CFTC announces record-breaking whistleblower award: Does it raise the bar for incentivizing whistleblowing?

Introduction

The U.S. Commodity Futures Trading Commission (the CFTC) recently made history by announcing the largest payout ever given to a single whistleblower under the Dodd-Frank Program - nearly USD$200 million. The whistleblower provided information that helped U.S. and U.K. regulators investigate the alleged manipulation of global interest-rate benchmarks. These investigations ultimately led to USD$2.5 billion in settlements with Deutsche Bank in 2015, including USD$800 million with the CFTC. This whistleblower award is intended to send a powerful message to businesses involved in improper and non-compliant activities: employees can, and are, incentivized to report wrongdoing to regulators, and those incentives work (especially when the incentive takes the form of a multi-million dollar payout).

A landmark whistleblower award

The CFTC (which regulates the U.S. derivatives market) established its whistleblower program a decade ago, as directed by section 748 of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act [PDF]. The CFTC’s whistleblower program was created by section 23 of the Commodity Exchange Act (the CEA) [PDF] and then implemented by the Whistleblower Rules (17 C.F.R. pt. 165) (the Rules). Much like Canadian capital markets regulators, the CFTC’s goals include the promotion of competitive and efficient markets as well as the protection of investors from manipulation, abusive trade practices and fraud.

Although the CFTC order [PDF] was heavily redacted, The Wall Street Journal reported that the award related to alleged manipulation of the global Libor interest-rate benchmark. This resulted in billions of dollars’ worth of derivatives (i.e., swaps) being priced based on movements in the benchmark. Investigations into these allegations by U.S. and U.K. regulators ultimately led to USD $2.5 billion in settlements with Deutsche Bank in 2015, including USD $800 million with the CFTC.

Interestingly, the whistleblower’s application for an award was initially denied by the CFTC on the grounds that there was insufficient information to establish that the whistleblower had led to the successful enforcement of the action. The whistleblower subsequently submitted a request for reconsideration and provided additional information, whereupon the regulator decided to grant the whistleblower an award (as mentioned in the order [PDF] and reported by Law360 in their article CFTC makes history with $200M whistleblower award .

To qualify for an award, a whistleblower must “significantly contribut[e]” to the success of an enforcement action and show that the information provided “led to the successful enforcement of the action” or its resolution (e.g., the CFTC’s ability to successfully complete its investigation, and to either obtain a settlement or prevail in litigation) (see section 23 of the CEA [PDF] and sections 165.2(i) and 165.5(a)(3) of the rules). Awards can also be given based on sanctions collected by other regulators besides the CFTC (foreign and domestic) that use the whistleblower’s information (see section 23 of the CEA [PDF] and sections 165.2(i), 165.2(m) and . 165.5 of the rules). In response to the newly provided information, the regulator determined that the whistleblower met this standard since the information provided led to successful enforcement actions by three regulators: the CFTC, an unnamed U.S. regulator, and an unnamed foreign regulator.

As for the size of the award, the CFTC has discretion to award anywhere between 10 and 30 percent of the monetary sanctions collected with no cap (see section 165.8 of the rules). Awards are given when civil penalties exceed USD $1 million and can be based on sanctions collected by the CFTC and other regulators (foreign and domestic) (see sections 165.2(e) and 165.5(a)(3) of the Rules). These awards are paid from the CFTC Customer Protection Fund, which is financed through monetary sanctions paid to the CFTC by violators of the CEA (see sections 165.2(f) and 165.12 of the rules). The size of the CFTC’s recent landmark whistleblower award, therefore, highlights just how much was collected as a result of the whistleblower’s information.

Implications for whistleblower awards in Canada

The Ontario Securities Commission (the OSC) is currently the only provincial regulator that pays whistleblower awards. Its progress with this program has been the subject of a number of written articles and posts (see, for example, our reporting on the OSC’s Whistleblower Program in the following blog posts: The Long-awaited OSC Whistleblower Program is now in force, OSC proposes changes to Whistleblower Program; 200 tips in two years: The continued progress of the OSC’s Whistleblower Program; Ontario Securities Commission announces first ever whistleblower awards and Tips and awards: the OSC and SEC whistleblower programs report milestones.) As with the American programs, Ontario whistleblowers are only eligible to receive awards where the information they provide leads to a successful enforcement action and the proceedings result in over CAD$1 million in total monetary sanctions (these can either be ordered or paid voluntarily in settlements).

A significant  difference between  the OSC’s Whistleblower Program and those authorized by the Dodd-Frank legislation is that the latter does not have an expressed award cap. The OSC cap of CAD$5 million avoids the remarkably large payouts given by U.S. regulators and has kept whistleblower awards in Ontario at far more modest levels than those south of the border.^[1]

The size of this and other awards granted in the U.S. does raise an important question about the size of incentives actually needed for whistleblowers possessing key inside information to come forward. If an award is meant to act as a true incentive for a potential whistleblower to ‘stick their necks out’ and come forward, is (up to) CAD $5 million enough? What is the most incentivizing limit? Does the OSC need to consider revising and increasing that limit? Or are they already getting enough tips to effectively enforce alleged wrongdoing?

Questions about the appropriate size of financial penalties under Ontario’s program and whether these penalties were large enough to effectively deter wrongdoing were recently raised by the Ontario Capital Markets Modernization Taskforce in its final report (see, for example, Recommendation 58 [PDF], which suggested increasing the maximum for administrative monetary penalties to $5 million and the maximum fine for offences to $10 million).

We have identified risks in prior posts about the role of “bounties” in capital markets regulatory enforcement, and the importance that these programs not unduly disrupt the ability of firms to effectively monitor and remedy risky behaviour within their own organizations (see, for example, our prior reporting on this topic in the following blog posts:  Osler comments on OSC’s proposed Whistleblower Program ; Incentives rise in proposed OSC Whistleblower Program; The long-awaited OSC Whistleblower Program is now in force and Alberta Securities Commission considering whistleblower program with no financial rewards). Regulators are faced with finding that balance. We will be watching with interest as to whether increasing whistleblower payouts like those seen in the U.S. will result in any pressure on the OSC to revisit and potentially increase its own cap on whistleblower awards in Ontario.