Investigations, Disputes, and Risk practice.