When the SEC recently announced a $260,000 award to three “harmed investors” for their help in spotting a “well-concealed fraud targeting retail investors,” the SEC no doubt hoped the announcement would encourage other investors to come forward with tips.
As further incentive, the SEC touted the tantalizing figures racked up by the whistleblower bounty program since authorization by Dodd-Frank: “The SEC has awarded approximately $387 million to 70 individuals since issuing its first award in 2012.”
However, encouraging more tips, rather than focusing on ways to improve the quality of the massive number of tips the SEC already receives, may bog down a program that already appears to struggle.
As it happens, the SEC only investigates a small number of the tips it receives, and only an infinitesimal number of the tips actually result in awards.
This suggests that the SEC expends resources responding to tips that ultimately have no merit. Given the high number of “meritless tips,” the bounty program could benefit from reform in 2020.
According to the 2019 Annual Report to Congress about the SEC’s whistleblower program, in fiscal 2019, the SEC “received over 5,200 whistleblower tips” and the Office of the Whistleblower “returned over 2,600 calls to the public.” Over the life of the program, the OWB has returned nearly 24,000 calls and received more than 33,300 whistleblower tips.
The 70 awards given out since 2012 represent approximately 0.2% of 33,000 tips received, and the numbers get worse once the 24,000 returned calls are factored in.
Keep in mind that the SEC may reward only those tipsters “who voluntarily provided original information to the Commission that led to the successful” enforcement actions resulting in monetary sanctions over $1 million.
Putting the success rate another way, 99.8% of tips do not lead to successful enforcement actions resulting in monetary sanctions over $1 million.
Similarly, the number of tips resulting in awards represents a very small fraction of the total number of enforcement actions brought by the SEC. With 70 awards since 2012, the SEC averages 10 awards per year. The Enforcement Division files about 820 enforcement actions every year.