In First of Its Kind Move, SEC Grants Whistle-Blower Award to Ex-Corporate Officer

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By Phyllis Diamond

March 2 — In a first-of-its kind action, the Securities and Exchange Commission awarded between $475,000 and $575,000 to a former corporate official who blew the whistle on a securities fraud after the firm's compliance personnel failed to act.

In a March 2 release, the agency said the whistle-blower provided “original, high-quality information” that led to an enforcement action resulting in more than $1 million in sanctions.

Exception to Exclusion

In the release, the commission noted that officers, directors, and other insiders who learn about a fraud through another employee reporting the misconduct generally aren’t eligible for a whistle-blower award.

However, the commission noted, under an exception to the exclusion, an officer can be eligible for an award if he or she reports the information to the SEC more than 120 days after other responsible compliance personnel had the information and failed to act. “This is the first SEC whistleblower award to an officer under these circumstances.”

Front-Row Seats

“Corporate officers have front-row seats overseeing the activities of their companies, and this particular officer should be commended for stepping up to report a securities law violation when it became apparent that the company’s internal compliance system was not functioning well enough to address it,” SEC Enforcement Director Andrew Ceresney said.

The SEC recapped that awards totaling almost $50 million have been made to 15 whistle-blowers since the agency's whistle-blower program was launched more than three years ago.

Payments are made from an investor protection fund financed entirely through monetary sanctions paid by securities law violators, the commission noted. “[N]o money is taken or withheld from harmed investors to pay whistleblower awards.”

Rigorous Internal Compliance

“Receiving information and cooperation from company insiders is particularly useful in the early detection of securities fraud, and we will continue to leverage whistleblower information to help combat securities law violations and better protect investors and the marketplace,” SEC whistle-blower chief Sean McKessy said.

“Meanwhile, companies must have rigorous internal compliance programs that adequately address and remedy potential violations voiced by their employees as well as by their officers, directors, or other individuals.”

The SEC made its first whistle-blower award in August 2012—$50,000 to a tipster who helped stop a multi-million dollar fraud.

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