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SEC Whistleblower Program
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The Securities and Exchange Commission (SEC), having faced significant criticism in recent years, was dealt another PR blow in a recent Wall Street Journal article reporting the agency’s “inadvertent” outing of an SEC whistleblower. According to the article, the disclosure occurred during an investigation of Pipeline Trading Systems LLC, when an SEC lawyer shared the whistleblower’s notebook with an executive who was being questioned. The executive recognized the whistleblower’s handwriting. The article, and the widespread follow-on reporting, raises legitimate questions about protecting whistleblowers’ identities and what assurances of confidentiality a whistleblower can reasonably expect.
As a former Assistant Director and Assistant Chief Litigation Counsel in the Enforcement Division of the SEC, I can assure whistleblowers that all SEC staffers are extensively trained to conduct investigations in a confidential and non-public manner. After the enactment of Dodd-Frank, which expressly required the SEC and other law enforcement organizations to attempt to protect the identities of whistleblowers, the staff received additional training from the SEC Whistleblower Office on the proper handling of whistleblower information. Practically, during an investigation, as a matter of practice, the SEC will neither admit nor deny whether a whistleblower reported possible securities violations. Among other techniques, SEC staffers attempt to request and use materials in their investigations in a manner that protects the identity of whistleblowers. Additionally, in their initial submission to the SEC, whistleblowers and their counsel are asked if any of the materials provided to the Commission are likely to reveal the whistleblower’s identity so that the staff can handle those documents with particular care. These important policies and procedures and practices are deeply ingrained into the SEC’s practice and culture. As a result, the risk of accidental disclosure of whistleblower information by the agency’s staff is remote.
Nevertheless, despite the agency’s best efforts, there is always some risk that the individuals or entities involved in the possible securities violations will learn the whistleblower’s identity. With respect to the Pipeline matter, the Director of the New York Regional Office, George Canellos, wrote a letter to the editor of the Wall Street Journal, which set forth the SEC staff’s efforts to protect the identity of the whistleblower in the Pipeline investigation. While it is unfortunate that the whistleblower’s identity was discovered, all publicly available information suggests that the SEC did nothing inappropriate and its conduct was consistent with agency best practices.
An important takeaway is that the risk that a whistleblower’s identity will be discovered is substantially reduced if he or she works with counsel to file a submission anonymously pursuant to the program rules. Working through counsel, even the SEC is unaware of the whistleblower’s identity (until the individual elected to accept a monetary award); and sophisticated counsel would never share with the agency any documents that might compromise a whistleblower’s anonymity.
In the end, potential whistleblowers should not be discouraged from reporting possible securities violations because of this apparently unwarranted criticism but should carefully consider their options in reporting potential violations to the SEC.