On this episode of inSecurities, Kurt and Chris discuss whistleblower rules and the explosion of tips from whistleblowers to the SEC and other government agencies in recent years. Joining them on this episode is Matt Stock, a Washington, D.C. attorney who represents whistleblowers before the SEC and other regulatory agencies.



Featured in this Episode

Matthew Stock

Matthew Stock is the Director of the Whistleblower Rewards Practice at Zuckerman Law. He is an attorney, Certified Public Accountant, Certified Fraud Examiner and former KPMG external auditor. Mr. Stock has audited a broad range of industries, both domestically and internationally, including large public companies and financial institutions. As an auditor, Mr. Stock developed an expertise in financial statement analysis and fraud recognition.

At Zuckerman Law, Mr. Stock leverages his experience as an attorney, CPA, CFE and external auditor to assist whistleblowers, and investigate and disclose complex financial frauds to the government. His practice focuses on representing whistleblowers in rewards cases at the SEC, CFTC, DOJ and IRS. In addition, Mr. Stock assists whistleblowers in Sarbanes-Oxley whistleblower retaliation cases, analyzing a wide range of accounting issues, including financial statement fraud, inadequate internal controls, and issuer disclosure violations.




[00:00:00.33] SPEAKER 1: This program is brought to you by the Practising Law Institute, a nonprofit learning organization dedicated to keeping attorneys, professionals, and accountants at the forefront of knowledge and expertise.  

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[00:00:15.00] KURT WOLFE: In the 1999 movie, The Informant, a 60 Minutes host asked the reluctant whistleblower Jeffrey Wigand, played by Russell Crowe, "And you wish you hadn't come forward? You wish you hadn't blown the whistle?" Wigand responds, "Yeah. At times, I wish I hadn't done it. There were times I felt compelled to do it. If you ask me, would I do it again, do I think it's worth it? Yeah, I think it's worth it."  

[00:00:42.90] Whistleblowers face numerous challenges. But for some, it is worth it. So what incentivizes people to blow the whistle? We'll discuss that today on InSecurities.  

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[00:01:04.46] CHRIS EKIMOFF: Hello and welcome to the InSecurities Podcast, brought to you by PLI, offering the practitioner's perspective on securities, regulatory enforcement, and fraud cases you should be following. Today, we'll be talking about the whistleblower rules and the explosion of tips from whistleblowers to the SEC and other government agencies in recent years. We're fortunate to have with us on this episode Matt Stock, an attorney at the Zuckerman Law Firm here in Washington DC, who represents whistleblowers before the SEC and other regulatory agencies.  

[00:01:36.38] KURT WOLFE: That's right, Chris. We're happy to have Matt with us. Matt is the director of the Whistleblower Rewards practice at Zuckerman Law. He's an attorney, a certified public accountant, certified fraud examiner, and a former KPMG external auditor. Matt leverages his experience as an attorney, CPA, CFE, and auditor to help whistleblowers, or potential whistleblowers, investigate and disclose complex financial frauds to the SEC, CFTC, DOJ, and IRS.  

[00:02:05.03] Matt also from time to time assists whistleblowers in Sarbanes-Oxley whistleblower retaliation cases. Analyzing a wide range of accounting issues, including financial statement fraud, inadequate internal controls, and issuer disclosure violations. I'll stop there. But if you want to know more about Matt, you can find him on the Zuckerman Law website at www.Zuckermanlaw.com or on Twitter, where I met Matt. He is @Matthew_Stock_. Welcome to the show, Matt.  

[00:02:39.20] MATT STOCK: Pleasure to be here.  

[00:02:40.97] CHRIS EKIMOFF: On today's episode, we're going to focus on the process of preparing and providing tips to the SEC. And-- this is kind of where the rubber meets the road for a lot of folks-- the procedure to obtain an award or sometimes called a "bounty payment" from the SEC in reporting that whistleblower matter. Let's get started.  

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[00:03:07.09] KURT WOLFE: All right, Chris, we've got a bunch of questions lined up for Matt. But I want to take a minute to orient our listeners to the SEC's whistleblower program. The SEC whistleblower program was created by the Dodd-Frank Wall Street Reform and Protection Act, commonly known as Dodd-Frank.  

[00:03:22.23] The rules of the program are a bit thorny. But to summarize, the SEC whistleblower program incentivizes whistleblowers to report specific, timely, and credible information about potential violations of the federal securities laws. Under the program, a whistleblower may be eligible for an award if he or she provides a tip that leads to a successful SEC enforcement action in which the SEC orders more than $1 million in disgorgement or sanctions. In such a case, the whistleblower may be entitled to receive 10% to 30% of the total amount collected. Whistleblowers are not required to report internally to be eligible for an award from the SEC, but we'll talk a little bit more about that later.  

[00:04:04.84] CHRIS EKIMOFF: We'll talk a lot a bit more about that later.  

[00:04:07.57] KURT WOLFE: In addition to establishing an awards program, Dodd-Frank also prohibits employers from retaliating against whistleblowers and gives the SEC authority to bring enforcement actions in certain circumstances against employers that retaliate against whistleblower employees-- another topic we're going to pick up on later. To give a sense of the scale and perhaps success of the program, let me throw out a few fun facts about the SEC's whistleblower program.  

[00:04:33.85] First, the SEC's office of the whistleblower receives thousands of tips every year. In the program's first full year-- that was fiscal year 2012-- the office received 3,001 tips. Last year, in fiscal year 2019, the whistleblower office received more than 5,200 tips. And since the office opened, it has received more than 33,000 tips.  

[00:05:01.39] Last year, corporate disclosures and offering frauds were the most frequently reported securities laws violations, amounting to roughly one third of the total tips received by the SEC's whistleblower office. And this has been consistent over the years of the program. Last fun fact-- and this is really probably the most fun fact-- the SEC has awarded approximately $387 million to 72 individuals since issuing its first award in 2012. To date, the highest awards to individuals include a $50 million award in March 2018, a $39 million award in September 2018, a $37 million award in March 2019, and a $33 million award in March 2018.  

[00:05:48.91] And you have to keep going for a while before you get out of the tens of millions of dollars. But I have to say, over the span of the program, awards are typically in the hundreds of thousands of dollars. Still, a potentially profitable business.  

[00:06:02.80] CHRIS EKIMOFF: And before we get too excited about it, that's, again, 72 whistleblowers received payments out of the-- what was it-- 33,000 tips that have been received since the program started.  

[00:06:11.68] KURT WOLFE: Correct.  

[00:06:11.96] CHRIS EKIMOFF: So we'll get into a lot of the details there. But I don't want all of you run out and calling some folks to see what kind of whistleblower moves you can make this week.  

[00:06:19.17] KURT WOLFE: Now, I want to be clear, the SEC is not the only agency that has a whistleblower program. Other agencies have their own programs-- notably the CFTC has a whistleblower program that was also created by Dodd-Frank and is functionally equivalent to the SEC's program. One of my favorite anecdotes about the CFTC's program is that when they initially released their rules, they clearly copied and pasted from the SEC, because they in fact referred to the SEC in their own rules.  

[00:06:48.46] But the CFTC's program has been much less popular for whistleblowers. So for example, last year, the CFTC received 455 tips, and their high watermark was 760 tips in 2018. Again, compare that to the more than 5,000 tips that the SEC got just last year. And to date, the CFTC has warded approximately $100 million in whistleblower awards. Again, compared to more than $387 million dollars doled out by the SEC.  

[00:07:23.21] I know that Matt represents whistleblowers in front of a bunch of different agencies. But for purposes of the conversation today, we're just going to focus on the SEC. So, Matt, that was a lot, but are you ready to get started?  

[00:07:35.22] MATT STOCK: I am.  

[00:07:36.20] CHRIS EKIMOFF: Excellent. Let's talk a little bit about your practice, Matt. In terms of whistleblower services and dealing with folks who are looking at bringing information forward to the SEC, what kind of a practice type of terms do you offer?  

[00:07:48.92] MATT STOCK: Thank you for bringing up that question. I think it's very important for whistleblowers to understand what roles attorneys can play in whistleblower rewards claims. Many potential whistleblowers assume that the process is as simple as submitting a tip to the SEC and waiting for a check in the mail. And in reality, there's countless hurdles to jump and walls to run through to obtain an award. And as you mentioned, just to put this in perspective, of the 33,400 tips submitted, only 72 whistleblowers received an award to date.  

[00:08:22.91] Now, we do expect the SEC to issue a significant amount of awards in the coming years as the program continues to mature, but it's just important to understand that not all claims are a slam dunk. So the short answer to your question is, we help whistleblowers navigate the rules of the SEC whistleblower program, and we work to maximize the likelihood that they not only obtain but maximize the amount of any future whistleblower award.  

[00:08:50.63] So there's a lot of aspects to this. But the first would be, helping a whistleblower assess the case. And in doing that, we analyze countless factors. But just to give a few examples-- for whistleblowers, the most important, or very important aspect is having a material violation.  

[00:09:08.72] So like we mentioned, thousands of tips, and the SEC has limited resources. They can only investigate so many tips. So we look to analyze the facts and hone in on the specific material violations that the SEC would want to bring a successful-- or would be able to bring a successful enforcement action for, resulting in total monetary sanctions in excess of a million dollars.  

[00:09:34.73] Another thing we do to assess the cases is look at the evidence involved and determine what type of evidence the whistleblowers should submit to the SEC, and also what evidence the whistleblower should absolutely not submit to the SEC. And a lot of times, in speaking with whistleblowers, they may be a bit shocked in terms of what would not want to go to the SEC. And that could perhaps hinder the progress of an investigation or the prospects of at least opening an investigation.  

[00:10:05.63] Another important thing we do to assess the case is determine eligibility. That's obviously a big part of this program. So is the whistleblower eligible to receive an award, or do they need to take certain steps or maybe fall under an exception to the rule to be eligible for an award? Another aspect of the SEC whistleblower program is that whistleblowers can obtain awards based off a successful related actions. So a place where we see this a lot is in FCPA enforcement actions-- that's the Foreign Corrupt Practices Act-- where the SEC will work with the DOJ to bring both criminal and civil enforcement actions against entities that violate the FCPA.  

[00:10:47.24] And in the event that the SEC obtains-- or has a successful enforcement action resulting in monetary sanctions in excess of a million dollars, and the DOJ has a successful enforcement as well, you combine those recoveries to determine that the total pot that the whistleblower could have a potential 10% to 30% award out of. And finally, for assessing cases, we also want to know whether or not the whistleblower is looking to remain anonymous. And thankfully, the SEC whistleblower program does allow whistleblowers to report anonymously if represented by counsel.  

[00:11:24.36] And that's not available in all whistleblower reward programs. For example, the IRS whistleblower reward program does not allow that. So I think that's a very important development, but it's also a very critical aspect of a claim on how to approach it going forward with what information do you tell to the SEC in terms of-- and also trying to protect your client's confidentiality.  

[00:11:46.92] And then next aspect is to help a whistleblower work up a case. Again, there's a lot of things that we can do to work up a case by-- for starters, we'll prepare an effective submission, which is known as a Form TCR-- Tip Complaint or Referral that's submitted to the SEC. And in short, the TCR should provide the SEC with a clear road map for bringing a successful enforcement action.  

[00:12:13.46] And besides submitting tips to the SEC, we also file a lot of additional submissions, especially if there's an ongoing scheme or if there's extensive analysis of the violation that's required. Or maybe there's simply too much information to submit in the first TCR, so you'll supplement it in additional TCRS. Another thing that attorneys can do is represent whistleblowers in interviews with the SEC, as well as work with the enforcement staff throughout the entire investigation. And finally, at the end of this process, if our client's tip leads to a successful enforcement action-- more than one million-- then we'll apply for an award for the client, emphasizing all of the factors that could increase the amount of an award to near 30%, instead of on the lower end of 10%.  

[00:13:01.93] KURT WOLFE: It's a really helpful overview, Matt. Thank you. And I'm pleased to see that you've been playing along with our acronym bingo game at home. I think I caught an FCPA, a DOJ, a TCR, and probably some other things in there as well.  

[00:13:13.87] CHRIS EKIMOFF: Add it to our list for future episodes.  

[00:13:16.06] KURT WOLFE: Just out of curiosity, I want to follow up on a point you made sort of in the middle, which is about information that a whistleblower would not submit. I mean, can you give me an example of what that might be?  

[00:13:26.60] MATT STOCK: Sure. For example, whistleblowers should not be walking out of companies with a flash drive of data and submitting these things to the SEC. The SEC does not want all evidence. They want evidence that is specific to the violation. And so if there is just the document dump, it's not helpful, one. Two, the whistleblower can open up themselves to liability, and three, it may contain confidential company information. There could be attorney-client privileged emails in these files. And so it's not necessarily helpful in all circumstances to submit more information. Sometimes less is better.  

[00:14:07.64] CHRIS EKIMOFF: That's great to know. And thanks for clarifying there.  

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[00:14:13.76] It sounds like a lot of the work that you and your firm do, Matt, is on the evaluation side. But how does a whistleblower or a potential whistleblower even know to reach out to you? How do you find that these referrals or these ideas are coming to you so that you can help these folks evaluate their claims or potential tips here?  

[00:14:28.80] MATT STOCK: Sure. Most whistleblowers will find us online at our website, Zuckermanlaw.com. We also get referrals from attorneys and former clients. But we also try to frequently publish articles about the SEC whistleblower program or developments in the SEC whistleblower program, in business, accounting, legal journals. Essentially, having a good online presence is just very important in this area due to the popularity of the program, not just in the United States, but internationally as well.  

[00:14:59.93] To date, the SEC has-- like you mentioned, Kurt, more than 33,400 tips, which includes tips from whistleblowers in 123 countries outside of the United States.  

[00:15:11.89] CHRIS EKIMOFF: I just did a quick little math here of that year that had over 5,000 tips. That's over 14 a day. So, Matt, your phone must be blowing up on a daily basis.  

[00:15:21.21] MATT STOCK: Yes, and at all times.  

[00:15:22.58] CHRIS EKIMOFF: That's right. Regardless of work or otherwise. That's good to know.  

[00:15:26.09] KURT WOLFE: Yeah. We're going to come back to this concept of how to advertise your whistleblower representation practice later in the lightning round. So stay tuned for that. But, Matt, I think it's a good point in terms of just the sheer volume, including where whistleblowers come from. And Chris is right. We're talking about 14 a day to the SEC. That must only be some fraction of how many whistleblower attorneys like yourself are fielding.  

[00:15:53.30] So when you're thinking about whether or not to take on a representation, what do you think makes a strong whistleblower? Or stated differently, what is likely to make a whistleblower successful?  

[00:16:06.62] MATT STOCK: Sure. And for starters, there's no requirement that a whistleblower is an employee or a company insider to be eligible for an award. But if you look at the SEC whistleblower program's most recent annual report, approximately 69% of the award recipients to date were either current or former company insiders of the entity that they reported to the SEC. So in other words, most successful SEC whistleblowers provide original information about a company where they're an insider or maybe only a few people in that company would have that information.  

[00:16:41.60] The next important thing-- and I'll probably stress this throughout the entire podcast-- but there needs to be a material violation. The SEC receives thousands of tips each year. They have limited resources to investigate a tip. So the tips need to be significant in order to get the SEC's attention. If potential whistleblowers are curious, is my case strong enough, potentially they can look at similar SEC enforcement actions online or reach out to an attorney to discuss.  

[00:17:12.19] And a final factor that I like to consider when assessing a case is whether or not the whistleblower fulfills a lot of the factors that the SEC considers when determining an award amount of between 10% and 30%. So there's positive factors and there's negative factors, which is where the SEC falls in when they make a specific award recommendation.  

[00:17:34.63] So for example, a whistleblower could receive an increased award amount based off the significance of their tip. Is the information reliable? Is the information complete? Another thing that can increase an award is the extent of a whistleblower's assistance. So did the whistleblower and their counsel provide ongoing, extensive, timely assistance to the SEC in their investigation?  

[00:17:58.16] A third would be the SEC's interest in deterring the specific violations. Is the subject matter of the TCR an SEC priority? Does it deal with retail investors, for example, most recently? And finally, if the whistleblower participates in a company's internal compliance and reporting systems, they can also increase their award.  

[00:18:17.58] On the flip side, there are factors, that can decrease the size of a whistleblower's award. For example, if the whistleblower participated or was culpable for the violation, that is a decrease in award percentage. Unreasonable delay in reporting is a frequent factor that will decrease in award percentage. And finally, if a whistleblower interferes with the company's internal compliance and reporting systems.  

[00:18:42.78] KURT WOLFE: So you've mentioned a couple times, Matt, this concept that the whistleblower needs to come to you with or report to the SEC a, quote, material violation. And I know that you're a CPA. Chris is a CPA. The concept of materiality is sort of loaded, and I can see Chris jittering in his chair at the thought of it.  

[00:19:05.70] So when you say "a material violation," can you tell me, what are you thinking about? Is it something that's programmatically important to the SEC enforcement division, or is it something more about the scale of the problem?  

[00:19:21.86] MATT STOCK: I guess for starters, in a perfect world, all violations, there would be an SEC attorney looking at it. They'd approach the company, and they'd fix the violation. That would be great.  

[00:19:32.39] In the system that we're working in, they have thousands of tips and limited resources. So a good example, I'd say, of a public filer would be a publicly-traded company would be-- let's say, accounting fraud, for example-- would the accounting fraud be material enough that the company would have to restate their financials?  

[00:19:55.07] Another example could be if it's a Ponzi scheme. We've seen a significant amount of cryptocurrency cases recently. And due to the extent of how many there are, it may just be a person who raised a fraudulent amount of $200 in their dorm room somewhere. These are not the cases that the SEC would be looking at. They need to be material, I guess in respects of also monetary and impact. Would an investor care about if it were discovered? Would it be a big issue? Would it require a restatement?  

[00:20:31.94] CHRIS EKIMOFF: It's kind of a great way to talk about some of the materiality issues. Obviously everything, I think, Matt, you'd agree, is facts and circumstance-based. But then that million dollar threshold compared to someone we might have known in college who walked away with $200 is a pretty clear line.  

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[00:20:49.79] One of the questions we kind of deal with here, you brought up a little bit, the anonymity portion of a potential whistleblower's thought process. Is there a material difference to the success of a tip in a potential payment or reward based on the individual being anonymous or not? Is there a change in the way that the SEC or other regulatory agencies will respond to those types of complaints, knowing that someone's name's attached to it, versus having legal counsel kind of protect them?  

[00:21:17.27] MATT STOCK: In terms of whether or not will impact in a word percentage, that's not one of the factors that the SEC states that it could consider. So I don't see it having any impact on the 10% to 30% determination.  

[00:21:30.65] Each whistleblower needs to understand the pros and cons of submitting a tip anonymously. For example, if you are a high level at a company and you know that the SEC is receiving thousands of tips each year and they only have limited resources, potentially your name on the complaint could be helpful. They'll say, this person's at a high level. They have a lot of credibility. They know exactly what they're talking about. And if we bring in an enforcement action here, open an investigation, it's very likely that we will have a successful enforcement action.  

[00:22:04.19] On the flip side, there's obviously risks involved with disclosing your name. And the SEC protects the whistleblower's confidentiality. However, just letting one more person know that's not your attorney your name in the course of the process obviously poses risks to the whistleblower if, for whatever reason, the report ever got out.  

[00:22:25.25] CHRIS EKIMOFF: That's great to know, and thanks for clearing that up for me. As we talk about the anonymous whistleblowers or where they are at a company, sometimes I understand that whistleblowers actually may have partaken in some of the conduct that ends up being reported as a potential securities violation. The term "culpable whistleblowers" is often represented in articles about this. What circumstances is that person under regarding their participation in the alleged conduct? Does that impact their ability to collect an award? Should they consider different characteristics when they're pursuing a claim, knowing that they kind of partook in the issues that they're going to be reporting?  

[00:23:02.49] MATT STOCK: So there's a few things on this question. But for starters, culpable whistleblowers can be eligible for awards. And in fact, the SEC has had speeches where they spoke about the importance of receiving information from these individuals. Culpable insiders frequently have first hand knowledge of the misconduct. They can provide the SEC with valuable information and assistance to essentially stop the fraudulent seems quicker than maybe somebody who is situated differently.  

[00:23:30.90] However, there's a few important items to note here. First, the SEC will not issue an award to a whistleblower who is convicted of a criminal violation in relation to an action for which they would otherwise be eligible for an award. So if you report to the SEC, they bring a successful enforcement action, but you are criminally prosecuted for your conduct in that action, then you cannot receive an award. Also, the SEC whistleblower program does not provide amnesty to whistleblowers who provide information.  

[00:24:04.01] Another consideration is that culpable whistleblowers cannot benefit from their own misconduct. So specifically, the SEC will not include any monetary sanctions in the calculation of an award if liability is based substantially on the conduct of the whistleblower. And finally, and like I already mentioned, if a whistleblower is culpable, that's one of the factors that the SEC considers when making an award determination of between 10% and 30%. So if a whistleblower is able to receive an award-- a culpable whistleblower is able to receive an award-- their award percentage would be reduced because of that.  

[00:24:41.09] CHRIS EKIMOFF: I think that's a very important point, knowing that people should not be incentivized to go out and create an issue and then report it. The SEC is pretty cognizant of that. So good to see that worked in there.  

[00:24:50.51] KURT WOLFE: But it feels like there's a pretty distinct line between involvement and being the mastermind here, and the mastermind isn't going to get a payout at the end of the day.  

[00:25:00.96] CHRIS EKIMOFF: That's right. And one of the other issues I know that comes up related to whistleblowers is the professional services providers who have access to information that may be at the forefront of some of these issues. As a fellow CPA, Matt, obviously those people related to the financial reporting of a company or an entity are going to know about those things first, as well as attorneys like Kurt and others may be party to conversations with the board of directors or key personnel at a company to know, we may have a securities violation in our hand. What types of eligibility requirements, issues, ways of thinking should service providers approach their thoughts about whistleblowing?  

[00:25:38.94] MATT STOCK: And first, I want to address just lawyers specifically. The question of whether or not they can get a whistleblower award is a very thorny and complex issue. My short answer to that is, there are very limited circumstances that allow it. In most situations, state ethics rules would prohibit disclosing client information, and the SEC's rules do nothing to change that. So for lawyers, yes, but in very rare circumstance.  

[00:26:06.75] Now, as for accountants or other individuals whose principal duties involve maybe compliance or internal audit, the general rule is that they're not eligible for awards unless an exception applies. And there are three exceptions in the SEC whistleblower rules. The first being is, if they have a reasonable basis to believe that disclosure to the SEC is necessary to prevent the entity from engaging in conduct that's likely to cause substantial injury to the financial interest or property of the entity or investors.  

[00:26:41.15] And obviously, that's a little bit gray. So you could submit and then make a good argument to the SEC that you should be eligible for an award because of this circumstance-- because of this exception, but obviously, that's gray. The second exception is if they have a reasonable basis to believe the entity is engaging in conduct that will impede an investigation of the misconduct. That's also a little bit gray, because you would have to have a lot of information in terms of how the entity is going about impeding an investigation. Perhaps they're shredding papers everywhere or something of that nature. But again, that's a little bit gray exception.  

[00:27:18.77] The most concrete exception is if at least 120 days have passed since either they properly disclosed the information internally-- for example, to their supervisor-- or if they obtained information under circumstances indicating that the entities-- either the supervisor or the entities officers-- already knew about the information. So those are the three exceptions.  

[00:27:43.07] And then I want to speak just briefly about external auditors, because I assume most people would think that external auditors of issues could never be eligible for whistleblower awards. But in some circumstances, they actually can become eligible for awards. And the eligibility analysis is particularly complicated, so I won't go through the entire analysis at the risk of putting everyone to sleep. But it should be known that external auditors do qualify-- or can qualify for SEC whistleblower awards in certain circumstances.  

[00:28:15.84] CHRIS EKIMOFF: That's good to know.  

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[00:28:21.49] KURT WOLFE: All right. So I think at this point, we have a pretty good lay of the land in terms of how whistleblowers find you, how you can help them, and the types of things that would help a whistleblower present a strong case to the SEC staff. Let's pivot a little bit. And what I'd like to focus on are things that you've seen change at the SEC's office of the whistleblower since the program took off in 2011.  

[00:28:48.89] And let me give you an example to start, although I'd be happy to hear other examples you might have. But there was a lot of conversation a couple of years ago about a case called Digital Realty versus Summers, which ultimately found its way to the United States Supreme Court. For those who aren't familiar with the case, in Digital Realty, SCOTUS held that the anti-retaliation provision in Dodd-Frank is available only to individuals who provide whistleblower tips to the SEC.  

[00:29:18.56] The whistleblower protection provision is not available to an internal whistleblower. That is, someone who reports only to a supervisor or using an anonymous complaints hotline internally. And as such, an employee who suffers workplace retaliation after reporting suspected misconduct internally but does not make a report to the SEC is not eligible for whistleblower protections.  

[00:29:43.73] The ruling effectively overturned an SEC interpretive release that said the anti-retaliation provision does apply to internal whistleblowers. This caused a lot of people in the market to get upset. Compliance professionals and whistleblower advocates insisted that the ruling would disincentivize whistleblowers to report possible violations internally. It would deprive companies of the opportunity to investigate or voluntarily disclose potential violations.  

[00:30:10.89] And shortly after the ruling came down, I actually wrote an article, where I argued that the data don't support the contention that this was going to disincentivize whistleblowers from reporting internally. Essentially what I said was, the data didn't show that there was going to be a sudden flood of whistleblowers to the SEC who effectively went around internal reporting mechanisms.  

[00:30:36.75] We're coming up on the two-year anniversary of the Digital Realty decision. So Matt, what are you seeing-- has it changed the landscape. And importantly--  

[00:30:46.54] CHRIS EKIMOFF: Very importantly.  

[00:30:47.70] KURT WOLFE: Did I get this one right?  

[00:30:48.87] CHRIS EKIMOFF: Yeah. How right was Kurt in his prognostication two years ago?  

[00:30:53.19] MATT STOCK: That's a tough question, where I should already have the answer that's aligned with your answer. But you don't know in terms of the increase in whistleblower tips whether Digital Realty caused the increase. Maybe there was just a correlation. There has been an increase year after year.  

[00:31:13.41] But, I guess, as you pointed out, the whistleblowers essentially had to file tips with the SEC if they wanted protection under the Dodd-Frank Act's whistleblower protection. Other laws protect internal disclosures-- for example, Sarbanes-Oxley Act, or Sox, protects internal disclosures but publicly-traded companies. But the remedies are a bit different than what's offered under Dodd-Frank.  

[00:31:39.48] So for example, Dodd-Frank offers some advantages like double payback. There's a longer statute of limitations, and there's just other advantages generally. So we did see an increase in tips to the SEC after Digital Realty, but it's really difficult to see whether or not the Supreme Court's decision was the reason for that increase. And also, we may go into this a bit later, but there's likely to be a legislative response to this soon.  

[00:32:07.47] CHRIS EKIMOFF: Man, I really wish you could have stuck it to Kurt there and tell him that he was wrong. But--  

[00:32:10.50] KURT WOLFE: What I heard was that I was right.  

[00:32:12.96] CHRIS EKIMOFF: Maybe I heard that you were not wrong and we'll leave it there. I understand Kurt's reference to the market's reaction. I mean, makes sense logically from a degree. But there's a part of me that also thinks that the whole tipping atmosphere under the whistleblower guidelines might break down into types of buckets where you've got those one-off individuals who have stumbled upon something internally and want to do the right thing. But knowing that there's 33,000 tips that have happened, I could potentially see that there's a handful of-- I don't know the right term-- but "super users" of the program who feel that any public disclosure or any financial statement that they read potentially has an issue in it, and they want to be the first ones to get to report it to the SEC.  

[00:32:53.97] Am I on the right track there? Does it kind of break down into that type of super user versus one-off category, or is it a little bit more opaque than that?  

[00:33:01.02] MATT STOCK: No. You hit the nail on the head. The SEC whistleblower program is having issues right now with the claims review process, specifically for-- or at least that is one of the reasons for the delay in the SEC processing claim. So like I mentioned, at the end of the process that the SEC brings a successful enforcement action of over $1 million. Whistleblowers can apply for an award.  

[00:33:24.73] And that award is analyzed by the SEC's claims review staff to see whether or not the whistleblower is eligible, what percentage the whistleblower is entitled to. And you lay out all the reasons to the claims review staff.  

[00:33:38.52] In addition to whistleblowers who lay out their reasons, so do the super users, as you say. Where the SEC continues to get a significant amount of applications for awards from people who just otherwise would not be eligible. And the problem with that is that whistleblowers are able to appeal the SEC's final determination on whether or not they are entitled to an award to the US appellate court.  

[00:34:08.46] So they have to develop a slight record for hundreds of tips that just have no absolute use at the program, or they never submitted a tip in the first place. They just applied for an award. But then the SEC has to spend a lot of resources going through and explaining why that person wasn't eligible for an award.  

[00:34:29.02] And so there is a proposed rule out now where the SEC would be able to bar certain individuals from applying for awards or just cut out otherwise obvious whistleblowers. I guess individuals, I'll say, who are applying for awards who it's just very clear that they are not eligible.  

[00:34:49.05] CHRIS EKIMOFF: Kind of the boys and girls who cried wolf.  

[00:34:50.70] MATT STOCK: Yes. Yes.  

[00:34:52.68] [MUSIC PLAYING]  

[00:34:56.64] KURT WOLFE: So, I mean, I think, Matt, had a couple of points now we've hinted at some things that might be on the horizon in terms of how the SEC's whistleblower program is going to potentially be changed by new rules or new legislation. So let's talk about that a little bit about some of these changes that may be coming. And first, you just hinted at it, there are proposed SEC whistleblower rule amendments.  

[00:35:19.92] As I understand it, the proposed rule amendments would provide the commission with additional tools in making whistleblower awards to ensure that meritorious whistleblowers are appropriately rewarded for their efforts. The rule amendments would increase efficiencies in the whistleblower claims review process. And maybe that's sort of limiting certain whistleblowers to the point you just made. And the rule amendments would clarify the requirements for anti-retaliation protection under the whistleblower statute. So in terms of new SEC rulemaking, where are we, Matt?  

[00:35:51.24] MATT STOCK: I should have touched on this, I guess, in my previous response. But in June 2018, the SEC announced that proposed amendments to the rules of the SEC whistleblower program. And they were going to vote in October of 2019, but the SEC cancelled its meeting. But despite the cancellation, we do expect the SEC to vote on these amendments soon.  

[00:36:12.90] There were some, I guess, controversial proposals. And the most controversial of the proposed rules was this discretionary award cap, which would essentially cap awards at $30 million. That's the short of it.  

[00:36:28.95] And the SEC would not, however, have discretion to award less than 10% of the total monetary sanctions collected. So if there was a $400 million award, the floor would be $40 million, and the SEC would honor that. But there was indication that the SEC would be looking at enforcement actions with total monetary sanctions of in excess of $1 million. They would be looking to reduce whistleblower awards if they go above $30 million.  

[00:36:57.51] So you mentioned the claims review process and how they're trying to speed that up. Also the whistleblower protections and getting in line with Digital Realty. But there is new legislation that's in the pipeline. A bill passed the House in July of 2019-- the Whistleblower Protection Reform Act of 2019-- by overwhelming majority of 410 to 12.  

[00:37:23.64] And in September, Senator Grassley and Baldwin, Durbin, and Ernst introduced the Whistleblower Programs Improvement Act. And this would essentially do two things-- or at least for the purposes of this conversation. One, protect corporate whistleblowers who report violations internally. So what Digital Realty went against. And then also expedite the claims review process.  

[00:37:48.84] Specifically, the SEC would be required to make an initial award determination within one year of applying for an award. Certain exceptions exist, and the SEC can extend the deadline by up to 360 days. So that would dramatically increase the current deadline, I would say, because there is no deadline. But the process of speeding up the claims review process.  

[00:38:16.32] KURT WOLFE: It's interesting that that legislation is where it is. It's sort of in keeping with a theme that Chris and I have discussed on previous episodes of the podcast, which is, we tend to only discuss bills that fly through the House with overwhelming bipartisan support. And I don't think anyone realized that many bills were getting through the House with bipartisan support.  

[00:38:35.52] What's interesting about this one is that it actually got taken up in the Senate. And I think perhaps that is because Senator Chuck Grassley, a Republican from Iowa, is a long-standing advocate for whistleblowers, for whistleblower protection provisions. And so maybe that is the type of champion you need to get some of these SEC or financial services bills over the hurdle in the Senate. I mean, Matt, do you have a sense-- does this thing have legs?  

[00:39:05.22] MATT STOCK: Disclosing fraud to the government and having them stop it, I think it's a pretty agreeable issue. So I don't see a lot of issues with this getting through. That said, that's just my opinion, and I'm also maybe a little biased.  

[00:39:19.69] I did want to mention, I guess, one more development though in terms of, I guess, important legislation and things that could impact SEC whistleblowers, and that deals with disgorgement. And I know you've spoken about this on previous episodes. Lou v SEC, which is going to be heard by the Supreme Court. Oral arguments are set for this March. The case is determining whether or not the SEC can continue seeking disgorgement and civil enforcement proceedings brought in federal court.  

[00:39:50.64] This obviously would have a huge impact on whistleblowers because the awards are based off their total monetary sanctions collected. So that's penalties, disgorgement, and interest. If the SEC is not allowed to obtain disgorgement in these cases, it fluctuates over the years. But typically, it's half of recoveries is penalties for the SEC, and the other half is disgorgement. You could see potentially half of their monetary sanctions collected for the entire enforcement year just cut in half.  

[00:40:26.57] However, we do have new legislation that's also in the pipeline to maybe address this issue. In November 2019, House passed a bill in the Investor Protection and Capital Markets Fairness Act that essentially would allow for a 14-year statute of limitations for the SEC in disgorgement.  

[00:40:46.94] KURT WOLFE: That's interesting. We've been following the Lou case closely, of course. I hadn't, to be honest, thought about it in terms of how it would affect a whistleblower's ability to obtain an award, or perhaps even a whistleblower's eligibility. I mean, I guess if what we're doing potentially is lopping off some amount of money or sanctions that would have otherwise been ordered, maybe you don't get to the million dollar threshold.  

[00:41:12.83] CHRIS EKIMOFF: Does that mean if you're a whistleblower that you should wait until you're pretty sure that the statute of limitations will amount to a million dollars? If you discover it too early, maybe you're not going to qualify.  

[00:41:24.08] MATT STOCK: So a few things on that. You can apply for an award if there's an order in excess of $1 million. So if there's a final judgment or order of $1 million, you can apply for an award. In some of these cases-- and I think there was an award very recently-- they can't collect all that money. So if there's a Ponzi scheme, and the Ponzi scheme owed its investors $2 million, but they can only collect $100,000 of that amount of money. Then you would get 10% to 30% of the total monetary sanctions collected.  

[00:41:58.23] And I think that this is also an important time to note that the money does not come from the investors. So in the case of a Ponzi scheme, you would not be stealing the people's money, essentially, who the SEC recovered it for. Instead, the SEC set up an Investor Protection Fund that is funded by the monetary sanctions of these exact enforcement actions. So the program is paying for itself, and then also paying whistleblowers through that fund. But no funds are taken from investors.  

[00:42:32.23] CHRIS EKIMOFF: That's good to know.  

[00:42:34.16] [MUSIC PLAYING]  

[00:42:38.13] Matt, besides making, I think, all three of us feel a little bit old, Dodd-Frank is coming up on its 10-year anniversary. I know all of us were around and following its development, what seems a short decade ago. Despite some of the challenges and changes we've talked about, do you feel that the implications of the Dodd-Frank Act as it relates to the whistleblower provisions, have they been successful in your opinion?  

[00:43:03.89] MATT STOCK: Sure. And we talked about a lot of challenges today in terms of what the SEC could be doing better. But it's without a doubt, the SEC whistleblower program has absolutely proven to be a success. I mean, since the inception of the program, whistleblower tips have led to many successful enforcement actions, resulting in more than $2 billion in monetary sanctions ordered against wrongdoers.  

[00:43:28.13] The SEC has issued $387 million and awards to whistleblowers. And while I did comment on the number of whistleblowers that was, at the same time, $387 million is nothing to turn your nose up at. And then the whistleblower program just continues to attract a high volume of tips.  

[00:43:46.58] Year after year, the SEC receives more and more tips. I think fiscal year '19 was the first time when there was a slight dip. My opinion is that-- because we don't know, I guess, essentially why tips are submitted, they do tell us the category. But I just think the crypto craze caused a very strong increase in tips in 2018 compared to fiscal '19. But overall, program is an absolute success. And as it continues to mature, I think the best is really yet to come.  

[00:44:17.82] [MUSIC PLAYING]  

[00:44:22.03] KURT WOLFE: All right. So, Matt, while we've got you, we want to put you through the lightning round, which is designed to be a little bit of fun and just sort of get your take on a few different things. So are you up for some off-the-cuff questions about SEC whistleblowers?  

[00:44:37.99] MATT STOCK: Of course. Yeah.  

[00:44:39.28] KURT WOLFE: All right. So first, this is an easy one. On a no names basis of course. Any good war stories, any funny or frustrating experiences you've had with a whistleblower or even with the staff?  

[00:44:53.87] MATT STOCK: So, like you mentioned, no names. And I obviously also have to protect my clients' confidentiality in addition to the SEC, so I can't give too many details. But overall, I can say that I probably represent a lot of courageous whistleblowers around the world.  

[00:45:10.00] And it always amazes me, but we continue to see the exact same frauds year after year. Whether it's accounting frauds-- they say, if there's pressure to make the numbers, then there is pressure to make up the numbers. And we will see the exact same revenue recognition schemes that we saw 10 years ago.  

[00:45:27.67] We continue to see large Ponzi schemes. People guaranteeing 20% on investor funds month after month, and they continue to exist. And not only exist, but also raise a significant amount of money. We see market manipulation, foreign bribery, and the list goes on.  

[00:45:44.24] But in short, it's an honor to represent people like my clients who are willing to take a risk and sometimes very significant risk, especially in FCPA cases, to put a stop to these frauds. And while the reward's always an important incentive I think that most people come forward because they believe it's the right thing to do. And I think we've all heard the saying, "If you see something, say something." But under the SEC whistleblower program, you can now say it anonymously and also potentially receive an award for doing so.  

[00:46:15.07] KURT WOLFE: All right. That's perfect. So earlier, we talked a little bit about advertising and how people find you or find your firm. In 2010, a New York whistleblower attorney started a website that he called SECSnitch.com. Your firm is Zuckermanlaw.com. Any regrets on the naming convention there? Did you did you miss a trick? Speaking of whistleblower websites, if you type "whistleblower.gov" into your browser, where do you land?  

[00:46:55.59] MATT STOCK: Whistleblower.gov?  

[00:46:56.52] KURT WOLFE: Uh-huh.  

[00:46:57.25] MATT STOCK: Where do I land?  

[00:46:58.12] KURT WOLFE: Yeah. What page does that take you to?  

[00:47:00.27] MATT STOCK: I'd have to look at it.  

[00:47:01.15] CHRIS EKIMOFF: Oh. We were hoping that you'd be able to pull the quick-- I had to fact check Kurt on this one too.  

[00:47:05.96] MATT STOCK: I was going to say, I don't want to guess and be wrong and I don't have my keyboard in front of me.  

[00:47:09.88] KURT WOLFE: It's actually--  

[00:47:10.67] MATT STOCK: Now I'm curious what it is.  

[00:47:11.74] KURT WOLFE: It's the CFTC.  

[00:47:14.11] MATT STOCK: Oh. They get a good URL.  

[00:47:17.19] CHRIS EKIMOFF: Certainly less well-known and less communicated segment. So maybe they've got a little in on the website.  

[00:47:22.87] KURT WOLFE: Yeah. I think so.  

[00:47:23.53] CHRIS EKIMOFF: Got a connection over at Squarespace or something.  

[00:47:25.60] MATT STOCK: I guess autofill has me [INAUDIBLE] I had it bookmarked.  

[00:47:29.23] CHRIS EKIMOFF: That's right.  

[00:47:31.51] MATT STOCK: Yeah. I did not know that. I was expecting to see something else that I didn't want to say. So that's good.  

[00:47:37.30] KURT WOLFE: All right. Sticking with ads, in 2010, the SEC snitch law firm famously ran ads during the previews in Manhattan movie theaters. Do you remember this?  

[00:47:51.05] MATT STOCK: No, I do not. I imagine they were pretty convincing in terms of people watching a movie looking to blow the whistle. But no, I do not remember that.  

[00:48:01.87] KURT WOLFE: We'll have to see if we can get the audio in the production set, because it sounds ominously like the Law & Order theme song. Dun dun. Yeah. All right. Well, do you guys have any ads, or are you thinking about running something in the local movie theater?  

[00:48:18.52] MATT STOCK: No. We have no ads right now. Just informative publications, our website, giving speeches, and speaking with you guys.  

[00:48:27.76] CHRIS EKIMOFF: Perfect. Well, we talked a little bit about the movie theaters in Manhattan. Whistleblowers are kind of an interesting development in the past 15 or 20 years in terms of Hollywood. A lot of feature films coming out related to some of the headline cases of whistleblowers. If you had to pick one, what has been your favorite feature film related to the topic of whistleblowing?  

[00:48:50.20] MATT STOCK: That's tough. One doesn't come exactly to mind, but I will comment on the fact that the popularity of whistleblowing and the concept of whistleblowing has just been exploding in the media. But I do watch most of the movies, and I can say for certainty that most people would not qualify for an award under the SEC's whistleblower program and I think most whistleblower programs. But, that's not to say they weren't important issues. It's just to say that I don't think they were eligible.  

[00:49:19.74] KURT WOLFE: All right. Well, for those of you listening, if you want to check out a couple good whistleblower flicks, we've got a handy little list here that we'll share with you. It includes The Insider, which is probably the highest rated whistleblower movie, at least according to Rotten Tomatoes. It's a 1999 film starring Russell Crowe.  

[00:49:38.78] There is always The Whistleblower, starring Rachel Weiss, 2010. Also pretty good ratings on Rotten Tomato. We've got Michael Clayton from 2007, starring George Clooney. The Informant, a sort of funny take on a whistleblower story, starring Matt Damon.  

[00:49:59.81] Just last year, The Report, starring Adam Driver of Star Wars fame. And of course, there is the o.g. whistleblower movie, All the President's Men from 1976, starring Robert Redford as Bob Woodward and Dustin Hoffman as Carl Bernstein.  

[00:50:16.25] CHRIS EKIMOFF: Memorializing that parking garage in Rosslyn, Virginia, right outside of DC, where were those conversations took place.  

[00:50:22.43] KURT WOLFE: That's right. That's right. All right, Matt, it's been a fantastic conversation today. Thank you so much for chatting with us. I think it's been helpful to give people the lay of the land in terms of the whistleblower rules and how things might change going forward. So thanks again for joining us.  

[00:50:38.19] MATT STOCK: Of course. No, it's been an absolute pleasure.  

[00:50:39.63] CHRIS EKIMOFF: And tell us again, Matt, where can our listeners find you or more information about your practice?  

[00:50:43.93] MATT STOCK: Sure. Find us on our website at Zuckermanlaw.com. And that's Z-U-C-K-E-R-M-A-N-L-A-W.com.  

[00:50:52.22] CHRIS EKIMOFF: Awesome. Well, thanks for joining us for the InSecurities Podcast, brought to you by PLI. I'm Chris Ekimoff. You can find me at Ekimoff CPA.  

[00:51:00.05] KURT WOLFE: And I'm Kurt Wolfe. You can find me at enforce_update.  

[00:51:04.97] CHRIS EKIMOFF: Please continue to use the hashtag #insecuritespod to join us in our conversations around securities, enforcement, and regulatory issues. If you have other guests or suggestions for our show, please let us know for future episodes. Thanks again, and have a great week.  

[00:51:18.09] KURT WOLFE: See you soon.  

[00:51:18.95] [MUSIC PLAYING]  

[00:51:31.02] SPEAKER 1: Thanks for listening to InSecurities, a podcast from PLI, the Practising Law Institute. PLI is a non-profit provider of authoritative professional services training and continuing education. In an increasingly complex business environment, where intricate corporate structures reign, InSecurities can help you make sense of it all.  

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