In Brief

• The Securities and Exchange Commission awarded $300,000 to a whistleblower who performed audit and compliance functions at a company.

The Securities and Exchange Commission has underscored the importance of a timely response to internal reports of wrongdoing by awarding $300,000 to a whistleblower who was an audit and compliance employee. This award sets a new precedent that may cause an increase in the number of audit and compliance employee whistleblowers complaints.

Generally, SEC regulations preclude whistleblower awards to employees whose principal duties involve compliance or internal audit responsibilities. 17 C.F.R. § 240.21F-4(b)(4)(iii)(B). There is, however, an exception to this rule where the employee first reports the alleged violation internally and then waits at least 120 days before reporting it to the SEC. 17 C.F.R. § 240.21F-4(b)(4)(v)(C). The SEC’s whistleblower program rewards high-quality, original information that results in an SEC enforcement action with sanctions exceeding $1 million. Awards can range from 10 percent to 30 percent of the amount recovered by the SEC. The statute is specifically designed to provide employees with a financial incentive to report wrongdoing to the SEC. 

The whistleblower program requires the SEC to protect the confidentiality of whistleblowers and prohibits the disclosure of any information that may directly or indirectly reveal their identity. However, it has been reported that the SEC mistakenly released (and later redacted) a reference number that disclosed the identity of the whistleblower who received this award. That case, captioned SEC v. Phillip J. DeZwirek, Civil Action No. 134-CIV-6135 (S.D.N.Y.), involved an audit and compliance employee who internally reported concerns to appropriate personnel, including a supervisor. The complaint alleged that the company failed to take action within 120 days, and subsequently, the employee reported the same information to the SEC. The SEC initiated an action against DeZwirek, the former chairman and CEO of the company, charging him with insider trading and numerous other securities violations. Ultimately, the SEC awarded the whistleblower $300,000 – 20 percent of the $1.5 million monetary sanctions it collected in the DeZwirek case – on August 29, 2014.  

Sean McKessy, chief of the SEC’s Office of the Whistleblower, said “[i]ndividuals who perform internal audit, compliance, and legal functions for companies are on the front lines in the battle against fraud and corruption. They often are privy to the very kinds of specific, timely, and credible information that can prevent an imminent fraud or stop an ongoing one.” Because audit and compliance employees are viewed this way by the SEC, it is imperative internal complaints be addressed immediately and well before the expiration of the 120-day limitation.