In the First Application of the Whistleblower “Safe Harbor” Rule, SEC Awards More Than $2.2 Million to Whistleblower Who First Reported Information to Another Federal Agency

In the First Application of the Whistleblower “Safe Harbor” Rule, SEC Awards More Than $2.2 Million to Whistleblower Who First Reported Information to Another Federal Agency

May 15, 2018

On April 5, 2018, the SEC announced an award of more than $2.2 million to a former company insider who voluntarily provided critical information to another federal agency before reporting it to the SEC, and whose report led to a significant SEC enforcement action. The text of the SEC Whistleblower Award Order may be found here. The SEC’s award is the first of its kind paid under the “safe harbor” provision of Exchange Act Rule 21F-4(b)(7).

The safe harbor provision of the Rule provides a 120-day grace period for reporting to the SEC, offering assurance to whistleblowers who report information to other federal agencies before submitting the same information to the SEC. For purposes of evaluating award applications in such cases, the SEC will now treat the information as though it had also been submitted to the SEC on the date of the original disclosure to the other federal agency. This is important because ordinarily, in order to be treated as a whistleblower under 17 C.F.R. § 240.21F-4, an individual must voluntarily report original information to the SEC. Under the safe harbor provision, however, a whistleblower who first reports to a federal agency other than the SEC is not disqualified from SEC whistleblower award eligibility, as long as he or she reports the same information to the SEC within 120 days.

Specifically, Exchange Act Rule 21F- 4(b)(7) provides in pertinent part that:

If you provide information to … any other authority of the federal government …, and you, within 120 days, submit the same information to the Commission pursuant to §240.21F-9 of this chapter, as you must do in order for you to be eligible to be considered for an award, then, for purposes of evaluating your claim to an award …, the Commission will consider that you provided [the] information as of the date of your original disclosure, report or submission to one of these other authorities or persons.

Rule 21F-4(b)(7).

Thus, the other agency’s use of the information in a referral that prompts the SEC to open an investigation is credited to the whistleblower for purposes of making an award determination.

In this case, after the whistleblower reported the information to another federal agency, the agency referred the matter to the SEC, which then opened an investigation. Within 120 days of the initial report, the whistleblower provided the same information to the SEC. Even though the whistleblower’s SEC report came after the SEC had already opened its investigation, which would typically preclude the reporter from being treated as a whistleblower, the SEC treated the report as though it had been made directly to the SEC at the same time the whistleblower provided the information to the other agency. 

In an SEC press release announcing the award, Jane Norberg, Chief of the SEC’s Office of the Whistleblower, stated that “[w]histleblowers, especially non-lawyers, may not always know where to report, or may report to multiple agencies. This award shows that whistleblowers can still receive an award if they first report to another agency, as long as they also report their information to the SEC within the 120-day safe harbor period and their information otherwise meets the eligibility criteria for an award.”

Norberg’s statement calls to mind the related situation of would-be whistleblowers who report internally within their companies, but fail to report to the SEC.  But as we discussed here, the Court recently held in Digital Realty Trust v. Somers that a would-be whistleblower who reports internally at a company without reporting to the SEC is ineligible for the anti-retaliation protections of the Dodd-Frank Act.

At least in the context of a report to another federal agency, however, the safe harbor provision provides would-be whistleblowers with incentive and protection. Awards like the one described above are likely to attract the attention of company insiders (and, at a minimum, the plaintiff whistleblower bar), further encouraging the reporting of alleged misconduct to the government.

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